When Massey Energy Chief Executive Don Blankenship announced plans this year for a 20 percent increase in exports of metallurgical coal -- the high heat-content rock that is mined underground -- Wall Street analysts asked him how he aimed to do it.
Blankenship noted the company had many ways to ship its coal out of central Appalachia, not only to East Coast ports but south to New Orleans or north to the Great Lakes. Asked during a February 4 conference call if the mines themselves could prove to be a barrier to Massey’s long-term goals, Blankenship suggested otherwise.
“I'd rather say the mine is where the opportunity to increase the volume is,” he said.
Massey’s drive to ramp up its underground production is now being questioned as a federal investigation begins into the worst U.S. coal industry disaster since 1970 -- the April 5 explosion at Upper Big Branch in Montcoal, West Virginia that killed 29 miners. While coal demand has been flagging in the United States, the rest of the world has been bidding up the price of the kind of high quality coal mined at Upper Big Branch that is needed to make steel. Massey had been seeking to capitalize on the hot global market for this metallurgical coal, known as “met,” despite the higher labor costs associated with mining a higher percentage of coal underground.
Weak market for surface coal
Blankenship is known for his combative defense of the practice of mountaintop mining, which blasts coal from surface mines with dynamite and flattens mountain peaks. But the market has been weak for mountaintop coal, most of which has been going to utilities to generate electricity. Coal consumption in the United States fell nearly 11 percent in 2009, according to the U.S. Energy Information Administration. Analysts cite many factors for the decline, including the economic downturn, utilities switching to natural gas, the growth of renewable energy, and new investments in energy efficiency. EIA analyst Fred Freme says that mild weather also played a role.
By the end of the year, however, demand was rebounding outside the United States for higher quality underground coal that can be used in blast furnaces. U.S. coal exports, which had fallen off from record levels set in 2008, increased 16.5 percent between the third and fourth quarters of 2009. And Freme says EIA’s figures show the trend continued at the start of 2010, with January metallurgical coal exports up 63.7 percent over the prior year. In contrast, “steam” coal exports -- for electricity -- were down 42.9 percent.
Massey had a rough fourth quarter 2009, with its profits down by half. But in announcing its earnings in February, the company noted that crude steel production in China was up 35 percent over the previous year. So Massey was aiming to increase its coal production by 2 million tons in 2010, most of it metallurgical coal it would sell abroad.
Analysts participating in the February conference call questioned Blankenship on the potential for higher labor costs. Already, Massey’s labor costs had increased since 2006 from $40 per ton to $50 per ton, in part due to more stringent underground safety regulation after the 2006 Sago, West Virginia, explosion that killed 13 miners, according to an analysis by Goldman Sachs analyst Justine Fisher. Blankenship said he expected better output in 2010 because so many productive days had been lost in 2009, due in part to the effort involved in complying with new regulations.
Ramping up production
After the deadly explosion at Upper Big Branch, it became clear that the Montcoal mine was one of the facilities where Massey was ramping up production. In a report to investors, Massey said it had planned to ship 1.6 million tons of metallurgical coal from the now closed mine over the remainder of 2010. That would have been 30 percent more coal than the mine produced in all of 2009. In 2009, the output at Upper Big Branch was more than three times higher than the previous year’s.
The U.S. Mine Safety and Health Administration says it is now investigating “all aspects of the accident, including potential causes and the operator's compliance with federal health and safety standards.” But MSHA likely will focus on locating the ignition source of the explosion and the technical cause of the accident, rather than on larger questions such as whether the company’s business goals had any effect on safety, says Tony Oppegard, a Lexington, Kentucky, mine safety attorney and former MSHA investigator. “Was the company ramping up production to meet these higher sales goals and cutting corners on safety in order to increase production? If you ask me those are important factors,” says Oppegard. He argues that those issues would be more likely to be aired if MSHA conducted public hearings on the accident, instead of relying on private, voluntary interviews, as is the agency’s typical practice.
Upper Big Branch was cited 50 times by MSHA in the month leading up to the accident, including for ventilation issues. President Obama today called the mine’s record “troubling,” and said he was directing his administration to strengthen enforcement of mine safety laws. Even after the changes in law that followed Sago, Obama said, “Safety violators like Massey have still been able to find ways to put their bottom line before the safety of their workers.”
But Massey called the White House statements “regrettable.” The company says that since January 2009 it had less than one violation per day of inspection at the mine, a rate consistent with the national average, and that most of its citations were resolved the same day. The company says it has made significant investment in safety improvements, resulting in a lost-time incident rate that has been better than the industry average for 17 of the past 19 years. “The safety of our members has been and will continue to be our top priority every day,” the company said in statements after the accident.
Massey plans to make up for some of the lost production at Upper Big Branch by increasing production at its other mines.
Meanwhile, global demand for underground Appalachian coal continues to surge. In the week following the accident, an index compiled by Energy Publishing Inc. showed that spot prices for metallurgical coal at the port of Hampton Roads, Virginia, were up 22 percent.