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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.

Mine Explosions

The region’s coal industry recovered from earlier crises. In 1921, police and troops helped put down a revolt near the town of Matewan by thousands of West Virginian miners seeking to unionize, according to the Friends of Blair Mountain, an activist group seeking to preserve the area.

More recently, safety has become a focus. Coal-mine explosions have killed 59 miners in West Virginia, Alabama and Kentucky since 2001, according to data from the Mine Safety and Health Administration, part of the U.S. Department of Labor. In April 2010, 29 miners died in a blast at Upper Big Branch, a Massey Energy Co. mine in West Virginia.

Alpha, which completed its US$7.1-billion takeover of Massey in June, in December agreed to pay US$209.3-million to end a criminal investigation and civil proceedings related to the explosion.

Producers in the region face challenges that didn’t exist in the last downturn in 2009. Inventories of the fuel held by domestic customers will soar to a 10-year high at the end of 2012, according to Doyle Trading. Mining companies also can’t rely on sales to foreign steelmakers to compensate as prices for those exports have declined.

Export Demand

Metallurgical coal, a premium coal variety used that in the U.S. is mined almost entirely in Appalachia, is used in steel blast furnaces. The raw material is typically more profitable than thermal coal sold to power stations. Steelmakers outside the U.S., who purchase about 72% of the country’s output of metallurgical coal according to the EIA, may buy this year at a slower rate.

Goldman Sachs Group Inc. dropped its estimate for growth in steel output in China, the biggest producer of the metal, to 2% from 6%. Andre Benjamin, a New York-based analyst at Goldman, said in a March 18 note that prices for U.S. metallurgical coal may fall to US$175 a ton in 2014 after touching US$225 this year.

Environmental Rules

Mark Levin, an analyst at BB&T Capital Markets in Richmond, Virginia, predicts metallurgical coal exports will fall to 61 million tons in 2012 from a record 69 million tons in 2011.

“It’s simply hard for us to imagine 2012 U.S. met exports being anywhere close to 2011 levels,” Levin said in a note yesterday.

Meanwhile, the U.S. Environmental Protection Agency is proposing the Cross-State Air Pollution Rule to cap sulfur- dioxide and nitrogen-dioxide emissions. Coal-fired power plants account for most of those two pollutants, according to the EPA.

“That has really put a chill on utility buying,” Peter Socha, chief executive officer of James River, said at an industry conference on March 6.

Appalachia will produce 322 million short tons of coal in 2012, a 5% decline from last year, according to an outlook published March 6 by the EIA.

James River and other Appalachian coal producers — Alpha, Patriot Coal Corp. and Arch Coal Inc. — are the worst-performing U.S. members of the Stowe Global Coal Index so far this year.

Alpha Cuts

Alpha, which gets most of its revenue from Appalachia, said Feb. 3 it expects to reduce output by about 2.5 million tons a year of thermal coal and 1.5 million tons of metallurgical coal because of “adverse” market conditions. Analysts have widened their projected first-quarter loss for the company by 90% in the past 10 days to 1.9 cents a share, according to estimates compiled by Bloomberg.

Rick Nida, a spokesman for Alpha, and Janine Orf, a spokeswoman for Patriot, didn’t immediately respond to requests for comment. Consol will keep monitoring demand and respond accordingly, Lynn Seay, a company spokeswoman, said in an e-mail yesterday.

Arch will maintain its timetable for developing its metallurgical-coal projects including Tygart Valley in northern Appalachia, Kim Link, a spokeswoman, said in an e-mail yesterday.