Preparation Costs

Humphreys, Kenneth K.
Organization: Society for Mining, Metallurgy & Exploration
Pages: 14
Publication Date: Jan 1, 1991
INTRODUCTION At the time the 4th edition of this book was published in 1979, the coal industry had experienced a sharp upturn in prices for its product. From 1950 throgh 1969, steam coal prices had held almost flat at about $5 US per st (about $5.50/t). Thus, when considering the effects of inflation, the price of coal had actually been declining for two decades. The passage of the Coal Mine Health and Safety Act in 1969 and its cost effects started an upward trend in coal prices which was rapidly accelerated by the effects of the Mid-East oil embargo in 1972. Prices of steam coal on the spot market eventually climbed to over $30 US per st ($33/t) and higher in some cases. Metallurgical coal prices skyrocketed in a similar manner and the industry at long last appeared assured of an adequate return on investment. Many companies did expend large sums of money to upgrade and expand their mining and preparation facilities. Unfortunately the bubble eventually burst, in great measure due to the downturn in the US domestic steel industry and the resultant decline in metallurgical coal demand, loss of export markets to other nations and even imports of large amounts of foreign coal to the United States, and more stringent environmental regulations which made many high sulfur coal measures uneconomical to mine. Compounding the problem was the rapid world decline in oil prices in the mid-1980s which encouraged many consumers to utilize oil rather than coal. During the 1980s, metallurgical coal dropped over 20% in price, which, when considering inflation, actually amounted to about a 40% decrease in value. Export coal decreased a similar amount in price. Steam coal prices held nearly constant, thus also losing considerable value when inflation is considered. All of these factors make it even more imperative than ever that the industry do everything in its power to make wise economic decisions and to examine carefully all existing operations and planned future expenditures to be certain that their full cost implications are understood and that they can be justified on the basis of an adequate return on investment. It cannot be assumed that the price of coal will increase. To the contrary, as indicated previously, when considering inflation, coal decreased in value in the 1980s, just as it also did in the 1950s and 1960s. The price surges in the 1970s merely were a catchup game, and in truth the true market value of coal is in reality even lower than it was in 1950. CAPITAL AND OPERATING COST ESTIMATION Prior to constructing a new plant or expanding existing facilities, a detailed preliminary cost estimate is necessary to determine the capital investment
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