November 26, 2018 Read More →

Study: Production costs key in closure of Appalachian coal mines

S&P Global Market Intelligence ($):

A new working paper focused on Appalachia coal mines concludes that mounting production costs were responsible for far more closures than [falling] natural gas prices in the time period they studied.

“We used a model to analyze these different scenarios, and what comes out of it is, rather than these different demand-side factors, which have been recently attributed as the biggest heartache for Appalachia mining firms, we actually found that it was their own production costs that were likely the biggest drivers of the industry’s decline in that region,” said Brett Jordan, a postdoctoral researcher at the University Alaska Anchorage’s Institute of Social and Economic Research and the lead author of the paper.

The paper modeled mine closure decisions as a function of expected profitability and concluded that between 2002 and 2012 — a period that largely precedes a boom in Marcellus shale development that flooded Appalachia and surrounding regions with abundant and cheap natural gas —about two-thirds of observed coal mine closures were caused by declining profits. Some of the factors leading to reduced profits include lower worker productivity, higher health and safety costs, and higher bonding costs. Natural gas prices and reduced electricity consumption independently explain about one-third of the mine closures in the observed period, the report concludes.

The new working paper from Jordan and his co-authors found that between 2002 and 2012, the real per-ton extraction costs in Appalachia had nearly doubled, with companies attributing factors such as the price of machine capital, steel, replacement parts, labor and diesel fuel in their public filings. Companies mining in the region have also increasingly pointed to tightening environmental and labor regulations as the depletion of coal reserves continues to push these companies into thinner and lower-quality seams of coal in the region.

“The conclusion that declining mine productivity explains more closures than declining coal demand is perhaps surprising, given the focus of the literature and public debate on demand rather than supply-side factors,” the paper said. “However, this conclusion is consistent with the magnitudes of the shocks. During the sample period, declining productivity reduced annual operating profits three times as much as did lower natural gas prices or electricity consumption.”

Had there not been such a drastic change in productivity, coal prices may have been sufficiently low for coal-fired plants to be competitive with natural gas plants, the report’s authors wrote.

More ($): Study points to supply-side costs as biggest driver of Appalachia’s coal woes

Comments are closed.