Near to 17% of forecast US coal production in 2015 is at risk of idling or closure, according to a report from Wood Mackenzie.
The company’s Coal Market Outlook shows that the majority of the coal at risk is produced in the Central Appalachia region of the USA where, it is claimed, 72% of total output is unprofitable due to years of declining productivity, thinning seams and increasing strip ratios. More stringent government regulations and a highly paid workforce have also taken their toll, claims Wood Mackenzie.
But Central Appalachia – the highest cost region in the USA – is not alone. Other regions also have substantial amounts of coal at risk, ranging from 47% of production in Southern Appalachia to 8% in the Western Bituminous and Powder River Basin. “In aggregate, this equates to approximately 14% of US thermal coal production and 58% of metallurgical coal production being at risk,” claims Wood Mackenzie.
The company’s senior research analyst, Dale Hazelton, claims that there are a significant number of mines unable to cover their operating costs plus sustaining capital. Despite this, he said that mine closures, while not rare, are not a frequent occurrence.
“Part of the reason for this is the amount of thermal coal sold on the open market is very small compared to that under contract,” he said, explaining how contracts can over multiple years and prices may have been agreed well before the current market’s lows.
“A producer may also be able to beat the market prices as they have a valuable niche-quality coal, such as stoker coal, or the location of the mine is near an end-user providing transportation advantage over competitors,” Hazelton said.
For prices to rise, Wood Mackenzie argues that global demand for steel and power must increase or coal supply must decrease.
For Hazelton, growth prospects for steel remain tenuous at best due to the fragility of global economies. The only way for the market to get back into balance is for producers to cut production ‘sooner rather than later’ and either voluntarily or involuntarily through bankruptcy.