HUNTINGTON -- Get a bigger piece of the shrinking pie.
That's how Danny Vance, owner of Service Pump & Supply in Huntington, describes his business strategy during challenging times for the coal industry and the many businesses that support it.
With the cost of mining coal rising and with natural gas becoming so competitive, the coal industry is in the midst of a battle. And Vance and some other local companies whose health is intertwined with the coal industry say they are doing what they can to fight the trend's ripple effect.
"So far we've been able to adapt and not had layoffs,'' said Vance, whose company sells and services pumps, blowers and other equipment used in the mines. "We're down about 15 percent, and we're very fortunate. A lot of companies like us are down 50 or 60 percent and are shutting the doors.''
The challenge has been the rise in the cost of producing coal compared with the low cost of natural gas, with the jackpot found in the Marcellus Shale formation that spans West Virginia, Ohio, Pennsylvania and New York.
Compared with the current affordability of natural gas, the price of coal is climbing, having gone from $43.75 per ton in 2007 to $63.78 per ton in 2011. Natural gas costs have dropped, to less than $3 per 1,000 cubic feet.
According to the U.S. Energy Information Administration's annual report released in June, higher coal exports provided some support in 2011, but U.S. coal production is projected to decline for four years thereafter as a result of the low natural gas prices, rising coal prices, lack of growth in electricity demand and increasing generation from renewable energy sources.
New federal environmental regulations are projected to take a toll on coal as well, including requirements to control emissions of nitrogen oxides, sulfur dioxide and air toxins such as mercury and acid gases. That will result in the retirement of some coal-fired generating capacity, including some here in West Virginia.
Charles Patton, president and chief operating officer of Appalachian Power, told The Herald-Dispatch earlier this summer that the company will close some of its older plants that won't meet new regulations of the U.S. Environmental Protection Agency by 2015. It also will convert some operations from coal to natural gas.
After 2015, coal projections vary by region, according to the EIA. Coal produced from the heavily mined, higher-cost reserves here in Appalachia will be replaced with lower-cost coal from places like Illinois and Wyoming, the EIA reports. But there's an expected increase in production in northern Appalachia that moderates the region's overall decline, the EIA says.
The EIA projects overall U.S. coal production to grow at an average annual rate of 1 percent through 2035, with coal used for electricity generation increasing as electricity demand grows and as natural gas prices rise. More coal also is expected to be used for production of synthetic liquids, and coal exports should increase, the EIA says.
All of it means that businesses related to the coal industry are doing what they've gotten pretty good at over the decades -- getting creative, diversifying and making adjustments.
"We are, by nature, survivors,'' said Nick Carter, president and chief operating officer of Natural Resource Partners in Huntington, which owns coal properties throughout the country. "We've done it every time there's been a downturn in the market. This is the -- I don't know -- sixth, seventh, eighth downturn in the 30 years I've been in the business, and it's the third downturn since we went public 10 years ago. It's a cyclical market, and you learn to live with the ups and downs.''
For NRP, that's involved limiting its Appalachian investments to properties with metallurgical coal, which is still in demand internationally. That type of coal is used in the production of steel.
However, "Metallurgical is only 6 percent of total coal production,'' Carter said. "It's only 60 million tons out of a billion tons of coal produced.... It's the high quality, high valued product, but it's not very much of the market.''
Meanwhile, Foresight Energy, a low-cost operator in Illinois, has been successful in selling coal and building new mines where NRP owns the reserves. That will produce in excess of 20 million tons in 2013, Carter said.
"We've certainly seen a number of mine closures and cutbacks in Central Appalachia that have impacted our production and the revenue from our properties, but percentage-wise it has not been as bad as many companies have been,'' Carter said. "We have been buying assets in the rock quarry business -- limestone, sand, gravel, slate.''
The percentage of NRP's income from those products has increased, and NRP has been buying oil and gas revenue streams in addition to the aggregates and coal properties it has, Carter said.
"We're trying to diversify our income stream as much as possible, both within the coal space and outside the coal space,'' he said. "We've made it fairly well. We had earnings released and it was a pretty good quarter. ... Tonnage to be produced from our property was down, but other revenue other than coal revenue was up.''
For the six months that ended in June, total revenues were up less than 1 percent from 2011, according to the report. He thinks shareholders were happy though, as the stock prices went up a bit.
At J.H. Fletcher & Co., trends in the coal industry have slowed work down in terms of domestic customers, but it helps that Fletcher does a lot of work internationally -- particularly with Australia, Poland and South Africa, said Rod Duncan, president.
Fletcher makes various equipment for the mining industry -- such as roof bolters, scaling machines, power loads and more -- and does business with 17 countries around the world.