Labour constraints hold back US coking coal

Labour shortages are the biggest factor constraining US coking coal supply in the short and long-term, industry participants said at the recent MetCoke World Summit in Pittsburgh.

While the US has for a long time been identified as a swing producer responding to market highs and lows in coal prices, the pace at which the country's producers have been able to respond to the 2021 boom in coking coal prices has been held back by the lack of labour. The Argus daily assessed US low-volatile and high-volatile coking coal prices reached respective records of $499.25/t and $497.50/t, both fob Hampton Roads, in late October, driven by demand from Chinese mills seeking alternatives to Australian coking coal.

US production could reach a similar rate to 2019 in 2022, with 5mn-7mn short tons (st) of annual capacity to be brought on line by the end of this year. But output would still be off 2018 levels by about 15pc, according to Argus estimates based on Mine Safety and Health Administration data. Meanwhile, the World Steel Association expects steel demand to remain level next year after an expected increase of 4.5pc in 2021.

Labour markets tighten

Labour is the biggest immediate constraint on US coking coal production, particularly since Covid-19 emerged, and market participants have expressed doubts as to whether projects planned for 2022 will reach their intended capacity.

Hours worked at US mines reached their lowest since 1983 in 2020, as miners cut back sharply in response to a short-term contraction in steel demand. In today's labour market, miners will struggle to regain all of the work hours cut, with US unemployment claims falling to a five-decade low in the week to 20 November.

One mining firm planning to open a mine in 2022 said that the start date could have been several months earlier without the labour shortage. "We can hardly staff our current mines and have been raising wages to prevent employees from being poached by competitors. If we get a class of 20 beginners in, five might stay to complete their training, and one might stay in the long term," the company added. The need to retrain staff who were laid off during industrial slowdowns in 2020 is another factor delaying output increases.

Faced with a high marginal cost of labour, miners are reluctant to invest too heavily in recruitment during the current upturn, knowing the cyclical nature of the coking coal market. For the same reason, larger companies with lower production costs have less difficulty attracting and retaining staff, as they are less likely to lay off workers or reduce hours during downturns.

The federal requirement for companies with more than 100 employees to make sure all staff are vaccinated by 4 January could add to the difficulties for miners. As of 24 November, the rate of vaccination in West Virginia, where a significant proportion of US coking coal is produced, trailed the national average by almost 20pc, with 41.5pc of the population fully vaccinated compared with 59.1pc nationally.

Labour could remain a difficulty in the long term. An ageing generation of experienced mine workers will be difficult to replace in an era in which fewer Americans will want to go into hard manual jobs. And rural areas where most of the population has traditionally worked in agriculture or mining are an attractive location for retailers offering low-skilled but less physically demanding employment.

Rail shortfalls add to supply squeeze

US rail operators, stretched by the swift recovery in global demand for several commodities, face similar obstacles to the US mining industry, creating another constraint on the coking coal supply response.

Total coal shipments from Hampton Roads rose to a 19-month high in October, 41pc higher than a year earlier, while total US rail shipments of grain were up by 18pc from two years earlier. But rail operator CSX recently acknowledged that its rail service is below target levels, after receiving a letter from the US Surface Transportation Board noting that over much of 2021 the system's average train speed is down 6pc, average terminal dwell is up 16pc and average time for loaded cars not moving in 48 hours is up 98pc, all against 2019 numbers. The other major eastern railroad, Norfolk Southern, is also understood to be behind with shipments.

"Rail operators are unlikely to invest in greater capacity unless they see it as an investment that will last," a major US miner said. "And they don't necessarily see coal as something with a long future."

Funding less problematic

Despite the efforts of several major banks to distance themselves from the coal industry, financing is less of an obstacle to the coking coal sector than labour and transportation, mining firms say.

In the short term, coking coal producers are in good shape financially, following a period of elevated prices.

In the longer term, even without the support of some of the world's biggest banks, there are alternative sources of funding available, such as hedge funds or private equity. One example is the family-owned Czech energy firm Sev.en, which is open to further investment in US coking coal after acquiring Blackhawk Mining and a 17pc stake in Corsa Coal last year.

But even Bank of America, which earlier this year committed to support financial efforts to reach net zero greenhouse gas (GHG) emissions by 2050, said at the recent MetCoke Summit in Pittsburgh that it would evaluate coking coal producers. "It comes down to credit risk and reputational risk," senior-vice president Ira J Kreft said. Educating financial institutions on the difference between thermal and coking coal is also key supporting to coking coal producers, he added.

"As long as there's money to be made from coking coal, there will be funding available," one miner said.

But climate initiatives have had a noticeable effect, and banks have been known to pull out of coking coal funding consortiums where the prospective borrowers have thermal coal in their portfolio.

By Brendan Kjellberg-Motton