Depletion of reserve

Since thicker coal seams that are closer to the surface are often first excavated, mining costs tend to rise over time. While new discoveries of low-cost mines and technological advancements will keep affecting the supply amount from time to time, commodity costs typically experience upward pressure over time.

Lower coal mine productivity: Companies face higher future costs

Appalachia

The previous article showed that the cost of mining in Appalachia region is much higher relative to other coal basins in the U.S. But it’s also important to know that mining cost in Appalachia has been rising over the last few decades. This is because as lower-cost mines are gradually mined, companies such as Alpha Natural Resources (ANR), Consol Energy (CNX), and Arch Coal (ACI) have to dig deeper into the ground and mine from thinner seams.

As the chart above shows, coal mine productivity, measured in tons of output per labor hour, has fallen since 2001 in Appalachia—especially in Central Appalachia. And as mining costs increase, Appalachia coal prices will rise as well. Given the high substitutability of different coal ranks, Appalachia coal’s higher mining cost makes it more unattractive relative to Illinois and Powder River Basin coal.

Powder River Basin

Productivity at the Powder River Basin is also falling—while output per labor hour stood at ~40 in 2001, it fell to ~30 in 2012. As companies move from the eastern to the western part of the basin, coal seams are further away from the surface. Mining operators in the basin will also have to remove larger amount of rocks and dirt to recover coal. That means higher cost for companies such as Cloud Peak (CLD) and Peabody Energy (BTU). So unless price rises, or technological improvements push mining costs down, coal may become less comeptitive to alternative fuels, which would negatively affect companies’ profitability.

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