The market
From your company point of view, where is the coal industry in the current cycle? Has it peaked and will we start to gradually return to lower prices and mine shutdowns, or is there still some upside left in the current market? What are your forecasts: immediate, a year from now and longer term?
We have seen a lot of price stability and overall favourable increases across most regions since the third quarter 2004 and continuously throughout 2005.
The only exception we observed was in the Powder River Basin, which lagged price increases in all of the other regions until the second quarter of 2005. The PRB began steady increases and then escalated late in the third quarter.
The Northern Appalachian pricing also began to weaken in October. On the other hand, the Illinois Basin pricing had held quite firm; general spot and contract pricing (usually three-year terms) traded at about the same price level, so there appears to be very little discount in the current market for term sales.
However, we must remember that the industry has historically had a tendency to oversupply strong markets, and this may happen again.
A more disciplined theme now dominates the coal industry, which bodes well for the prospect of longer-term stability. There is no doubt that companies are planning for significant new production.
Under these circumstances, the rationale exists that both production and prices will remain stable and reasonably favourable.
With a disciplined industry now more established, it is logical to expect that the industry will fully retain its favourable markets and also enjoy profitability.
On a longer-term basis, there are concerns. Manpower needs in all sectors will remain a challenge. The industry must realise that all the fossil-fuel industries (oil, gas and coal, as well as the stone and aggregate industries) recruit from the same limited pool of prospective graduates.
The industry faces the growing dilemma of decreasing numbers of mining engineers and educators due to retirement, and an overall decrease in the number of students and university programs.
An increase in state and federal government funding to coal geology and mining engineering schools and departments would strengthen and enhance programs and professional staff. This funding is critical to meet future industry manpower needs and maintain the long-term stability of these crucial industries.
The most significant challenge will be properly staffing the industry in the next 10 to 20 years by maintaining positions for miners, engineers, geologists, environmental specialists, hydrologists and seasoned managers.
Despite the overall labour concerns, technical improvements and advancements within the industry helped offset segments of the labour shortage. Mergers, acquisitions and consolidation of the industry also provided considerable relief and stability to the manpower issue.
The above factors require considerable investment and will impact prices; but considering the significant challenges related to the needs of the coal industry, it is difficult to imagine that prices will not increase.
I certainly expect to see a softening of prices in the near term (1-3 years) followed by a steady and gradual increase thereafter.
Mining today’s reserves and future reserves will require additional investment, more improved technologies and increased labour and transportation costs.
It is also reasonable to expect that similar challenges and increased costs will prevail with the competing oil and natural gas fuel production processes.
How has the recovery of the coal market over the past few years changed your business?
Our company was initially established in 1975 as a geologic consulting firm primarily servicing the coal industry, and the ups and downs of the coal industry significantly impacted our project load.
However, with continued growth in other skill sets and diversification into civil, geophysical and environmental engineering services, we have maintained consistent growth in revenue and professional staff throughout our company’s history.
This diversification allowed us to weather the fluctuations in the coal industry. In the early 1970s (the “boom days” of the coal industry), our company experienced steady and favourable growth.
It was during this time that we introduced geophysical logging to the coal industry to accurately define subsurface coals. This service was very well received and contributed to our growth and diversification.
Today, this facet of our work continues, and we now service multiple coal basins in the US with a suite of geophysical logging options developed to meet the changing needs of our clients.
As changes occurred within the industry in the 1980s and many of the high-cost producers exited the industry, our company actually increased staff and focused on increasing our abilities to predict mining and geological hazards in advance of mining.
These services were essential to industry growth. Also during this period, the top 10 producing companies reached an all-time level of production and accounted for 47% of US production. The transition, brought about by mergers and acquisitions, was healthy and established discipline and focus within the industry.
In the 1990s, the coal industry reacted to increased environmental laws and regulations along with some depressed prices and tight markets.
The industry responded with improved technical consolidation and exercised “economies of scale” to handle the increased pressures to maintain profitability. Many companies, however, were not able to manage the transitions successfully.
By the end of the 1990s, the consolidation and downsizing within the coal industry resulted in the top 10 coal producers in the US accounting for over 60% of the total US coal production.
With this change, the industry gained further technical consolidation and increased overall sophistication of mining expertise and management. With ever-increasing mining and geological problems, both the industry and equipment manufacturers responded aggressively with thin-seam mining technologies.
At the same time, more attention and investment was provided to engineering, geological, hydrological and roof stability programs and investigations by industry, equipment manufacturers, educational institutions and consultants. Consequently,improved roof stability and prediction techniques were developed during this period.
During the 1990s, the Government shut down the US Bureau of Mines, which was charged with the primary responsibility for...click here to read on.
