STABILIZATION OF BITUMINOUS COAL MINING INDUSTRY MARCH 2, 1935 UNITED STATES SENATE, ON INTERSTATE COMMERCE, Washington, D. C. The subcommittee met pursuant to adjournment, in room 335, Senate Office Building, at 10:30 a. m., Senator M. M. Neely, presiding. Present: Senators Neely (chairman), and Minton. Dr. Burke. STATEMENT OF DR. S. P. BURKE, MORGANTOWN, W. VA., REPRESENTING THE NORTHERN WEST VIRGINIA SUBDIVISIONAL COAL ASSOCIATION Dr. BURKE. Mr. Chairman and gentlemen of the committee: I am Dr. S. P. Burke, residing at Morgantown, W. Va. I am appearing here at the request of the Northern West Virginia Subdivisional Coal Association and in their behalf. I have here the brief of the Northern West Virginia Subdivisional Coal Association, a copy of which I should like entered into the record, and I should like, if I may, to give each of the gentlemen of the committee a copy. The Northern West Virginia Subdivisional Coal Association wishes to express its appreciation to the framers of Senate bill 1417 for their forward looking efforts in attempting to stabilize and aid the coal industry. Unfortunately, we are forced to appear nere in opposition to the bill because we are firmly of the belief that its operation will not attain the objectives desired. We are opposed to this bill because we believe it to be unconstitutional, inequitable, and unfair to the interests of the consuming public, to West Virginia. operators and mine employees, and to the people of the State of West Virginia and furthermore because we believe it to be unsound in principle and administratively unworkable. Finally, we believe its effects will be opposed to basic principles of the conservation of natural resources, and therefore contrary to the future welfare of the people of our State and of the Nation as a whole. Obviously, the criteria to apply in considering the merits of this bill are, will its operation prove beneficent to the consumer; to labor; and to the producer of coal; or on the other hand, will it work serious or even avoidable injury or inequities to any of these parties of interest. Moreover, one should also inquire whether or not its long term effect will aid the conservation of our natural resources and thus forward the economic welfare of the country as a whole. To arrive at an answer to these implied questions, we must consider certain of the economic factors which affect the price and movement of coal. Coal is essentially an inelastic commodity. That is the price of coal will not substantially affect the amount of coal which will be consumed. To lower the price of coal will not induce consumers to use more coal than they need, nor will an increase in the price of coal result in a decrease in the amount consumed, within relatively narrow limits. It is, of course, true that coal suffers an intercommodity competition from oil and gas and that high prices for coal over a long period of time would induce a steady shift from coal to a competitive fuel. However, such a shift cannot be made rapidly, owing to the high capital outlay which is necessary to convert utilization equipment to other types of fuel. Consequently, at any one time or over a period of 6 months to a year, we may consider coal as substantially inelastic in its economic characteristics. Now the price characteristics of inelastic commodities are well known. When there is a shortage, the price soarst When the supply or the potential availability is even slightly in excess of the probable demand, the price immediately tends to fall to the cost of production or to the lowest price quoted. These price trends inevitably occur, unless some arbitrary barrier is interposed to prevent them. This is not academic theorizing. We have no better example of these phenomena than the history of the coal industry itself. The curve of consumption of coal bears no relation whatever to the curve of coal prices. On the other hand, the graph of coal prices is an accurate historical record of real or threatened coal shortages, whether because of wars, labor difficulties, car shortages, railroad strikes, or whatever cause. Since 1927, there has been no serious doubt as to the availability of ample coal supplies, particularly since the requirement or demand was steadily decreasing. This period has been marked by low and steadily decreasing coal prices, which fell at least as rapidly as the cost of production could be brought lower. During this period, the industry naturally operated at a net loss. Consider now the geographic complexion or structure of the coal industry. Major producing fields are far removed from each other and yet compete in the same market. In some cases, important producing areas are so located that their coal cannot reach any major market, without being transported across a competitive producing area. Whether this situation is economically defensible or not is beside the point. It exists! Investments have been made, populations have grown up, and entire communities and cities depend for their very existence upon the maintenance of the coal industry in such producing areas. Whatever alterations are made in the economic and geographical structure of the coal industry must be made slowly and with due regard for the rehabilitation of the population and the associated industries which have grown up in such areas. Any sudden alterations in the structure of the industry will