Massey Energy: Strong Asian Markets Will Counter Declines in U.S. Coal Demand

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Researched by Industrial Info Resources (Sugar Land, Texas)--Massey Energy Company (NYSE:MEE) (Richmond, Virginia) reported a third-quarter 2010 net loss of $41.4 million, compared to net income of $16.5 million in the same quarter of 2009. Massey executives clearly blame the company's declining profits on the increasing regulatory oversight from the Mine Safety and Health Administration (MSHA) in the wake of the company's Upper Big Branch (UBB) coal mine disaster. In April this year, an explosion at the UBB mine resulted in the deaths of 38 miners. Additionally, as the company forecasts a gradual demand decline in the U.S. coal market, Massey clearly intends to rely on foreign markets, particularly those in Asia, to maintain profits.

In a conference call regarding the earnings, Massey President Baxter Phillips Jr. spoke of the disruption in the company's operations caused by MSHA inspections and regulatory issues. "Mining productivity in the third quarter continued to be hampered by issues relating directly or indirectly to the UBB tragedy. Specifically, increased inspection activity and more stringent enforcement actions by MSHA led to the disruption of operations and lost shifts. In total, approximately 450 shifts were lost during the quarter, due to regulatory issues," said Phillips.

The Massey president also discussed future and current production issues: "As a result of MSHA's new policies, we believe that some of our older mines and more extensive underground works may need to be idled, as they become impractical to operate. Needless to say, management focus and attention continue to be distracted, as the management team supported the federal investigation at UBB. As a result of these issues, productivity as [measured in] feet of advance per shift in underground mines declined by 16% in the third quarter of 2010, as compared to the first quarter of 2010, prior to the UBB accident."

Last week, MSHA denied Massey's request to open a new mine adjacent to UBB, forcing Massey to reduce its 2011 production estimates.

Adding to Phillips' words about MSHA and the UBB tragedy, Chairman and CEO Don Blankenship discussed the broad outlook for the U.S. coal industry and the significance of emerging Asian coal markets. Blankenship stated that an estimated 40 million to 50 million tons of coal-fired generation was displaced in 2009 by natural gas, because of the low costs and increased production that natural gas has experienced in the past few years.

Increasing obstacles to coal-fired power generation in the U.S. are also expected to cause significant declines in domestic demand for U.S. coal. "Challenges to all efforts to permit new coal-fired generation plants have led to most utilities to scrap future plans to add coal-fired capacity," said Blankenship. "Projects already under construction or that have already been permitted will likely add 18 gigawatts (GW) of coal-fired capacity between now and 2015. This could add approximately 50 million tons of annual coal demand. Beyond 2015, we expect coal-fired generation capacity will begin to decline. ... In total, U.S. coal demand is expected to decline by approximately a half a percent annually from 2010 to 2030."

Blankenship stated that opposite trends are occurring in foreign coal markets. "Globally, planned coal-fired generation capacity additions over the next five years amount to 382 GW of capacity and nearly 1 billion tons of coal on an annual coal-demand basis--most of this growth in Asia. In addition to the increases in power generation, steel production and the demand for metallurgical coal are growing significantly. Total global, seaborne imports could increase by as much as 100 million tons over just the next five years, approaching 290 million tons by 2015. China and India will, of course, see the greatest growth. We believe these global dynamics represent tremendous opportunity for Massey. The high quality of our coal, the scale and efficiency of our operations, and our proximity to the east coast and Gulf ports allow us to participate in coal markets around the world."

Massey is currently increasing its access to ports on the east coast and the Gulf of Mexico to accommodate this anticipated growth.

This summer, Massey, with subsidiary Marfork Coal Company (Whitesville, West Virginia), began construction on the Beckley Seam underground coal mine in Raleigh County, West Virginia. The mine will have a production capacity of 2 million tons of metallurgical coal per year and will include a 1,200-ton-per-hour preparation plant. The project, which has an estimated total investment value of $160 million, is expected to be completed in the fourth quarter of 2011. Powell Construction Company Incorporated (Beckley, West Virginia) is performing engineering and construction work on the mine. Details on this and other Metals & Minerals Industry projects are available in Industrial Info's North American and International Project Databases.

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