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Challenging Labor Economics in the Coal Industry

October 26, 2011 | About:
Josh Zachariah

Josh Zachariah

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The suffering and devastation of the Black Death that ravaged Europe in the 14th century is widely known. Less understood were the economics that transformed the continent. The estimated loss of life was on the order of between one third and two thirds of the population. The vast majority of those that perished were laborers and peasants. Consequently, the few remaining laborers benefited from a marked rise in their incomes because of this scarcity of labor. The flip side was that prices of agricultural land went down as landowners had difficulty finding peasants to plow the land. Similar, but much less drastic events affect businesses in today’s world. Bloomberg Businessweek reported in their October 17 issue on the ailments of the coal industry in West Virginia.

The coal industry is coming under heat from many directions, one of which is the retiring baby boomers whom are leaving the industry. Coal companies have been experiencing difficulty replacing these retirees. They are finding many of today’s younger generation are less inclined towards this line of work even as salaries remain high, close to $70,000 a year to work in an underground mine.

Coal mining certainly would be characterized as a labor intensive industry. For each additional kilowatt of electricity generated by coal, labor needs to be employed to haul coal from underground. Solar and wind power by contrast are much more capital intensive. Once solar and wind farms are constructed very little manual work is needed to produce an additional kilowatt of energy.

Coal is still a much cheaper form of electricity than solar and with demand from the Chinese, the price of coal remains high. At the same rate the price of solar panels has been dropping as the industry has become subsidized by many countries. If the trend continues, energy produced by solar could eventually become cheaper than coal.

These trends, along with the fact that the coal industry, a labor-intensive one, is finding it difficult to hire in this generous labor market bodes ill for the industry’s future. By contrast the oil industry has seemingly had a little more success in recruiting new workers. Their issue in places like North Dakota has been a lack of housing rather than workers. Coal companies will likely have to further raise wages in order to replenish their aging workforce, especially as unemployment comes down in future years.

Investors like Warren Buffett have been keeping an eye to coal companies. Buffett had paid a visit to an Arch Coal mining operation and noted that if anything the visit would serve as useful information for the future. If Chinese demand for coal wanes, coal stocks would certainly lose some luster. But the low-cost advantage of coal does not seem impenetrable. With its economics seemingly deteriorating and that of solar improving, investors should take notice. As the European landowners of the 14th century would learn, a contracting labor force can be punishing to your investment. As is also the case with coal, a dwindling labor pool is not helpful to profit margins.

Josh Zachariah

About the author:

Josh Zachariah
I credit my father and Warren Buffett for molding me into the investor I am today.

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