US coal crisis: 17% of coal production uneconomic

NEARLY 17% of forecast 2015 US coal production is at risk of idling or closure, totalling 162 million tonnes, as these mines’ total cash costs plus sustaining capital expenditures exceed current market pricing, according to Wood Mackenzie's latest coal market outlook.
US coal crisis: 17% of coal production uneconomic US coal crisis: 17% of coal production uneconomic US coal crisis: 17% of coal production uneconomic US coal crisis: 17% of coal production uneconomic US coal crisis: 17% of coal production uneconomic


Lou Caruana

Most of the coal at risk is produced in Central Appalachia where about 72% of the total output is unprofitable, according to Wood Mackenzie.

Years of declining productivity, thinning seams, increasing strip ratios, more stringent government regulations, and a highly paid workforce have taken their toll and made Central Appalachia the highest-cost region within the US.

Other US regions also have substantial amounts of coal at risk, ranging from 47% of production in Southern Appalachia to a low of 8% in both the Western Bituminous and Powder River Basin. In aggregate, this equates to about 14% of US thermal coal production and 58% of metallurgical coal production being at risk.

Wood Mackenzie senior research analyst Dale Hazelton said: “Based on current economics there are a significant number of mines unable to cover their operating costs plus sustaining capital. Despite this, mine closures, while not rare, certainly aren’t happening frequently.

“Part of the reason for this is the amount of thermal coal sold on the open market is very small compared to that sold under contract. Contracts can cover multiple years, and prices may have been agreed well before the current market's lows.

“A producer may also be able to beat the market prices as they have a valuable niche-quality coal, such as stoker coal, or the location of the mine is near an end-user providing a transportation advantage over competitors.”

Companies are not closing coal mines because it is possible they are actively shopping the assets and having them currently in operation is more attractive to buyers.

“A company may also need to generate certain levels of revenue or cashflow to avoid triggering debt covenants that result in accelerated debt payments or higher interest rates,” Hazelton said.

“Some companies may also be willing to temporarily lose a certain amount of money on some mines where the losses from operating are less than not yet high enough to require idling or closing the operation.

“This is particularly true for some of the assets recently purchased by new mining companies or private equity firms. In those cases, the companies understand that there will be some period of losses as management gets costs under control. The end-game here is to maintain operations and customer relationships until the eventual recovery.”

For prices to rise, fundamentally one of two things must happen: either the global demand for steel and power must increase or the supply of coal must decrease, according to Hazelton.

“The growth prospects for steel demand remain tenuous at best as many countries’ economies remain fragile,” he said.

“The recent strength of the US dollar also encourages non-US producers to grow their production as a strengthening US dollar compared to their local currency effectively lowers their costs of production when denominated in US dollars.”