Why falling labor productivity will increase coal producers’ cost

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Improving economy may not mean positive future for coal producers (Part 4 of 5)

(Continued from Part 3)

Falling mine productivity

Coal mine productivity refers to the number of shorts tons that are being extracted each labor hour. While coal mine productivity across the U.S. increased until 2003, it has been on a downtrend since then.

When a mine starts operating, producers (KOL) extract coal near the surface of the earth in both the methods using different tools. As they continue extracting more coal out of the earth’s surface, they have to dig deeper to extract the next lot which requires more labor hours to extract a ton of coal than it did when the coal was closer to the surface. Miners also have to employ sophisticated machinery from mining equipment manufacturers such as Caterpillar (CAT) to dig deeper which adds to the costs.

Coal is usually extracted in two ways—through surface mining and through underground mining. Surface mining is applied when the coal bed is available on or near the surface of the earth—in the case of the Powder River Basin in Wyoming and Montana. In underground mining, coal seems are located deep inside the surface of the earth—in the case of the Appalachians. Appalachian mines’ productivity has dropped by 40% from 2001 to 2012 while the productivity for the western region—dominated by the Powder River Basin—has dropped by 17% during 2001–2012. Appalachian mines are located deeper inside the earth’s surface, so the efforts and tools needed are much higher in order to dig even deeper. This leads to a huge drop in productivity. As a result, companies like Alpha Natural Resources (ANR) and Arch Coal (ACI) have a tight cost structure due to higher presence in the high-cost Appalachian region. In contrast, Cloud Peak Energy (CLD) operates only in the low-cost Powder River Basin which leads to better cost structure and greater ability to withstand the difficult operating environment.

The Environmental Protection Agency (or EIA) expects the downtrend in mine productivity to continue at an annual rate of 1.2% until 2040. Consequently, the cost of extraction of coal is expected to increase at 1.6% annually until 2040. While coal prices remain subdued, the costs continue to increase. The better economic prospects also aren’t welcoming news for the coal industry in the U.S. Continue reading the next section in this series to learn why.

Continue to Part 5

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