s 14.GS: CIR268 c.l STATE OF ILLINOIS WILLIAM G. STRATTON, Governor DEPARTMENT OF REGISTRATION AND EDUCATION VERA M. BINKS, Direcfor EFFECT OF COAL INVEN- TORIES ON STABILITY OF THE COAL INDUSTRY H. E. Risser DIVISION OF THE ILLINOIS STATE GEOLOGICAL SURVEY JOHN C. FRYE, Chief URBANA CIRCULAR 268 1959 Digitized by the Internet Archive in 2012 with funding from University of Illinois Urbana-Champaign http://archive.org/details/effectofcoalinve268riss EFFECT OF COAL INVENTORIES ON STABILITY OF THE COAL INDUSTRY H. E. Risser ABSTRACT This analysis of changes in past coal consumption and in- ventories was undertaken to determine the extent to which inven- tories contribute to the general stability or instability of the coal industry. Coal inventories are of two types: 1) seasonal inventories built up during the summer for use during the winter, and 2) protec- tive inventories, held to assure adequate supplies of coal in the event of an interruption in supply. Seasonal inventories tend to stabilize production by leveling out the troughs and peaks of sea- sonal consumption. Protective inventories tend to follow changes in the rate of consumption and thus to accentuate their effects. As a result, fluctuations in coal production far exceed those that might be expected on the basis of changes in the amount of coal used by consuming industries. Studies of seasonally adjusted consumptions and invento- ries reveal a distinct pattern of behavior when significant changes in industrial activity occur. Such studies may be useful in fore- casting changes in the demand for coal, and the information may be valuable to both producers and consumers in planning their opera- tions and inventory policies. INTRODUCTION This analysis of changes in past coal consumption and coal inventory prac- tices was undertaken in order to determine the extent to which inventories contri- bute to the general stability or instability of the coal industry. The stabilizing ef- fect upon the coal industry of seasonal inventories is widely recognized, but some- what less apparent is the unstabilizing effect of protective inventories which tend to emphasize the influence of changes in the level of industrial activity. It was hoped that such an analysis might be valuable to both the coal industry and to con- sumers in planning their operations and inventory policies. The paper was first presented before the Mid-America Minerals Conference of the American Institute of Mining, Metallurgical and Petroleum Engineers in St. Louis, Missouri, October 23, 1958. TYPES OF COAL INVENTORIES On September 30, 1958, the major coal-consuming groups of the United States held a total of 74 million tons of coal in inventory stocks. This was equal to more than 15 percent of the average quantity produced annually during the 10-year period, 1948 through 1957. It represented a 75-day supply of coal at the rate of consumption then current. [1] 2 ILLINOIS STATE GEOLOGICAL SURVEY The size of coal inventories in the United States tends to vary widely, both seasonally and on a year-to-year basis. The extent of such variations is shown in tables 1 and 2 . Table 1. - Coal Inventories in Hands of Commercial Consumers and Retail Dealers' Yards, by Months, During 1957 Date Tons (millions January 1 78.0 February 1 73.0 March 1 71.3 April 1 72.0 May 1 73.3 June 1 76.1 Tons (millions) July 1 78.3 August 1 75.0 September 1 77.7 October 1 79.8 November 1 81.4 December 1 81.3 Source: U. S. Bureau of Mines. Table 2. - Coal Inventories in Hands of Commercial Consumers and Retail Dealers' Yards, 1948-1958 (As of January 1 ) Year Tons (millions) 1948 52.2 1949 69.4 1950 45.1 1951 72.5 1952 76.6 1953 S. Bur 76.7 Source: U. eau of M Year Tons (millions) 1954 80.6 1955 69.2 1956 68.4 1957 78.0 1958 80.8 Inventories may roughly be classified by type according to their purpose. The first type is the seasonal inventory, built up during the "off season" when con- sumption is low, for use during the period when the requirement for coal increases. This type of inventory has special significance in cases in which the coal is used to provide heat or warmth, as in domestic heating and other similar uses. The second type of inventory, which might be called a protective inventory, is built'up primarily as a protection against possible interruptions in coal supplies. The level of such inventories usually is based on current operating conditions and the rate of coal consumption. For example, a given concern may maintain a 30-, 60-, or 90-day supply at its current rate of consumption, in accordance with its in- ventory policy. The function that the coal serves determines to a large extent whether the consumer maintains seasonal inventories, protective inventories, or a combination of both. Tables 3 and 4 show the inventories of coal held at specified times by several major consumer groups - electric power utilities, coke plants, other indus- trials, and retail. These groups consume about 93 percent of the coal used in the United States each year and normally they hold about 96 percent of the country's total coal inventories. EFFECT OF COAL INVENTORIES Table 3. - Coal Inventories in Hands of Major Consumer Groups, By Months, During 1957 (in millions of tons) Electric Coke Other Date power utilities plants industrials Retai: January 1 46.0 13.9 14.1 1.1 February 1 43.4 12.8 13.2 0.8 March 1 42.3 12.8 12.9 0.8 April 1 42.8 13.3 12.8 0.6 May 1 44.0 13.3 13.0 0.7 June 1 45.9 13.9 13.0 0.8 July 1 47.6 14.0 13.1 0.9 