Sunday, September 21, 2003

Industry brief: Coal Coal is an industry that has its ups and downs in the US. In recent times it has been down, competing mostly against cheap natural gas (as a fuel for electric generation), dealing with labor problems and environmental restrictions. But coal is turning around. The second Bush administration is removing restrictions on both strip mining and on emissions from coal-based electric generators. Natural gas prices have risen, and coal has become ever more competitive. Stockpiles are low. And as mining moves from labor-intensive, highly unionized underground work in the Appalachians to open-air, heavy equipment, less-unionized Rocky Mountain strip mines, the cost of extracting coal has declined. Coal already is an oligopoly. At present, the top five companies control over 50% of all coal production, and the top ten control over 66%. That's not an overwhelming amount of consolidation, but it's part of a relentless pattern. In 1984, according to a report by consulting group Pincock, called "Consolidation in the Coal Industry," the top five companies owned only 24% of the market. A number of major consolidations have changed the landscape, and with coal prices rising, we're likely to see a lot more in the near future. That's seconded by a recent Reuters report ("Acquisitions in coal industry expected to heat up,. 7/2/03): The largest U.S. coal miners, looking to cash in on an expected rise in coal prices, are trying to grow by buying smaller rivals instead of gambling on developing new mines because it is cheaper and less risky, analysts say. The high fixed costs of investing in unproven mines and concerns about the quality of their reserves are putting a lid on the development of new mines. Instead, coal producers like Arch Coal Inc., are buying smaller producers as a way to meet rising demand while keeping a tight control on costs. The article explains that it is more desirable to acquire preexisting mines, since the problems of labor contracts and local environmental site-location have already been solved. In addition, it's likelier that transport problems (roads, railroads) have been already taken care of. Thus it's faster and cheaper to expand by gobbling up smaller mining companies and expanding their operations by digging new mines. According the article, "coal prices are expected to rise around 15 to 20 percent over the next 12 months. " Long-term coal contracts are expiring and that should bump up prices as well. In the last year #3 Arch Coal bought #7 Vulcan Partners, making Arch the second largest coal firm. #1 Peabody acquired #13 Black Beauty Coal. Nor is that a North American phenomenon. According to the Pincock industry report on consolidation we cited above, "It is also of great interest to note that, of the top five producers, every entity has been deeply involved in the ownership revolution and that all entities, other than Arch Coal, have been or are now owned by foreign entities. There is no doubt the coal industry is a global market, not only in terms of production and marketing, but in terms of ownership as well." That quote is only partially correct. Peabody Coal has since been spun off form the UK conglomerate that owned it. It does, however, own mines in Australia. Kennecott Coal is a subsidiary of Rio Tinto, an Australia-based mining concern with worldwide interests. RAG American is a subsidiary of German energy firm RAG AG; Consol Energy is owned by another German company, RWE. TXU is part of an Australia-based conglomerate. Other top coal companies seem to have North American ownership. What is true is that almost all of these companies have undergone changes in ownership within the last five years, and the ownership situation remains fluid. One big trend over the decade has been the tendency of some oil and gas companies, such as Arco, Exxon, Sun, and Chevron to discard their coal operations.                            Top Ten US Coal Producers, 2002 Company % of coal production, 2002 Peabody Coal 13.7 Kennecott Energy 10.2 Arch Coal 10.1 RAG American 6.4 Consol Energy 5.6 A. T. Massey Coal 4.0 Vulcan Partners 3.9 Horizon Natural Resources 3.6 North American Coal 2.7 TXU Corporation 2.2 Source: EIA 7:50:52 PM

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