The renewed interest in coal as a fuel source for power generation will increase coal demand by up to 4 percent a year for the next 20 years. With so much coal produced domestically in this...
Coal: Inconvenient Truths
The current coal bust might lead to a future boom.
in demand (annual growth of 1.1 million tons/year). Lignite demand should remain relatively flat.
Fully allocated mine costs, which include full production costs including return on capital, are expected to increase over the forecasted period. The cash cost of coal for all U.S coal basins is expected to rise for a number of reasons, including: decreasing productivity due to thinner and deeper seams; limits on economies of scale; rising prices for fuel, equipment, tires, and explosives; competition for skilled labor across the energy sector; and an aging workforce that is nearing retirement in the East.
U.S. coal mine fully allocated costs are expected to decrease over the next five years by about 4 percent. This is a result of increases in production of PRB coal and decreases in production of Central Appalachian coal. Numerous industry sources have indicated that the MINER Act will add up to $8 per ton of coal extracted from underground mines due to increased safety costs, higher penalties, and more frequent stoppages.
At Western coal basins (including the Powder River and Rocky Mountain), fully allocated costs are expected to increase by about 5 to 6 percent over the next five years. Factors contributing to that change include: increasing coal ratios; seam splitting and washouts; higher input costs; and increasing tax and royalty costs. These cost increases are not expected to be offset by productivity-increasing technological improvements.
Productivity is the single largest factor that contributes to a mine’s overall production costs. Aggregate productivity at U.S. coal mines is likely to fluctuate through the mid-term. The variability in productivity is mainly due to large volumes of higher cost, lower productivity mines being shut-in, and some larger western mines ramping up production as market conditions and prices fluctuate. For example, in 2007 over 43 million tons of production capacity with productivity less than 19.6 tons per miner-hour will go off line. With reserve blocks becoming increasingly difficult to mine, major increases in productivity in the future are unlikely unless new technologies for extracting coal are developed.
Eastern U.S. productivity (Appalachia and Illinois Basin) primarily depends on the mine type (surface vs. underground) and technology ( e.g., continuous miner vs. longwall). Surface mines typically have higher productivity than underground mines due to accessibility and economies of scale that allow for easier and more cost-effective production. On average, eastern surface mines have almost twice the productivity as underground mines.
Central Appalachian productivity will decline by a total of 6 percent over the next five years as producers continue to move into thinner and more geologically challenging seams. Northern Appalachian productivity will not decline as rapidly as Central Appalachia, with only a 2.5 percent drop over the next five years. While some underground seams in this region are becoming smaller, the extensive use of longwall miners in Northern Appalachia helps support positive productivity. Even though Illinois Basin production capacity will grow over the mid term, productivity is expected to decline through 2010. Productivity in the PRB is expected to flatten over the next three years, but remain the highest of all the U.S.