Rail problems, labor shortages continue to plague coal industry

Washington (Platts)--15Mar2006

Railroad performance continues to be on the top of the list of concerns of attendees at Tuesday's 14th annual Platts' Coal Properties and Investment Conference in Fort Lauderdale, Florida.

"Is coal going to get delivered? Will utilities be able to test burn?" asked Bear Stearns Managing Director Michael Dudas. "Year-to-date, 2006 has gotten much better as has performance."

In the Powder River Basin, Robert Reilly, vice president of corporate development for Peabody Energy, said BNSF Railway and Union Pacific made progress in upgrading their Joint Line. They added triple track to an additional 80 miles, spent more than $400 million on existing lines, replaced ballast on 75 miles of track, resurfaced 275 miles of track, replaced 60 turnouts and nine bridges, and replaced 31,000 concrete ties.

But, Dakota, Minnesota and Eastern Railroad, which has proposed extending its line into the PRB "could be a real game-changer," he said.

DM&E's rail route plan got approval from the Surface Transportation Board earlier this year and the company is now trying to secure funding for the project. The route would allow PRB coal to be shipped from Wyoming through South Dakota and to meet up with the Canadian railroads in the upper Midwest. The route could also go into Minnesota, where the coal could be loaded on barges and shipped down the Mississippi River for export or sale to eastern utilities.

Sami Shalah, a BNSF vice president, is scheduled to speak today at the conference.

But railroad performance is only one of the things Wall Street looks at when valuing coal companies, Dudas said. Others are operational costs, natural gas prices and utility inventories.

Operational costs are especially of concern in Central Appalachia, where they can eat into profit margin and realized price increases faster than costs. Coal remains competitive as long as natural gas prices remain in the $5 to $8/Mcf range. Significant growth in utility stockpiles could cause prices to fall, but Dudas doesn't see that happening.

Miners in high demand

And coal producers are faced with an ongoing employee shortage, said Michael Bauersachs, vice president of planning for Massey Energy.

The labor shortage is especially bad for underground mines, which require more miners, Bauersachs said. In 2004, Massey had a 15% to 20% turnover rate. "There is a strong demand and fierce competition for labor."

In 2005, 42% of Massey's turnover was from employees who had worked for the company less than a year and 21% had one to three years of experience with the company. Overall, Massey's turnover rate was 22%, he said. So far in 2006, turnover is running about 30%.

Of the employees who left, Bauersachs said 58% went to work for competitors, 24% left the industry and the reason the other 18% left is unknown. "Pay and distance to work were the primary reasons for leaving. Hiring, training and retention is the greatest challenge we face."

To fight that problem, Massey increased the amount of surface mining it does and bought new, higher-productivity equipment such as electric shovels and its first electric dragline that increased capacity without labor.

The company has also had "measured wage increases", enhanced its medical program benefits including opening a medical facility, offered productivity and retention benefits and offered supplemental benefits such as automobile and homeowners' insurance.

It also has a mentor and training and development program. "Only through training are we going to be able to overcome the challenges we have," he said. "Retention is not a new phenomenon, but the existing situation was made worse by the strong coal market." -- Mark E. Heckathorn, mark_heckathorn@platts.com

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