Challenges for Coal
“We can be proud of what we do because we are providing nothing less than a vital national service,” said Pete Lilly, COO, CONSOL Energy. “Electricity is vital – as the blackout in the northeast and the hurricanes in Virginia and the Carolinas last year proved. We need it. We depend on its reliability and we cannot function normally without it. That is a vital public service and coal is the cornerstone of which our electricity supplies are built.”
Lilly was addressing the 31st Annual West Virginia Mining Symposium sponsored by the West Virginia Coal Association at the Charleston House Holiday Inn, Charleston, West Virginia. Lilly provided seven reasons for optimism in the coal industry.
First, no other fuel has yet emerged to challenge coal’s dominant position in the generation of electricity. According to Lilly, coal generates more than 50% of the electricity in the United States. That’s 300 gigawatts of generating capacity. There is no other means of generating electricity that under foreseeable circumstances can come remotely close to replacing coal in the generation of electricity. The existing fleet of coal mines and coal fired power stations are valuable national assets that ensure the United States economy has access to low cost electricity.
Second, prices for coal are rising. Coal markets are tight right now largely because supplies are tight. Lilly said that demand is satisfactory, but the financial decline of the small and mid-size producer and the higher regulatory hurdles that must be cleared to bring additional production into market have created a knife-edge balance between supply and demand. According to Lilly, any upward movement in demand is immediately followed by and upward movement in price. “Customers with a significant coal-fired base of generation recognized that the days of overcapacity have come to an end,” said Lilly.
Third, we have never had a better-trained, better educated, or more skilled workforce in the coal industry than we have today. The number of people actually engaged in coal mining has declined substantially over the years, from 700,000 in 1923 to 75,000 active miners today. At the same time the United States coal industry is producing more coal each year on average than any time in the history of this nation. This is the result of incredible productivity gains made possible through the deployment of increasingly productive and technically advanced mining technology.
By adding a second longwall mining system at McElroy Mine later this year, the mine’s capacity will be increased to about 11 million tons making it the largest underground coal mine in the United States. Twenty-five years ago a big underground mine would have produced two million tons per year. “No longer is the miner’s chief attribute the size of his shoulders or the strength of his muscles,” said Lilly. “It is the power of his brain.”
Fourth, our mines are safer than ever before. “The safest mines are usually the most productive mines,” said Lilly. “Having worked in this industry for more than 25 years, I can attest to the truth of this statement,” he said.
Between 1991 and 2000, coal mine safety in the U.S. industry improved by more than 30% while productivity increased by more than 70%. Technology alone has not been the key to improve safety, according to Lilly, safety awareness and training have been essential. Lilly mentioned the three A’s: awareness, analysis, and action. Safety awareness is the process of constantly reminding people that hazards can be inherent in any activity.
Analysis is the constant effort to break down tasks into their component parts and develop a safe procedure for accomplishing the task. Every task at CONSOL mines has a written safework procedure accompanying it. There may be many ways to accomplish a task but not all of the ways may be safe.
“Finally, safety involves Action, doing the job the right way, correcting employees when the job is done improperly. We still have accidents and even one is too many, but the mines today are safer because we have made safety a priority and a habit,” said Lilly.
Fifth, capital markets are better informed today about coal than at any time in recent history. In the long run this will translate into better and lower cost access to capital markets. When CONSOL went public in 1999 there were only two other coal equities. Not only were there few coal equities, but as a consequence there were few coal analysts writing about coal. At the time of the IPO, CONSOL had three analysts covering the company. Today, there are 14 equity analysts and two bond analysts. This increased attention creates a better understanding on the Street of the coal business and its opportunities.
Wall Street today is enthused about coal as evidence by the fact that all the publicly owned coal companies hit 52 week share price trading highs. That enthusiasm will mean access to capital markets at a time when the industry needs to recapitalize if it is to meet the nation’s needs for coal-fired electricity.
Lilly said that CONSOL was recapitalizing. In March, they expect to begin full production at the Loveridge Mine after being idle for several years. At full production Loveridge should produce between five to six million annual tons, employ 465 people with an annual payroll of $25 million, spend $27 million per year on supplies and services and generate $8.5 million annually in state and local taxes.
Lilly said that CONSOL was in the last stages of the expansion of the McElroy Mine. A new preparation plant has already been built to serve the Ohio River markets and a second longwall mining section will go to work in the third quarter. All told CONSOL will have invested $139 million of the McElroy expansion by the end of this year.
Sixth, the coal economy is getting organized. There are numerous businesses that exist in part or in whole because they provide products and services to the coal industry according to Lilly. This is the untold story of coal’s benefits to this country. While it is true that the automation and technology have reduced the number of direct jobs in mining, the coal industry is a tremendous consumer of products and services. That consumption translates into real jobs and real wealth in the coalfields and beyond.
Finally, government policy remains largely committed to coal. At the end of the day, said Lilly, government still recognizes the one immutable truth – that coal for better or worse remains the cornerstone of our increasingly electrified economy. The right to produce the coal is circumscribed by an obligation to repair and restore what is damaged in the process. The need to burn coal is counter balanced by a mandate to burn it as cleanly as possible.
“Now let’s look at the challenges, said Lilly. I think there are three: Geology, Geriatrics, and Government. The three G’s.”
With regard to Geology, Lilly referred to more difficult conditions in Central Appalachia with thinner seams and less extensive reserves with the need for the development of better mining equipment. In the Powder River Basin stripping ratios are increasing and with that mining costs. Geology is the miners constant challenge whether it is reserve degradation, roof control, or highwall stability the challenge is to extract coal safely and profitability on a daily basis in a changing environment.
Lilly referred to his next G, Geriatrics. The average workforce age is 50 and in the next five years many of them will retire. With the industry needing to recruit new employees with the skills to work safely and productively. There is the challenge of providing benefits, particularly medical benefits to retired miners and their beneficiaries. According to Lilly, last year medical costs increased ten percent. An annual cost for retiree medical adds roughly $2.00 to $2.50 per ton. It is a challenge for companies to generate the cash to pay for these promised benefits and it is the reason why everyone should be concerned for the financial health of industries such as the coal industry.
Lilly referred to the next G – Government. Government – through statute and regulation – determines whether or not mining companies prosper or perish, said Lilly. Applauding Governor Wise and the legislature for tackling the issue of the trucking law, Lilly referred to other issues that must addressed on which the fate of the industry depends.
• Predictability and consistency in the permitting process;
• Continue to reform the worker’s compensation system;
• Recognize that technology now allows the safe use of diesel equipment in coal mines;
• Ask the government regulators to recognize that the coal industry is essential to the state of West Virginia;
“When you look past the day-to-day politics or news coverage, I think the long term fundamentals of coal are very strong,” said Lilly. “We have every reason to be optimistic and as leaders in the industry we have the duty as well. Spread the word, keep the glass half full, and I guarantee that the opportunities for coal will remain for all of us to share.” cl
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