A Sign of the Tough Global Economy...Major Coal Producers Planning Deep New Cuts

It’s no secret that we’re all living in tough economic times. In North America, in Europe, in South America, in Australia and throughout the Pacific Rim commerce has slowed and people in many countries find themselves out of work and idle. It’s not a pretty picture. In fact:

In this difficult climate, it’s also not hard to imagine that many companies – in key industries – are beginning to “feel the pain,” as well. Consider the plight of the major coal producers.

Two of the world’s most prominent coal producing companies recently announced that they are planning steep cuts in coal output. According to an unnamed analyst for Dahlman Rose, the cuts are the necessary response to reduced demand for coal in Europe and the United States.

According to another analyst, Daniel Scott, Alpha Natural Resources, Inc and Patriot Coal Corp. are the two major coal producers who have already forecast cuts in coal production for 2012. Scott also noted that other large coal producing companies are likely to cut production, as well.

So why is this happening? Is it all due entirely to a struggling global economy?  The answer to that question is “yes” and “no.”  The better answer is that U.S. demand for coal has dropped because many power companies have decided to rely on natural gas as their primary power source.

Here’s why: natural gas prices continue to hover at near 10 year lows. Yes … natural gas is much cheaper than coal. Add to that the fact that Europe is struggling economically and currently requires much less American coal than it normally uses and it becomes easy to understand why coal producing companies in the U.S. and elsewhere are forecasting dramatically reduced production.

Alpha Natural Resources, Inc is planning to cut its total production by about 4 million tons over the next twelve months. The cuts will affect working, active mines in Kentucky and West Virginia. Reduced output will include a cut of 2.5 million tons for thermal coal and an additional 1.5 million tons for lower quality metallurgical coal.

Metallurgical coal is, of course, a key component in the manufacturing of steel. In all, 300 employees at both mines are expected to lose their jobs or become subject to fewer working hours weekly.

What about Patriot Coal? They’ve announced that their total output for 2012 will be about 27-29 million tons, a figure that is significantly below the company’s total production for 2011. It was more than 31 million tons.

This question needs to be asked? Will reduced coal output negatively impact the economies of the United States, Europe and the Pacific Rim, especially Australia?

Clearly, it’s likely to have some impact. Reductions in coal production lead directly to reductions in economic activity. However, there are already some signs in the U.S. and around the globe that the worldwide recession that has lingered over the national economies of so many countries for the last two-to-three years is beginning to ease.

If that’s true, the reduction in coal output and the economic malaise it creates appears to be little more than a short term problem. Let’s all hope that’s turns out to be true.

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