Diesel intensive coal mines suffer

WITH many mining machines now run by diesel, and oil costs rising to record highs, the resulting situation is the last thing a US soft coal market needs, according to a Dow Jones report Friday.

Donna Schmidt

Higher costs to run equipment, especially those in the diesel-use hotbed of the Powder River Basin are looking at growing costs, former Peabody executive and current Westminster Securities analyst Dick Price said in the report.

However, the same operators that run in that area also are known as some of the nation's largest producers, and because of that Price noted their position to hedge against increases is good.

However, "the guys that aren't hedged are going to be squeezed," he said.

With the largest producers in the area being Peabody Energy, Arch Coal and Foundation Coal, Dow Jones said that Peabody uses about 105 million gallons annually of diesel fuel, and a report earlier this year from the operator reflected a 60-70% hedge rate for the year at that time.

By next year, Peabody's Greg Boyce said in July, that diesel requirement hedge rate will be about 40%, and with crude oil prices up to the "low to mid 60s" from the high 50s.

Because of Peabody's size and stature in the industry, it can take on higher oil costs, Dow said, but smaller operations and operators will feel a bigger pinch. Massey Energy, the report said, is an example of that.

"They're more limited in their capacity to hedge because of their overall scale and economic circumstances," Price said of the miner, which has the majority of its mines in the Central Appalachian region and uses much of its diesel - totalling about 55 million gallons annually - for mountaintop removal.

The Dow report also added that there is some discussion in the market community about how oil impacts coal prices, but does note that "in the short term, natural gas and coal prices are correlated because of demand for electricity".

Because oil is not heavily utilised for US power generation, power facilities cannot switch to the less expensive outlet and, therefore, the price of oil can increase without a lot of impact on natural gas and coal prices.

"Coal companies, therefore, get squeezed between the price of oil and the price of coal," the report said.

Contributing expert Jim Thompson of Coal and Energy Price Report added: "In the short term, coal companies may not be able to pass on these higher diesel costs to their customers."