WHEN WILL PRICES IGNITE ON THE SPOT MARKET?

WHEN WILL PRICES IGNITE ON THE SPOT MARKET?

A hot summer has not been enough to make last winter's surplus coal inventories disappear, but it's helped to reduce them on the way to the winter of 1996.

"The knee-jerk reaction is that a few hot days is good for coal," said Rafael Villagran, a coal industry analyst for Lehman Brothers of New York. ''But there's a lot of coal that we have to work our way through to get to a robust spot market."Warmer-than-normal temperatures from the fall of 1994 through the spring of 1995 slashed electricity demand for heating last winter, causing coal inventories at utilities to build with each arriving train. What's more, the warm weather also helped producers dig more coal, creating a surplus at the mine mouth as well, said Mr. Villagran.

As a result, coal prices on the spot market fell by 25 percent, to 40 percent between September and April.

"You've had one of the mildest winters on record," said Daniel Roling, a coal analyst for Merrill Lynch & Co. of New York. "People didn't burn coal, prices collapsed, and some companies went to a four-day work week."

"Then you had a hot summer, and things have come up a little bit but not much," said Mr. Roling. "Right now, it's more balanced, but it's not a robust environment out there."

Despite poor market conditions, U.S. coal production has been just ahead of last year, when the winter of 1994 posted some of the coldest days on record. Through Aug. 12, output has totaled 630.7 million tons, up 0.3 percent from 628.5 million tons produced in the same year-before period, National Mining Association figures show.

High-sulfur mines, particularly those in the Midwest, are suffering the most because they have also been hit by closures and cutbacks as utilities shifted to low-sulfur supplies to meet Phase I clean air rules that took effect Jan. 1.

"Everybody knew that the impact of the 1990 clean air amendments would be difficult for the coal interests in the Midwest, and that's certainly proved to be true," said Taylor Pensoneau, vice president of the Illinois Coal Association in Springfield.

"It's been about what many analysts predicted, but it's still a difficult situation," he said. "There's no way to minimize the hardships in the communities that depend on coal for their economic lifeblood."

Production in Illinois will total about 50 million tons this year, down

from the 60-million-ton average produced over the last 20 to 25 years. But the downturn is expected to bottom out later in the decade, with output improving as Phase II requirements take effect in the year 2000, said Mr. Pensoneau.

"Emission reduction requirements will be even more stringent in the second phase, and more (emissions reducing) technology will be needed," he said. ''Then the playing field gets level again, because you won't even be able to burn low-sulfur Western coal without technology."

In the East, mines that depend on the spot market have also suffered, and some have been forced to temporarily close or curtail production until conditions improve, said Mr. Villagran. "It's been a very tough environment, and the more spot-market exposure a company has, the weaker the earnings."

Companies that are struggling include Pittston Co. of Stamford, Conn., which posted operating losses this year, and Westmoreland Coal Co. of Philadelphia, which pulled out of the export market entirely and may now pull out of its Eastern mines to focus on Western production. Others, like Peabody Coal Holding Co. of St. Louis, Mo., are having mixed results, with good performance in the West but poor in the East, he said.

But companies that can produce coal more efficiently than others, and that can delay capital spending until conditions improve, are fairing better than others, said Mr. Villagran.

Those include Zeigler Coal Holding Co. of Fairview Heights, Ill., and Cyprus Amax Coal Co. of Englewood, Colo., a producer that has shifted much of its activity to low-cost, low-sulfur Western mines.

"We're in the East, Midwest and the West," said Cyprus Amax spokesman Mike Rounds. "But the shift has more to do with low-sulfur coal than anything else."

Low-sulfur coal is simply doing better in the market than high-sulfur supplies, he said, and 80 percent of the company's reserves meet or exceed Phase I standards.

"We've had some inventory buildups that we're working off, but that's turning around," said Mr. Rounds. "We've had high heat here this summer just like every place else, and we expect things to be better in the second part of the year."

The Cyprus Amax expects to produce about 85 million tons this year, up from 80 million in 1994.

Another company, Atlantic Richfield Co.'s Denver-based Arco Coal Co. subsidiary, has also been doing well because most of its production comes from low-cost, low-sulfur mines in the West.

Arco spokesman Terry O'Connor said that the company's low-sulfur, high-heat reserves in the Black Thunder mine in the southern Powder River Basin, coupled with rapid expansion of the West Elk mine in western Colorado, has allowed Arco to reduce costs and increase production. "We're seeing significant increases in demand, but that hasn't translated to higher prices," said Mr. O'Connor. "That demand has been met by increased capacity, which has resulted in an increasingly competitive environment."

Still, in the first six months of 1995, Arco's earnings, including the company's Australian export operations, increased to $44 million from $31 million in the first half of 1994, in part because of a $6 a ton price increase that the company's Australian mines received earlier this year from Japanese steel mills and utilities. One Eastern coal producer that's doing well in spite of difficult circumstances is Ashland Coal Inc. of Huntington, W. Va., said Mr. Roling of Merrill Lynch.

"They're very well positioned, with a good cost structure," he said. "And they haven't overexpanded."