(The Associated Press circulated the following article by Erik Schelzig on September 15.)
NORFOLK, Va. — The boom in coal demand has the industry ramping up production and capacity, but not without a cautious eye toward what happens on the next downside of the cycle.
Because of increased exposure to shareholders, coal companies would be quick to respond to a downward trend in coal prices, Michael J. Quillen, president and CEO of Alpha Natural Resources Inc., said during a panel discussion at the Bluefield Coal Show.
When that happens, Quillen said, “you’re going to see the higher-cost mines shut down pretty doggone quick.”
Coal fuels more than half of all electric production in the United States, and a growing economy coupled with high natural gas prices is driving coal demand — and prices — upward.
Spot prices for Central Appalachian coal have doubled to about $60 since August 2002, according to the U.S. Energy Information Administration.
Despite a bullish outlook over the next few years, the industry has become accustomed to sudden changes.
“Every three years we have some unpredictable things happen,” said Quillen. “We’re confident for the next two years, but a lot can change.”
Rising diesel, explosives and labor expenses contribute to increased costs for coal mines, and a decrease in coal prices could quickly make some of them unprofitable.
Alpha Natural Resources, based in Abingdon, Va., made $524.1 million from its initial public offering in February, while Foundation Coal Holdings Inc. of Linthicum Heights, Md., netted $519 in its December IPO.
ArcLight Capital Partners LLC of Boston and St. Louis-based Arch Coal Inc. have announced plans for a Central Appalachian joint venture that they want to take public, and International Coal Group Inc., headed by New York billionaire Wilbur L. Ross, also plans an IPO.
“Ten years ago, I don’t think there was one public company among the top 10 (coal producers),” said Danny Smith, a vice president for energy and properties at Norfolk Southern Corp., one of the country’s largest coal-hauling railroads and holders of coal reserves.
Railroads have been struggling to meet the increased coal demand, not least because they have tried to protect themselves against downturns, Smith said.
“We’ve stayed in business over the years by paring down and increasing efficiency,” he said. “And now, suddenly, we’re trying to increase everything.”
Smith said that by 2007, Norfolk Southern plans to replace its coal cars with new ones that have 11 percent more capacity and are 30 percent lighter when empty. This will eliminate 200,000 carloads per year. But coal cars take 18 months to acquire and labor shortages hamper expansion efforts.
The Norfolk, Va., railroad expects to train more than 2,000 new workers this year at a cost of $60,000 each, but will lose more than one in four within the first two years because of the difficult work and the unpredictable hours, Smith said.
Retention figures are even more stark for coal producers: Central Appalachia’s largest producer, Richmond, Va.-based Massey Energy, has said that more than two in three of its first-year miners don’t last through their first year.
The key for sustained coal demand will be the price of natural gas, said Keith Barnett, a managing director for forecasting at American Electric Power Co., the top coal consumer in the country.
The utility, which plans to invest more than $3.7 billion in coal-fired generation and environmental controls by 2010, takes “a significant risk with our strategy of being such a large coal consumer,” Barnett said.
“The risk we take is that some people will be right about natural gas prices coming back to $3.50,” he said. “If that occurs, AEP’s strategy is flawed. … We can’t compete with $3.50 natural gas.”
Natural gas, which fires about 20 percent of power plants in the country, is selling for more than $11 per 1,000 cubic feet on Nymex. That is almost double the price from one year ago.
Even though coal prices are surging, they remain more affordable than natural gas. Nevertheless, Barnett said, transportation problems and other delivery issues have made coal supplies less certain that in the past.
“It’s the first time since I got in this business that people refer to coal as expensive and unreliable…,” he said. “That only used to apply to natural gas.”