China's Using Less Metallurgical Coal Hurting USA Coal Jobs

Slowing growth in China is taking a toll on Appalachian coal mines and coal towns, which have one of the world's richest deposits of high-grade coal used to make steel (metallurgical coal).  China's metallurgical coal imports dropped to 2.6 million metric tons in August, from an average of 4.5 million metric tons per month through July.

Chinese demand metallurgical coal, whose low-ash and low-sulfur content makes it ideal for steelmaking, sent the price to a record $330 a metric ton in early 2011.  But the Chinese economy is slowing and so is its steel industry, which has sent the price of coal used for steelmaking down nearly 50% to $170 a metric ton.

The Chinese steel industry, which consumes half of all metallurgical coal mined each year, faces the possibility it could operate at a loss in 2012 for the first time as a result of overcapacity and weak steel prices. That would mean tougher times in West Virginia, where rail, barge, trucking and other jobs depend on coal.

While many have blamed the downturn in the U.S. coal industry on cheap natural gas supplanting coal and tougher environmental regulations, the slide in metallurgical coal demand has been equally devastating. Coal companies were caught flat-footed after ramping up production last year with the expectation that steep prices would cover their rising costs, despite coal's past cyclicality. Instead, demand in China began to falter just as Australian metallurgical coal production—interrupted by floods last year—surged back into the market.

Now coal mines are closing throughout Appalachia.

In July, Patriot Coal of St. Louis filed for bankruptcy protection, shortly after it lost a contract for coal bound for an Asian steelmaker. Patriot said it would temporarily idle metallurgical coal operations at three mining complexes in southern West Virginia and lay off 250 miners, in addition to 1,000 layoffs earlier this year. On top of that, Patriot has said it will need to reduce "unsustainable" pension and health benefits to 2,000 miners and some 20,000 retirees and surviving spouses.

Earlier this month, Alpha Natural Resources Inc., of Bristol, Va., which derives a large share of its profits from metallurgical coal, said it was cutting 1,200 jobs, or 9.2% of its workforce. Earlier this year, Alpha laid off more than 700 miners and trimmed production at more than 20 mines.  Consol Energy Inc. of Pittsburgh, which sells more coal into China than any other U.S. producer, earlier this month idled the nation's biggest metallurgical coal mine, which employs 620 miners. Arch Coal Inc.   trimmed its metallurgical coal production estimate by 21% this year.

Appalachian coal industry executives had been counting on metallurgical coal sales to steelmakers to offset the dwindling market for lower-grade thermal coal used by power plants. The thermal coal market has been weakening because utilities are buying cleaner-burning natural gas instead. Natural-gas prices have plummeted as energy companies used hydraulic fracturing to extract gas from vast shale formations.

In April, natural gas and coal each fueled 32% of the nation's electricity, achieving parity for the first time in the decades that the Energy Information Administration has tracked the data. For decades, coal powered about 50% of the electricity to the nation's businesses and homes. (WSJ, 9/27/2012)