Appalachian coal fights for survival on shale boom

March 21 (Bloomberg) -- Coal mining in Appalachia has survived deadly explosions, the Great Depression and the country’s largest armed insurrection since the Civil War. The latest threat is booming shale-gas production.

U.S. power utilities are favoring natural gas, which is trading at its cheapest in a decade as hydraulic fracturing opens up previously inaccessible reserves. Consumption of coal to generate electricity will fall 5% in 2012 to less than 900 million tons, a 16-year low, according to the U.S. Energy Information Administration.

Mining companies in Appalachia, an area covering 12 eastern states and home to 85% of U.S. coal mines, have cut at least 21 million tons of production this year, according to Doyle Trading Consultants in New York. The industry needs to curtail about another 90 million tons nationwide, with the “lion’s share” coming from Appalachia, to stem losses, according to CRT Capital Group LLC. Alpha Natural Resources Inc. and James River Coal Co., which mine in the region, have fallen 18% and 13% respectively this year.

“A lot of the marginal producers in Appalachia that were able to hang on in 2009 are in a much worse situation today,” Kuni Chen, an analyst with CRT in Connecticut, said in an interview.

Average operating costs now exceed coal prices for the first time in three years, according to data compiled by Bloomberg Industries. Appalachian coal, the U.S. benchmark grade, fell 28% in the past 12 months. Coal futures closed 0.4% lower at $61.75 a ton on the New York Mercantile Exchange yesterday.

Rising Costs

So-called mining cash costs in the region climbed 9.2% to $60.28 a ton in 2011, according to data compiled by Bloomberg Industries.

Gas futures in New York have tumbled 51% in the same period. Gas inventories were 51% above their five-year average on March 9 as surging production combined with the warmest winter in 10 years, according to data compiled by Bloomberg Industries.

For U.S. power utilities, who consumed 90% of the country’s coal production in 2010, the prospect of relatively cheaper gas supplies now and in the foreseeable future has pushed them to switch some of their generation to gas-burning plants from units that use coal.

Gas for April delivery fell 0.4% to $2.325 per million British thermal units at 12:54 p.m. in New York. Gas futures traded at $2.204 per million Btu on March 13, the lowest intraday price since Feb. 15, 2002. Gas is down 22% in 2012, the worst performer on the Standard & Poor’s GSCI Commodity Index.

Commodity Prices

“Power prices are in the tank,” said Gordon Howald, a utility analyst with Doyle Trading Consultants in New York. “In this environment, nobody’s building anything but natural gas,” he said, referring to power-plant construction.

U.S. coal companies have faced slumping commodity prices before. Coal prices declined in 2009 after the financial crisis led to a recession. U.S. coal production fell 8.3% that year, according to data from the U.S. Department of Energy.

Appalachian output dropped to 270 million tons in 1932 from a peak before the Great Depression in 1926 of 500 million tons, according to data from the U.S. Geological Survey. In Pennsylvania, home to U.S. Steel and Bethlehem Steel, production plunged 54% in the period, the data show.

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