Coal industry, West Virginia may see decline

Oct 13 - McClatchy-Tribune Regional News - George Hohmann Charleston Daily Mail, W.Va.

The coal industry has been a major force in keeping West Virginia out of a recession but the industry's -- and state's -- fortunes may be about to change.

West Virginia's exports soared 43 percent in the first six months of 2011 to $4.4 billion, led by coal, which accounted for $2.6 billion of the total. Most exported coal is metallurgical or coking coal, which is used to make steel. It commands a much higher price than steam coal, which is used to make electricity.

Mark Muchow, state deputy revenue secretary, has noted that higher coal exports and higher coal prices continue to result in double-digit gains in severance tax receipts.

The state collected a record $526.9 million in coal severance taxes in the fiscal year that ended June 30, Muchow said Wednesday. Of that amount, $390 million was deposited in the state General Revenue Fund.

The official forecast predicts coal severance tax collections will decline to $519 million in the fiscal year that began July 1. The forecast was made in December.

"Even though total severance tax collections for the first three months of this fiscal year are up by nearly 19 percent over last year, there are signs of an emerging trend of slower collection growth on the near-term horizon," Muchow said.

"Coal is one industry that may experience both a boom and a bust in a single year."

When it comes to the coal company stocks, that cycle has already occurred this year. Most coal stocks hit a 52-week high in March or April and sank to a 52-week low last week. Although the stocks have bounced back a little, they are still down 30 percent or more from their 52-week highs.

"'Collapse' isn't a word to be bandied about in mining circles," The Wall Street Journal observed last week. "But how else to describe the recent precipitous drop in stocks of U.S. coal producers?"

The Journal noted that companies reporting production problems have had their stocks hammered after they disclose bad news.

From a larger perspective, the newspaper noted that the industry has become increasingly focused on producing coking coal. The Journal reported that global financial services firm Morgan Stanley has determined that while coking coal is less than 10 percent of total U.S. coal output, it accounts for about half of the sector's earnings.

"Japan, China, India and Europe import nearly three quarters of the world's seaborne coking coal," The Journal said, referring to coal shipped on ocean barges. "Everything from natural disasters to monetary tightening have cut or could cut steel demand in those regions. Meanwhile, half the world's exports of coking coal comes from Australia, where output is now recovering after last year's floods."

Meanwhile, there's concern that economies around the world are slowing down. All of which may help explain why coal company stocks have fallen out of favor.

Alpha Natural Resources, which bought Massey Energy in June, is the largest coal producer in West Virginia. The combined company has 6,748 employees in West Virginia, making it the third-largest private-sector employer in the state. Alpha says it paid $596.8 million in wages in West Virginia last year, bought $472.6 million worth of goods and services from suppliers and paid $157.7 million in state and local taxes.

On April 4 Alpha's stock traded at $71.19, a 52-week high. It sank to $15.49 on Oct. 4. The stock closed Wednesday at $20.79, off 71 percent from the April high.

Other coal stocks have endured a similar fate. Consol Energy's stock traded at $56.32 in March, fell to $30.56 last week and closed Wednesday at $38.94, down 31 percent from its high. Arch Coal's stock traded at $36.99 in March, fell to $13.09 last week and closed Wednesday at $16.84, down 54 percent from its high.

West Virginia's coal industry faces some unique problems. One is the fact that after 100 years of mining, the easily reached seams of coal have been mined. The state is, as The Journal put it, "a veritable Swiss cheese of old shafts."

Another is the industry's ongoing battles with the federal Environmental Protection Agency.

"The challenges are clearly there, such as the accessibility to the seams. And we've risen to those challenges. When you look at production, I think you'll see we're on the upswing compared to last year, up 2 or 3 percent," said Bill Raney, president of the West Virginia Coal Association. "I continue to contend we have the best coal miners and coal mine managers in the world and they know how to address those challenges.

"It's remarkable to me there's demand for our coal all over the world and yet the federal government seems to be doing everything they can to diminish the use of coal in this country, even though America has more coal than any other country in the world," he said.

Considering the March earthquake and tsunami in Japan and violent storms that have affected some areas, "you would hope there would be a resurgence in demand for coal," Raney said. "It's an awful way to frame a recovery but infrastructure has to be put in place after natural disasters."

"We need to keep our jobs here," Raney said. "If we would continue to use coal and push the development of the technologies that are so advancing in regards to environmental achievement, we would again become the world leader in the use of coal. We have more coal than any other country and we truly ought to be taking advantage of it."

The coal industry is notorious for its boom-and-bust cycles. One doesn't have to look back very far to find the last time coal stocks cratered. It happened most recently in late 2008 and early 2009 when many economies slowed and the United States was in the Great Recession.

Between the second quarter of 2008 and the second quarter of 2009, coal production in West Virginia fell about 13 percent, according to West Virginia University's Bureau of Business and Economic Research.

Contact writer George Hohmann at business@dailymail.com or 304-348-4836.