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In This List

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Eastern US coal productivity slumps in Q3'19 but rises in Powder River Basin

Coal mine worker productivity slumped in the third quarter across major eastern U.S. coal basins as the opposite occurred in the Powder River Basin, an S&P Global Market Intelligence analysis shows.

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Higher productivity figures, measured as the amount of coal produced per employee hour, are generally associated with a competitive advantage and lower costs. With weakening export markets dragging down prices, higher-cost coal mines are facing pressure to close or scale back their workforce as production adjusts to falling demand.

Average mine worker productivity differs significantly across the U.S., mine geology and mining techniques used. For example, in the Powder River Basin, mines produced about 28.3 tons per employee hour in the third quarter, while the average in Central Appalachia for the same period was 2.6 tons per employee hour. Within the Central Appalachia region, surface mines produced an average of 3.6 tons per employee hour versus 1.3 tons per average employee hour at underground mines in the area.

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Mining productivity has generally been drifting downward in the Powder River Basin since the end of 2016. While a third-quarter spike in coal produced per employee hour is typical in the region, the growth in the 2019 quarter was the sharpest rise in productivity since 2016 when producers bounced back from steep cuts in production volumes.

While third-quarter production volumes increased compared to the prior quarter, production was weaker than the third quarter in previous years. As competition from natural gas and renewable energy continue to drive down demand for coal from the region, the third quarter has consistently set a new and lower ceiling for quarterly production since 2015.

Blackjewel LLC, one of the larger producers in the Powder River Basin, filed for Chapter 11 bankruptcy reorganization July 1. Due to challenges with its initial financing attempt, the company was forced to send employees home and dramatically curtail production. However, the region still cumulatively produced more tons quarter over quarter as workers' hourly output rate rose.

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Companies in the Northern Appalachia and Central Appalachia coal basins can generally command a higher price per ton than Powder River Basin producers due to the quality of coal in the region, which offsets lower average productivity due to more challenging mining geology. While the diminishing availability of accessible reserves in the region impacts productivity, some of that has been improved with new mining technology in the past few decades.

A recent boom in global metallurgical coal demand slowed a sharp decline in production in Central Appalachia, but as those markets deteriorated in recent months, production is falling again. Volumes began to slip downward in mid-2018 after a brief rise off of 2016 lows and productivity rates followed.

On a recent earnings call, Contura Energy Inc. executives focused on their efforts to increase worker productivity as the company becomes increasingly focused on metallurgical coal.

"Evidence of the success of our actions taken in the last three months can be seen in our underground advancement rates," Contura Executive Vice President and COO Jason Whitehead said, noting that the company's West Virginia operations improved the amount of coal mined per shift by 17% in the same time period. "As you know, productivity rates are directly related to the cash cost of production."

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The Illinois Basin, primarily a thermal coal region, saw recent productivity improvements slide throughout 2019. Miners in the basin were challenged in 2019 by high water on the Mississippi River that limited export opportunities.

Weakness in the market should soon drive out higher-cost competitors as companies lean back into a structurally declining U.S. power generation market, Alliance Resource Partners LP President and CEO Joseph Craft said on an October earnings call.

"I mean, I believe there will be increasing cash flow. I believe we will be able to show a customer demand that wants our product," Craft said. "That will allow us to grow once we get the higher-cost producers to face reality and get back to a supply-demand position that will stabilize the market. Then, when the export market pops back up, we've got even more opportunities, and we just need to get through this trough to be able to convert that story to reality."

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