Coal taking market lumps

By Dennis Webb
Friday, August 17, 2012

When mudslides recently closed Union Pacific railroad tracks in Eagle County, Oxbow Mining President Jim Cooper was glad the shutdown didn’t last long.

Thanks to lessened market demand, Oxbow’s Elk Creek Mine in Somerset already had a coal stockpile of close to 35 days of production, which is about the most it can store. It could have had to curtail operations if the shutdown had lasted several days and it couldn’t have kept shipping coal to Eastern customers that were still buying.

Because of factors including increased competition from natural gas and more regulations, domestic coal producers, including ones in the North Fork Valley, are facing challenges finding markets for their product. In an effort to avoid laying off any of its 350 or so employees, Oxbow has been scrambling to find new customers and considering stockpiling coal in remote locations.

Mountain Coal Co., operator of the nearby West Elk Mine, let go of some contract employees in June but has managed to avoid any layoffs of the mine’s nearly 350 employees and interns this year. Mountain Coal’s owner, Arch Coal, has been closing or curtailing operations at some Eastern mines this year because of what the company described as an “unprecedented downturn in U.S. coal demand.”

A challenging domestic market isn’t immediately evident by looking at things in Colorado, where overall coal production began rising last year and the Bowie Resources’ Bowie No. 2 mine in the North Fork Valley near Paonia has shifted back to a high level of mining. But Stuart Sanderson, president of the Colorado Mining Association, said the state’s increase in production after seven years of declines is a bit misleading, partly reflecting Bowie’s sharp pickup in mining.

Bowie ran into difficult geological conditions with underground faults, its production dropped to about 1 million tons a year and its employment fell to about 200. Company Vice President Dewey Tanner said it since has mined about three miles into a new area and again is producing at a more normal level of 5 million tons a year, using 320 employees.

But it also faces some of the same market challenges.

“We are building inventories because our customers have taken less coal than they had taken in previous years,” Tanner said.

Cooper said Oxbow has had trouble getting customers to return trains in a timely fashion after receiving shipments.

“If they’ve got a full stockpile and they’ve got a train on their end, why would they hurry to unload it?” he said.

Some of coal’s challenges relate to last year’s mild winter heating season affecting electricity demand, as well as to competition with low-priced natural gas as a fuel source. In April, for the first time since the U.S. Energy Information Administration began collecting data, U.S. power generation from natural gas equaled generation from coal.

But Cooper and Sanderson say Environmental Protection Agency emission regulations on power plants and what they call the Obama administration’s “war on coal” aren’t helping matters.

“The conditions that I see in the coal industry are the most serious that I have seen in my 18 years as the head of the Colorado Mining Association,” Sanderson said.

He said they will become worse as Colorado legislation kicks in requiring conversion of some coal production in the state to gas-fired production.

He said that doesn’t mean he doesn’t support natural gas development, but he objects to the government intervening in markets. He added that gas has a history of price volatility and historically costs four times more than coal per British thermal unit of energy produced.

Jeremy Nichols, climate and energy program director with the environmental group WildEarth Guardians, said he would have liked to see the state legislation go further, not allowing Xcel Energy to continue to burn coal in at least two plants.

As for EPA regulations, they’re simply helping to bring out the true costs of burning the nation’s dirtiest fuel source for electricity, he said.

“I think people are seeing natural gas in particular, but also renewables, as a more solid approach to investing in our energy future,” he said.

Cooper points out that for decades, pollution emissions from coal-fired power plants have been steadily going down even as electricity production from coal has been rising.

Countered Nichols, “That’s like touting the fact that you’ve made a light cigarette much cleaner than before. It’s still a cigarette.”

North Fork Valley coal producers have been able to capitalize on the fact that their coal has less sulfur and is cleaner-burning than eastern coal, helping give them a market at eastern power plants.

Cooper said the market problems have been slower to hit western coal. But Tanner said the spot price for regional coal is now $35 a ton, down from $45 a year ago.

He said his company has benefited from having a long-term, fixed-price contract with the Tennessee Valley Authority, an eastern electricity producer.

EXPORT POSSIBILITIES

Domestic coal companies also are looking to exports as one market option, although even that market has softened somewhat thanks to global economic problems.

Bowie for years has exported about a half-million tons a year to Mexico. Arch Coal spokeswoman Kim Link said domestic power producers are the primary buyers of West Elk coal, but the mine is getting increased interest from abroad and ships coal to Europe and South America.

Cooper said export possibilities exist in places such as China and Japan. But transportation costs are an issue. In the case of Japan, which is seeking energy alternatives after its recent nuclear disaster, it can get coal shipped more cheaply from Australia.

With demand down, Link said Arch Coal is projecting combined lower coal production this year for its four-mine region that includes West Elk and three Utah sites. It doesn’t disclose production estimates on a per-mine basis.

Cooper said Elk Creek expects to produce about 3 million tons this year. That’s about the same as last year, which was down from 6.5 million the previous year because of geological conditions and the need to move a longwall mining operation.

With production down, it has kept workers busy doing maintenance, construction work, cleanup and preparation for future mining.

‘There’s never too many people on the ground. There’s always plenty of work to do,” he said.

Sanderson said that in the long run, energy demand will continue to grow.

“The question is whether we will continue to harness our most abundant and affordable source of energy, and that is coal,” he said.

Nichols said the next few years will be “really interesting.”

“If natural gas prices continue to be this low, there’s going to be some big changes,” said Nichols, who predicted solar and wind will continue to become more cost-effective as well.