Another growing competitor for
Appalachian coal is coal produced in
the Powder River Basin (PRB). Though
West Virginia coal is far superior in
terms of quality of burn (with twice the
Btu), PRB coal’s low cost of production
(thick seams of up to 100 ft just below
the surface in the largely flat Wyoming
prairie) makes it attractive. PRB coal is
essentially one quarter of the price per
Btu of Appalachian coal.
PRB coal is limited by its lengthy rail
transport to eastern markets and by the
limitations of rail capacity for PRB coal.
If these limitations are overcome, PRB
coal will likely displace most of the coal
produced domestically.
Looking at the relative prices of coal
from the various domestic producing
regions provides a picture of the
challenge faced by West Virginia’s coal
industry. It must reduce costs
sufficiently to bring its market price
down to a level competitive with its
primary rival – Illinois Basin coal – in
order to protect, as much as possible, its
share of the thermal coal marketplace.
This would essentially require a 19%
reduction in the cost of production.
How can this be accomplished? There
are four potential sources of savings:
improved productivity, decreased taxes,
decreased pay for miners and reduced
transportation costs.
Clearly productivity can be
improved. Since 2008, productivity in
West Virginia has dropped by 24%.
Therefore, the industry must reclaim
most of that loss in order to compete.
Another source of savings is
decreasing the tax burden on the state’s
coal producers. One place to start is to
repeal the 56 cents/short t special
severance tax that has helped the state
retire the worker’s compensation debt.
The debt will be repaid later this year
and it is time to restore that money to
the industry that worked as a partner
with the state to solve its debt crises.
Also, the state currently has one of
the highest base rates of severance
taxes in the nation at 5% of the sale
price of coal. Competing coal
producing states have substantially
lower severance taxes and one
(Pennsylvania) has no severance tax at
all. The state can move to bring
severance taxes in line with those
charged by competitors.
Third, the state can reduce the
property taxes charged to coal
companies. Currently, coal producers
pay exorbitantly high rates of property
taxes on both producing and
non‑producing properties. Reduction
of property taxes should be a major
part of the broader discussion of tax
reform as the state moves toward the
2016 legislative session.
Lastly, the state could look at ways
to reduce the cost of transport of
West Virginia coal to market – through
investments in port facilities, rail rate
reductions or improvements to truck
transport routes. In essence, none of
these options can be seen in isolation,
each of them in some combination will
likely be required to improve the
state’s competitive position in the coal
marketplace.
Author
T.L. Headley is a consultant working in
West Virginia’s coal industry.
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