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U.K. Coal Mines Close

Turning to Imports

Written by Brian Hicks
Posted March 11, 2013

Trouble over in the United Kingdom. The Daw Mill colliery in north Warwickshire will shut down, leading to some 650 jobs being cut, after a big fire at the facility just last month.

That was the most major such incident at a U.K. coal mine in over three decades, but the Daw Mill is one of the very last traditional coal mines remaining.

U.K. Coal Mine Holdings has stated that the majority of the Mill’s 650-strong workforce will be let go, although a core team will oversee the winding down of operations over the next few months. As of March 7th, the flames were still going strong nearly 740 meters below ground.

The Guardian quotes Daw chief executive Kevin McCullough:

"This has been a terrible week, not just for the company and its employees but also for the energy security of the country, as it brings an end to 47 years of coal production at Daw Mill."

U.K. Coal Mines supplies about 5 percent of the nation’s total energy needs, which makes it Britain’s largest coal producer, but the Daw Mill had already come under scrutiny in March of last year when it became evident that significant restructuring would be necessary in order to guarantee the facility’s near future.

Right now, it is uncertain when the fire will be extinguished—it could go for months yet, despite the fact that all oxygen supply has been shut off. More than 100 million GBP ($148.9 million) in equipment has been lost underground, per the Telegraph, and that almost certainly meant Daw Mill would’ve had very little chance of recovery.

U.K. Coal’s other deep mines, Kellingsley and Thoresby, remain functional, as well as six open operations, but the company is mired in talks with the British government trying to identify ways in which to keep things going.

It seems that short-term financing is foremost on the company’s agenda now, with a fairly large insurance payout coming at some point in the future. The payout could be as large as several tens of millions of pounds.

Of course, what this means for British utilities overall is an increased reliance on imported coal; companies like E.ON UK and Scottish Power may well turn to Colombia, Russia, and even the United States to try and compensate for the production gap.

When you combine the U.K. Coal affair with Scottish Coal’s own mine closures, which it recently announced, more than 1,000 jobs end up being eliminated. Reuters reports that Scottish Coal’s problems are largely a function of anemic global prices, which have weighed heavily on the company’s yearly supply of some 3.5 million tons of coal.

Much of the competition from low-cost imports has actually come from the U.S., where the shale revolution has resulted in drastically low gas prices (and, correspondingly, displaced coal prices) on the global market. Right now, coal swap prices are at around $95/ton for delivery next year; that’s nearly 30 percent lower than levels as of two years back. The twin pressures of slowed demand and oversupply are affecting the industry.

From Reuters:

"Coal still consistently provides between 40 percent and 50 percent of the UK's electricity needs and demand remains high. However, Scottish-mined coal is priced in relation to global pricing trends, which have been at record low levels," Scottish Coal said.

According to the National Union of Mineworkers, Scottish Coal stands to lose roughly 450 employees by the end of this year. It’s a long way from the 1980s, when coal mining was in fact one of Britain’s most thriving industries, employing well over 100,000 people.

A mixture of skyrocketing labor costs, international competition, and of course decreasing deposit resources have meant that deep-shaft mining has become increasingly unappealing due to the costs and payoffs involved. On top of that, the rising cost of rail freight and fuel add to the industry’s woes.

It’s a great opportunity for a company like Kinder Morgan (NYSE: KMI) though, which is presently considering adding a coal export option to its Charleston facility.

Platts reports that Kinder Morgan is hoping to turn some profits on long-term export demand, which is growing significantly. It quotes Will Browning, Kinder Morgan’s commercial director for southeastern operations and coal businesses:

"We don't build on speculation, we do it in lockstep with our customers. Right now we have a good sense of demand of exporting coal out. Hopefully we can do something in the future."

The company expects that coal exports this year will be a bit lower compared to 2012’s 120 million st total, largely due to decreased thermal and met coal prices worldwide.

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