create new problems of social maladjustment and stranded population which the slow and as yet unsolved problem of rehabilitation will not be able to care for in a reasonable period of time. Since transportation is the largest single factor entering into the cost of coal to the consumer, it is obvious that those producing areas more distantly located from a given consuming market suffer a competitive disadvantage as compared with those producing areas more adjacently located to the market. This follows, since, generally speaking, there will be a freight differential against them, because of the increased distance of transportation. Obviously, coal producers in these remote areas must find some means of overcoming or absorbing this handicap if they are to compete successfully. Prior to 1933, this freight differential was made up by West Virginia coal operators in part by employing labor at a lower rate than the prevailing wage in the northern fields and in part through mining advantages which geologic conditions afforded them. In 1933, and early in 1934, under the operation of the Bituminous Coal Code, the wage rate for labor in West Virginia producing areas was increased, until at the present time, speaking generally, costs of production in the West Virginia fields are no longer sufficiently below the corresponding cost of their northern competitors, so that these relative freight differentials can be absorbed, taking the quality of the various coals into consideration. Furthermore, any subsequent reduction of the remaining small wage differentials would further intensify the competitive discrepancy between northern producers and West Virginia producers. In other words, if all producers were to sell their coal at the minimum prices as defined in this bill, the consumers in many of the market areas where West Virginia coals find their major outlet would have to pay substantially more for West Virginia coals than for the coal of the producers in the northern field, paying due regard, to be sure, to the relative utilization values of these various coals. The question naturally arises, how, in view of this situation, the consumption of coal from these various fields has been kept so well in line with their previous relative proportion of business as agreed upon in the terms of the so-called "Adams allotment." The answer lies in the fact that the establishment of minimum fair competitive prices under the terms of the Bituminous Coal Code has been roughly interpreted to mean that such minimum prices should be so fixed as to give each of the coals entering a given market an equal competitive opportunity. In other words, coal has not been selling in proportion to the cost of production, but has been selling at prices which are very roughly in proportion to their values to the consumer at the point of destination. This has meant, in the case of superior quality coals coming from producing areas located adjacent to the consuming area, the price in some instances has been substantially in excess of cost of production, in order that poorer quality coals entering the same market from distantly located producing areas might sell at a lower price, giving them an equal competitive opportunity with the better grade coal and at the same time permitting the producers of such coals to receive not less than the cost of production for their product. 2 THE EFFECT OF SENATE BILL 1417 ON THE PRICE AND MOVEMENT OF COAL This bill proposes an allotment of coals to each of the producing areas in accord with a prescribed formula. According to this formula the West Virginia fields will immediately suffer a great decrease in their previously considered normal allotment and the Pennsylvania fields will enjoy a great increase over their previously established normal allotment. Now one of two things will inevitably ensue: Either the sum of the allotments made will exceed the demands for coal, thus making ample supplies of coal potentially available, or the total allotted production of coal will be maintained sufficiently low so that the consumer will not have the assurance that adequate supplies of coal will be available. In the former case the price of coal will inevitably trend downward to the cost of production or to the minimum price established. In the latter case, the tendency for the price will be to rise rapidly, stopping only at the maximum price to be established. In the latter case, the proposed National Coal Producers Board will be under the terrific pressure of consumer demand to increase their allocations and insure an ample supply of coal. That they will be forced to accede to this demand appears inevitable, and as a consequence, we are justified in assuming that the consumer will always be assured of ample supplies of coal and therefore that coal prices will tend not toward the maximums, but toward the minimums. Under these conditions, what will be the result? Inevitably, those producers enjoying proximity to the market will, under the terms of this bill, be able to undersell on a quality basis their competitors located in distant producing areas. To be sure, if the terms of this bill are strictly enforced, they will not be permitted to sell more than their quota. On the basis of recent experience of the coal industry under the coal code, however, one may be permitted some doubt as to whether a tremendous consumer demand to purchase