Once-Hot Coal Piles Up as Demand Cools

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31 Jul 2009

Mountains of coal are piling up along the winding roads of Central Appalachia, a boon to buyers and a bane to miners. Coal companies centered in this region, which includes parts of Kentucky, Tennessee, Virginia and West Virginia, are seeing far fewer shipments to utility companies and steelmakers, resulting in contract renegotiations or cancellations for many of them.
A new analysis says the coal sector will have to cut production 50 million tons this year, on top of even steeper cuts earlier in the year, to get supply in line with demand.
So far, fortunes are mixed. Massey Energy Co., for example, the largest producer in Central Appalachia, matched its first-quarter shipments even though overall production in the region is down 9.8% compared to last year, according to Paul Forward, an analyst with Stifel Nicolaus Equity Research.
This week, Massey reported better-than-expected second-quarter earnings of $20.2 million, or 24 cents a share, because of cost-cutting and higher-than-expected volume and pricing.
Arch Coal Inc., the nation's second-largest coal miner by production, posted a loss of $15.1 million, or 11 cents a share, and saw a 20% drop in coal sales in the second quarter, as weak industrial activity cut demand for coal.
"Unfortunately, coal has suffered the full brunt of this economic recession," said Steve Leer, CEO of the St. Louis-based company. It has renegotiated some contracts with utilities, in some cases delaying shipments and in others allowing utilities to cancel orders and pay a fee.
Arch, which supplied coal for 6% of the nation's electricity in 2008, now expects sales of between 114 million to 118 million tons of coal for 2009, down from its estimate in the last quarter of 116 million to 120 million tons.
Consol Energy Inc., which reports earnings Thursday, is expected to be hit by lower output. It already cut its 2009 output forecast to 60 million tons from 62 million tons. Last year, it shipped 66 million tons of coal.
Stockpiles of coal and idled barges mark a significant departure for the nation's coal industry, which a year ago was struggling to find enough workers to unearth the ore and railcars to deliver it.
But with the recession, steel production is down and utilities are seeing less demand and increasingly relying on cheaper and cleaner natural gas. Both utilities and steelmakers are postponing coal deliveries and driving down prices.
With coal piles overflowing, "we're renegotiating contract terms," says Michael Morris, chief executive of American Electric Power Co., the nation's top coal burner. He says his utility, which operates in 11 states, is delaying 2009 shipments into 2010 and beyond in the hope that electricity demand will pick up by then. So far, his company, based in Columbus, Ohio, hasn't had to change contract terms.
David Ratcliffe, chief executive of Southern Co., says his four-state utility has a 50-day supply of coal but would prefer a 35-day supply. The company is negotiating with suppliers to reduce shipments.
Likewise, steelmaker ArcelorMittal renegotiated its contract with Foundation Coal Holdings Inc. to buy less coal. Its supply deal was signed last year when coal prices were about $300 a ton -- more than double the current $130 a ton.
Energy consultants Wood Mackenzie said the Central Appalachian coal producers will end the year with cuts of at least 20%.
Wood Mackenzie analyst Matt Preston said current spot prices of $45 to $50 a ton for Central Appalachian coal are lower than the $70 to $80 a ton most coal producers need to operate. At the peak of the coal boom that ended last year, Central Appalachian coal fetched as much as $175 a ton.
Coal companies, which began cutting production and laying off workers in the 2008 fourth quarter, are expected to announce more of both. The Central Appalachia mines are the highest cost mines because the coal is deeper and getting to it more labor intensive.

Source: Wall Street Journal