The collapse in energy prices is dealing another blow to the struggling Appalachian coal industry, with estimates that two-thirds of Eastern Kentucky’s coal output is now unprofitable.
“It’s pretty bad for Kentucky,” said Dale Hazelton, senior research analyst at Wood Mackenzie, a leading energy consulting firm.
The price of coal, just like oil and natural gas, has fallen because there’s a glut of supply and not enough demand, Hazleton said. Central Appalachia is by far the most vulnerable coal-producing area in the nation to sink in prices because it’s the most expensive to mine.
About 70 percent of the coal production in Eastern Kentucky and throughout Central Appalachia is not profitable at current prices, Hazleton said, raising the risk of coal mines being idled or closed.
The number of coal jobs in Eastern Kentucky has already plummeted by half in recent years and continued to drop in 2014, reaching the lowest total since the state started keeping records.
Eastern Kentucky produces primarily thermal coal, which is burned for electricity, along with some higher-grade metallurgical coal, also known in the industry as met coal, which is used to make steel. Both types are struggling in the market downturn.
“Certainly a lot of Central Appalachian producers – especially the thermal, but also some of the met ones – are underwater at current price levels,” said James Stevenson, the director of North American coal analysis for the global energy consulting firm IHS,
Central Appalachian spot prices have dropped by more than 30 percent since 2011, and are at $53.06 a short ton.
The estimate that two-thirds of Central Appalachia’s coal production is uneconomical didn’t come as a surprise to Bill Bissett, president of the Kentucky Coal Association, which represents mining companies throughout the state, although he thinks the figure “may be on the high side.”
Bissett said the coal industry is struggling with the plummeting price of natural gas, which competes with coal in the electricity generation market. With cleaner-burning natural gas this cheap, power plants are more likely to choose it over coal.
Environmental regulations, Bissett said, also are adding to the cost of coal production. But Bissett said coal job losses, once at apocalyptic levels, have slowed and the mines in Kentucky now tend to be owned by smaller, more nimble, companies rather than multi-national firms.
He said it’s possible there could be another round of big job losses but “I think it’s now more dependent on the health of the individual company.”
Bissett said the hope is that the companies can weather the price downturn as well as the final years of the Obama administration. Environmental Protection Agency actions such as a plan to limit mercury and hazardous pollutants at coal-fired power plants have led Republican members of Congress to declare there is a “war on coal.”
Wood Mackenzie analyst Hazelton said government regulations add to the costs, but coal’s current problems are far more about the market than the EPA.
“You’ve got more coal than you need and prices just don’t support much Central Appalachian production right now,” he said.
Central Appalachia is so vulnerable to low prices because the expense of mining makes profit margins thin. The area has been mined heavily for a century, and the thick coal seams are harder to find.
In contrast, the Powder River Basin of Wyoming and Montana, where large strip mines are common, 92 percent of the coal production remains economic at current prices, according to Wood Mackenzie. The Illinois Basin, which includes the mines in Western Kentucky, is also cheaper to mine than Central Appalachia and most of its coal production is still profitable as well.
In fact, Wood Mackenzie estimates that 83 percent of coal production nationwide is still economic. It’s mainly in Central Appalachia where the costs are exceeding the profits, the firm said.
Hazleton said companies keep producing more coal at a loss, hoping they can avoid the huge financial hit of a mine shutdown long enough to outlast competitors and for prices to rebound.
But the coal industry needs to cut production in order to get the supply and demand back in balance, he said.
“This needs to happen sooner rather than later, either voluntarily or involuntarily through bankruptcy, as the losses these mines are generating cannot be sustained,” Hazleton said.