coal at a lower price from nearby producers will not result in surreptitious production in excess of allotment. However, let us assume that this will not occur. It is almost certain that the quotas of producing areas adjacent to the market will be sold in advance and far more readily than those of distant markets. The geographically favored producers will have less selling expense. The desirable long-termcontract business will inevitably drift to them. If working times are to be maintained normal and uniform in the various producing areas, it will present almost insuperable administrative difficulties to the producers' board in the constant adjustment and readjustment of periodic district allocations in accord with subsection (c) of section 4 of the bill. Quite evidently, the framers of this bill recognized that one of its effects would be to cause a gradual redistribution of production as between the various districts. Quite evidently also, it was forseen that this bill could not be thoroughly enforced and that production beyond the quotas would occur in some districts. Otherwise, it is extremely difficult to understand or to justify the inclusion of subsection (i) in section 4 of this bill, providing for a reallocation every 2 years, based solely upon the output of the preceding period of operation under this act. We are in agreement with this anticipation and we have demonstrated above that the displacement of coal tonnage will be into those districts which have a geographically favorable situation in respect to the principal markets, which means a shift from southern fields, and particularly West Virginia fields, to northern fields. The subsection just referred to furnishes a great impetus to the producers in this favorable competitive situation to undersell their competitors, to dispose of their quotas quickly, and by fair means or otherwise, to add to the output of their districts in order that at the end of a 2-year period, their allocations may be increased. Those familiar with the coal industry are well aware of the urge of high idle time costs, and high capital ratios on operators for additional production. OPERATION OF SENATE BILL 1417 IN A GIVEN DISTRICT Consider now the application of this bill in any given district. If coal prices tend toward the minimum, and it has been shown that under the practical application of this bill they will, then all the coals of a given district will sell at substantially the same price, that is, at the minimum prices determined by the average cost of production for the entire district. Yet in any given district, the cost of production in a high-cost mine is often more than 30 percent greater than the cost of production at the low-cost mine. This does not necessarily imply that the high-cost mines are inefficient. This spread in costs of production is fully justified economically by the superior quality of the coals coming from the high-cost producing mines. It is freely admitted of course that this is not always the case. Under the terms of this bill, the minimum price will be a weighted mean which will fall between the high cost and the low cost of production. Consider then the economic warfare that this may give rise to in any given division. If the potential supply of coal is plentiful, prices will inevitably trend toward this minimum. The high-cost producer will find it difficult, if not impossible, to realize any profit for the sale of his product. The low-cost producer will be in a fortunate position provided the value of his coal to the consumer is relatively greater than the minimum price. The low-cost producer of inferior coal will not be able to lower his price to the point where he can put his coal on the market with an equal competitive opportunity with the superior coals from his own districts, or from other districts for that matter. This situation has nothing to commend it. Quite evidently, it does not in any sense guarantee the consumer the benefits of efficient operation, nor on the other hand does it permit the low-cost producer to offer his product to the consumer at a price where the consumer can take advantage of these lower costs. It will entirely distort the present price relationship existing in the industry and, in some cases, will render worthless the investments made by the consumer for the utilization of special coals which heretofore have been offered to him at a price advantage. These results follow largely as a consequence of the fact that mine allocations are strict and immutable. It is recognized that subsection (a), part 2, of section 4 provides for the establishment of fair competitive prices and practices in the markets by district boards or marketing agencies. Unfortunately, no administrative criteria are set up for the determination of fair competitive prices, nor are such prices even defined in the bill Moreover, these provisions of the bill are not mandatory, but optional. In other words, this bill gives not more but less assurance than does the present Bituminous Coal Code to the disadvantageously located producing areas that the coal industry in such regions will be maintained. On the other hand, the operation of the Bituminous Coal Code has clearly shown that if minimum fair competitive prices, suitably correlated and so designed to give each producing area an equal competitive opportunity in the various consuming areas, are |