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Caught in the coal crunch

As West Virginia coal prices are rising, especially on the spot market, coal production is dropping and mining employment has plummeted.

From 1975 to 1982, the Mountain State had between 53,941 and 62,982 coal miners. During those years, annual production reached 129 million tons.

In 1997, West Virginia produced 182 million tons of coal. But it took only 18,165 miners to set the state's all-time production record. Last year, fewer than 15,000 miners still had jobs.

Most West Virginia coal is mined under long-term contracts with major power utilities, such as American Electric Power. That coal generally sells for between $25 and $30 a ton.

But coal sold on the spot market in Central Appalachia to buyers, who do not have long-term contracts, hit $55.25 a ton the first week of this month, according to the U.S. Energy Information Administration.

Yet production dropped from 175 millions tons in 2001 to 146 million tons in 2003.

(The latest spot market prices were $45 a ton in northern Appalachia and just $6.75 a ton in Wyoming's Powder River Basin.)

Deck Slone, Arch Coal's director for investor relations, said, "We think the demand for high-quality eastern coal is growing. The economy is showing new signs of vigor - a significant driver for coal prices.

"Natural gas prices are triple what they were a couple of years ago, driven by a shortage in the natural gas supply. Gas production is going to be declining," Slone predicted. "Today, utilities have a huge economic incentive to maximize the utilization of coal-fired plants."

Slone noted the "precipitous decline" in coal production in West Virginia, dropping by 20 percent from 1997 to 2003.

"This year, coal production is down again, despite the fact coal prices are extremely strong," Slone said. "A significant part of the story is the regulatory climate in the state. It is very complex and challenging.

"There is very little predictability in permitting requirements. At the prices we are seeing today, coal producers should be seeking to increase their investment and production. But there is difficulty in securing permits."

Jim Truman, a coal market and supply analyst for Hill & Associates, believes recent production declines also have other causes.

"Permitting difficulties are one. Another is the general depletion of thicker coal reserves. As we go into thinner and thinner coal seams, it becomes more expensive to mine.

"Another issue is that labor is harder to find. There are a lot of miners in the 40-plus age range. We have lost a generation of miners. Today, it is hard for a coal mine to look like an attractive place for people in their 20s to go to work," Truman said.

Stephanie Timmermeyer, director of the West Virginia Division of Environmental Protection, does not think the permitting process is hurting production.

"Is it easy to get a mining permit? I don't think so. It shouldn't be easy. Mine permits go through a rigorous review at our agency. If they meet all our environmental criteria, they get issued. If they don't, they get denied.

"In the past, there were issues with our agency being able to get permits out. But a lot of that had to do with the mountaintop mining lawsuits. In 2002, there was an issue with permits.

"But in 2003, our agency made great strides. We made internal administrative changes. While mine permits go through a rigorous review, they don't sit on someone's desk because that person is on vacation for two weeks or at a conference," Timmermeyer said.

The number of acres in newly issued DEP permits dropped from 13,671 acres in 2001 to 7,044 acres in 2002. Last year, it rose to 22,046 acres.

Norm Steenstra, the director of the West Virginia Citizen Action Group, spent 13 years operating small mines in places like Clay County.

Steenstra believes today's West Virginia coal prices are up because coal supplies are down. "To blame lower production on the environmental permit process is not true.

"Coal is an industry that traditionally overproduces, and therefore contributes to a soft market. If you take Economics 101, you learn that if you have a whole lot of product, high prices are not going to be there."

In the past, some environmental regulations have actually helped some companies.

"When new provisions of the Clean Air Act went into effect in 1990, it spurred a radical shift in production from the northern coalfields to the coalfields below Kanawha County," Steenstra said.

"The Clean Air Act shifted production, but did not change production numbers. Some companies benefited, like Arch Coal and Massey Energy. Others, like Consol, did not."

Growing exports are also spiking today's prices.

Truman said, "Export demand has picked up, especially for coking coal, for which West Virginia is a prime supplier. Our exports had fallen over the past few years, but are up this year."

West Virginia exports are increasing to Europe, Brazil, Japan and India.

"We are not used to big price increases," Truman said. "They had been relatively stagnant for a long time."

Truman believes seam thickness will remain a major challenge.

"Coal companies always go after the bigger seams first. By the time they get to the thinner coal, they hope technology will have increased to the point where mining costs are reasonable."

Timmermeyer said her agency will continue improving the permitting process. "We are seriously considering consolidating permitting in our main offices in Nitro. Having all permitting under one roof, supervised by one person, will make the process more consistent."

For years, DEP has issued permits from its several regional offices around the state.

But whatever happens, Slone sees a good future for Arch Coal, his company, and for the whole industry.

"We believe the outlook for coal is very bright and the demand for high-quality eastern coal will remain strong."

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