By FRED PACE
The Herald-Dispatch of Huntington
HUNTINGTON – A recent upturn in the price of metallurgical coal is expected to spark new production and some additional employment in at least one smaller part of the beleaguered Appalachian coal industry.
But how long the surge lasts remains to be seen. The spot market price of metallurgical or “met” coal has grown from a low of less than $80 a ton just a few months ago to more than $200 a ton today.
“There are several reasons for this, but the primary reason for the recent run up is the decision by China to cut production of metallurgical coal there,” said T.L. “Terry” Headley, communications director for the American Coal Council.
Headley says to fully understand the run up in met coal prices, you have to first understand that depending on several quality and heat factors, different coals are used for different reasons and thus exist in different marketplaces.
“Much of our coal in the U.S. is used to generate electricity (steam or thermal coal), some is converted to coke and used for the production of steel (met coal), and some is used in the chemicals, paper and cement industries,” he said.
In West Virginia, Kentucky and Ohio, about 60 to 70 percent of the coal produced is used for the generation of electricity, according to Headley.
He says about 25 to 35 percent is used as met coal, and the remainder is used in various other processes. Met coal is baked into a substance called coke that plays an important role in steel production.
“With met and thermal coals, downturns in one market segment don’t typically impact the dynamics of its use in the other,” he said.
New production expected
New mines and higher production from existing locations could bring a much-needed dose of jobs and investment to an industry that has suffered a series of devastating setbacks that resulted in a wave of bankruptcies and layoffs, according to some in the industry.
Ramaco Development CEO Randall Atkins told The Associated Press last month that his company is preparing to open two new met coal mines in southern West Virginia and Virginia. Those two mines will create approximately 400 jobs in counties where unemployment ranges close to three times the national average.
Long term, Ramaco seeks to produce up to 4 million tons from the two mines per year, Atkins told the AP.
At the West Virginia Chamber of Commerce’s Annual Meeting & Business Summit in September, Jim Justice, coal operator and Democrat candidate for West Virginia governor, said coal is not dead and is poised to make a comeback.
“We are going to be opening up two more coal operations in Raleigh County that will lead to us putting 300 coal miners back to work,” Justice said. “I truly believe from the metallurgical side, we will see a rebirth of coal like you can’t imagine.”
During a recent discussion with the editorial board of The Herald-Dispatch, Justice gave an example of the profitability at the $74 per ton rate of a few months ago.
“To convert it to a standard ton, which is in a standard railroad car, a 2,000-pound ton, take 10 percent off of it, $7 off of it, and it’s $67. Then you got $67 at the mine, but you gotta get it to the port and put it in the vessel. It costs about 25 bucks to do that,” he explained. “So, you get $42 to put in your pocket.”
But with the price of $188, profits triple.
“Let’s work it back. Take 10 percent off it. That’s $18. That brings you to $170. Let’s say the rail freight goes up, because everybody tries to get their part of the pie, and say the rail freight now goes up to $35 instead of $25,” Justice said. “Now, you’ve got $135 standard ton in your pocket versus $42. It hasn’t just gone up. It’s tripled in value. It’s exploded to the upside. Now, you’ll have more miners come back to work.”
It also improves coal severance taxes.
“You got $2.10, when it was $42. Now, you’re getting 5 percent of $135. Now you’re getting about, that’s $6.65 versus $2.10. You’ve tripled your severance tax dollars over the same ton.”
Positive sign for industry
James Stevenson, director of North American coal for analyst firm HIS, told the AP that a metallurgical coal mine in Alabama formerly owned by bankrupt Walter Energy is set to reopen under new owner Warrior Met Coal.
New life for metallurgical coal mining could become a trend if companies can lock in contracts at higher prices, he said.
“It’s pretty slowly ramping up, but you’re going to see that kind of effect, where strong prices bring production,” Stevenson told the AP.
West Virginia has historically produced both types of coal and is well known as having some of the best metallurgical quality coal in the world, according to Headley.
“For some time, both the steam and metallurgical coal markets have been down in the U.S. and globally with oversupply dampening prices,” he said. “The weakness in the U.S. steam coal market is due to well-known regulatory factors, low electricity demand growth and the impact of a glut of natural gas.”
The metallurgical coal market had been down in the past due to a major decline in the demand for steel and the overall uncertainty of the world economy, Headley added.
“The recent rally in price for metallurgical coal is a welcome sign for the coal industry, as is news that financial institutions like Goldman Sachs have revised their projections and suggest that higher met coal prices are likely to remain into the foreseeable future,” Headley said. “In fact, Goldman is projecting prices stabilizing in the $135-145 price range over the next couple of years. Of course, there is no certainty in the marketplace, but this combined with recent improvements in the demand for steam coal provide the first real positive moves in the U.S. marketplace in several years.”
Coal mining jobs outlook
Bill Raney, president of the West Virginia Coal Association, said there is no question West Virginia’s coal industry is in the most challenging time in its history, citing a 29 percent decline in production and an employment drop from 23,000 to 14,000 since 2008.
“The reasons for this decline have been discussed in detail over the past several years and those include, among others, the reduced demand for electricity because of the sluggish economy, both here in America and across the world, the unrealistic and unsustainable low price of natural gas, and at the heart of it all is the ongoing regulatory assault of the Obama Administration and its Environmental Protection Agency,” Raney said.
Raney said the rise in met coal prices is welcome news to an industry that needs it.
“Hopefully, prices remain high and it allows more of our miners to get back to work,” he said. “We may never get back to the number of jobs we had, but I do believe that higher prices and less EPA regulations will put thousands of coal miners back to work.”
West Virginia has plenty of steam and metallurgical coal remaining to be mined, Raney said.
“In those reserves that we have remaining to be mined, we produce approximately 60-70 million tons of the finest quality metallurgical coal, which accounts for about 40 percent of our historic annual tonnage,” he said.
The Herald-Dispatch reporter Lacie Pierson contributed to this story. Follow reporter Fred Pace at Facebook.com/FredPaceHD and via Twitter @FredPaceHD.