Whitesburg KY

Productivity of region’s miners better, but still lags far behind

Underground coal miners in eastern Kentucky and elsewhere in Central Appalachia mined coal at the rate of 1.37 tons per man-hour during the last quarter of 2014, while the region’s surface miners produced 3.23 tons of coal per manhour during the same three-month period, a new analysis shows.

Combined, Central Appalachian miners produced 2.37 tons of coal per man-hour during the final three months of 2014, stopping what had been a 10-year decline in productivity.

While miner productivity has improved in Central Appalachia, mines here still lag far behind two of the country’s other three major coal producing regions, says the analysis prepared by SNL Energy, a subsidiary of SNL Financial LC, a leading financial information firm based in Charlottesville, Virginia. Miners in the Illinois Basin, which includes all the coal producing counties in western Kentucky, produced an average of 4.21 tons of coal per manhour during the quarter — 4.51 tons per man-hour in underground mines and 3.97 tons per man-hour at surface mines. In the Powder River Basin of Montana and Wyoming, underground miners produced 13.47 tons of coal per manhour while surface miners produced a whopping 30.16 tons of coal per man-hour. The Powder River region is “well-known for its ability to produce a lot of coal with fewer employees, and at 30.16 tons per man-hour of production, the region dwarfs other coal-producing regions,” SNL Energy’s Taylor Kuykendall and Michael McGarry report.

The large gap that exists between the coal producing regions, notes the SNL Energy analysis, demonstrates the problem mining companies have in trying to remain profitable in Central Appalachia, which is home to coal reserves that are among world’s best in terms of quality, but by far are the most expensive reserves to mine.

SNL Energy analysts say the latest figures represent the first increase in per-miner productivity in Central Appalachia since the peak year of 2003, but caution that the increase may be short-lived.

“Productivity increases may be the product of the industry’s increasing obsession with cost cutting in an effort to boost ailing margins or could potentially be a function of the idling and closing of the industry’s low-productivity of high-coast coal mines,” SNL Energy’s Kuykendall and McGarry report.

The SNL Energy report also notes that, “Central Appalachia’s fall in productivity has led many coal companies to hesitate in investing capital into the region. Recent earnings calls suggest productivity and costs are major concerns.”

The reports cites as an example Alpha Natural Resources Inc., which has operations in Letcher County, and is the “public coal company that most drastically trimmed its costs in 2014.”

Alpha “mentioned on its recent earnings call that it was pulling assets from its eastern division and sending it west while idling older machines,” write Kuykendall and McGarry. “The company has idled many of its Central Appalachian coal mines as it attempts to find a sustainable level of Central Appalachian production. Chairman and CEO Kevin Crutchfield has called the current market ‘as volatile as any in our career. … Over the last two years Alpha has taken significant steps to reduce the number of active mines, with accompanying total cost reductions of more than $350 million in 2013 and 2014. Unfortunately, the market conditions continue to be very challenging, especially for Central Appalachian thermal coal.’”

The report says that mining consultants Wood Mackenzie, based in Scotland, cautioned earlier in March that “72 percent of coal output in Central Appalachia is unprofitable,” noting that Wood Mackenzie also said that “roughly 17% of U.S. coal production estimated for 2015, the majority of which is from Central Appalachia, is at risk of idling or closure due to mine cash costs exceeding market prices.”

The report says the Illinois Basin appears to be the biggest beneficiary of Central Appalachia’s mining woes. It quotes Hallador Energy Company President and CEO Brent Bilsland as saying his firm is “in the right place” with “low-cost assets.”

“He (Bilsland) said that a major problem right now is that Central Appalachia and some Northern Appalachia coal miners are selling (a ton of coal) below costs just to stay in business.”

The report also notes that three Foresight Energy LP mines located in the Illinois Basin were the nation’s most productive underground mines in 2014, citing

Mine Safety and Health Administration data that shows Foresight’s three longwall mines averaged about 13.46 tons of coal produced per employeehour in the fourth quarter. That figure, says the SNL Energy report, is well over the Illinois Basin underground mine average of 4.51 tons per man-hour.

Ted Boettner, director of the West Virginia Center on Budget and Policy, a group that monitors coal mining productivity in that state, told SNL Energy that the decline in productivity “is the central reason that West Virginia’s coal market has grown uncompetitive with other coal producing states and regions in the West.”

“Since 2000, productivity has declined rapidly in West Virginia as the easierto reach coal seams have all but been mined out,” Boettner told SNL Energy.

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