Sunday, April 24, 2016

As Coal Declined, Execs Gorged Themselves

In a state where virtually everyone, including the majority of the media, blames Barack Obama for the decline of the coal industry, it's sometimes hard to glean fact from fiction.

Fortunately, it's not an impossible task to discover the dirty truth about the machinations of big coal over the past several years. The sordid little secret the coal barons don't want you to know about is this: they did more to damage themselves than anyone else.

Just a few years ago, China was gobbling up all the metallurgical coal it could get its hands on. The country was exploding with new commercial and industrial construction.

Skyscrapers require steel. An essential part of the steelmaking process is "met coal". China was consuming the stuff by the millions of tons. U.S. coal companies, sensing the potential for enormous profits, went on a buying spree the likes of which has probably never been seen in the industry.

They practically fell over themselves in their zeal to acquire the mines that produced the met coal required for steel fabrication. Billions of dollars changed hands as the coal barons devoured smaller mining companies and formed partnerships with their counterparts overseas.

At the same time, U.S. coal executives rewarded themselves handsomely. The "big three" - Arch Coal, Peabody Energy, and Alpha Natural Resources - paid their respective management teams a combined $186 million in stock awards, incentives and other forms of compensation between 2012 and 2014.

Even as the executives lined their pockets, their companies weren't doing so well. Arch, Peabody and Alpha have not recorded a profit since 2011. All three companies are now in bankruptcy. Just for the record, 2011 is when these companies embarked on their big shopping sprees.

Unfortunately, China decided to put the brakes on new construction, with a new 5 Year Plan that emphasized the development of social services and improvement of overall quality of life. At the same time, the U.S. market for thermal coal contracted, impacted by cheap natural gas and milder winters.

Here in Appalachia, the coal companies struggle with thinner, hard to reach coal seams. Over 100 years of extraction has depleted the rich, thick seams near the surface. Therefore, Appalachian coal costs much more to produce than coal from the Powder River Basin in Wyoming.

Arch, Peabody and Alpha engaged in an unprecedented gutting of their West Virginia workforce, closing mine after mine and laying off hundreds of workers. At the same time, they sought to shirk themselves of their obligations to retirees, while also attempting to walk away from their responsibilities in the cleanup of old mining sites.

Logic would dictate when times are hard, your company must cut costs everywhere including the boardroom. Instead, the coal companies continue to hand out fat bonuses to their executives even as they leave the rank and file in the lurch. The excuse is they need to give their upper-level managers an incentive to stay as the companies navigate the difficult waters of bankruptcy.

Essentially, these people are being rewarded for saddling their companies with enormous debt at a time when the market was beginning to shift, driven in large part by China's changing economy.

One can't really fault the companies for taking the risks they did. That's what high-paid executives in very competitive industries do, and the result is often enormous profits and growth.

This time, however, they placed their bets unwisely. Is it too much to ask that the boardroom fat cats share in the suffering caused by their bad decisions?

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