August 1 47.5 11.7 12.4 0.9 September 1 49.1 12.5 12.5 1.0 October 1 50.5 13.0 12.7 1.0 November 1 51.2 13.9 12.6 0.9 December 1 51.1 14.0 12.6 1.0 Days supply, at current rate of consumption January 1 99 February 1 86 March 1 91 April 1 98 May 1 108 June 1 115 July 1 117 August 1 118 September 1 117 October 1 121 November 1 117 December 1 114 46 42 42 44 45 47 48 40 43 45 50 53 52 45 45 49 52 58 62 62 59 58 50 48 9 4 5 6 7 14 18 19 14 12 Source: U. S. Bureau of Mines. Retail sellers' inventories are principally seasonal - that is, the retailers build up their inventories during the summer months to assure an adequate supply during cold winter months when the demand for fuel is high. Also, they can buy coal at lower prices during the summer months. Table 3 shows a decline of more than 40 percent in the size of retail coal stocks from midwinter to early spring. The plants classified as "other industrials" also build up some seasonal inventories, but significantly larger percentages are in their protective inven- tories. In contrast, inventories by coke plants (and also by cement plants, steel plants, and railroads, not shown in tables 3 and 4) have little or no seasonal significance, except perhaps where coal may be bought in summer to take advan- tage of lower prices. Electric utilities use a combination of both types of inventories. During the summer months while large quantities of natural gas are consumed by the electric utilities, inventories of coal are being accumulated for use during the winter when gas is reserved for domestic purposes. In addition to these seasonal ILLINOIS STATE GEOLOGICAL SURVEY Table 4. - Coal Inventories in Hands of Major Consumer Groups, 1948-1958 (As of January 1) Electric Coke Other Year power utilities plants industrials Retail 1948 16.8 9.1 15.3 2.0 1949 24.8 12.1 18.0 2.7 1950 17.8 9.9 10.2 1.4 1951 27.1 16.8 18.7 2.5 1952 33.4 15.3 19.4 1.8 1953 35.9 14.4 19.1 1.7 1954 39.8 16.5 17.8 1.5 1955 39.7 12.3 13.0 0.8 1956 38.2 13.3 12.9 1.0 1957 46.0 13.9 14.1 1.1 1958 50.3 14.1 12.7 0.9 Days supply, at current rate o f consumption 1948 62 34 52 33 1949 90 43 53 46 1950 77 39 35 32 1951 93 61 58 50 1952 112 55 62 56 1953 107 50 62 58 1954 117 62 60 64 1955 106 48 56 60 1956 82 44 39 47 1957 99 46 52 62 Source: U. S. Bureau of Mines. invent6ries, a 2- to 3-month supply of coal is also kept as protection against possible interruptions in supply. The utilities' gradual increase in coal consump- tion is reflected in the steady growth of their inventories over recent years. PATTERNS OF COAL CONSUMPTION Recent changes in the patterns of coal consumption have materially changed the relative significance of the two types of inventories. Figure 1 shows the consumption of coal by the major consumer groups during the past 25 years. It shows that retail consumption, in which seasonal inventories are an important factor, has declined in relative importance. Likewise the growth of electric power, which has both seasonal and protective inventories, and of coke, which has primarily protective inventories, is apparent. EFFECT OF COAL INVENTORIES 600 500 400 300 200 100 Fig. 1. - United States consumption of coal, by consumer groups. Figure 2 illustrates, perhaps even more graphically, changes in the relative importance of the consumer groups. Railroad and retail use, which in 1933 accounted for almost 50 percent of total consumption, now account for about 10 percent. Electric power, coke, and other industrials, which accounted for less than 50 percent in 1933, now consume about 85 percent of the coal; they also are the major holders of protective inventories. EFFECT OF FLUCTUATIONS The use of coal inventories by consumer groups can have either a bene- ficial or detrimental effect on coal industry stability, depending upon the type of inventory involved . Seasonal inventories have a stabilizing effect upon the coal industry. The accumulation of such inventories during summer months for consumption during winter months tends to level out the peaks and troughs in production that otherwise would occur. Thus the total annual need for coal can be supplied with a lower productive capacity than otherwise would be required. Seasonal inventories of coal in the hands of consumers or retailers amount to about 7.3 million tons each ILLINOIS STATE GEOLOGICAL SURVEY 40 42 44 46 48 50 52 54 56 58 Fig. 2. - Percentage of coal used in the United States, by consumer groups. year, as shown in figure 3, which shows average monthly industrial inventories, consumption, and production of coal over the 5-year period 1953 through 1957. Production is calculated as the quantity of coal consumed plus or minus the inven- tory change during a given period. Beginning in about March of each year, a grad- ual build-up occurs until a peak is reached in about September or October. From November until March there is a gradual decline in coal stocks as the inventories are used. Consumption, on the other hand, follows a similar seasonal pattern, but with a lag of about four months. The low point of consumption usually occurs in July, the peak consumption in January. As the consumption begins to decline in late winter and early spring, production is supported by the demand for coal to replenish stocks consumed during the winter. On the chart it may be seen that except for July, when the miners take their annual 10-day vacation and production ceases almost entirely, the production is maintained at a fairly stable level. A comparison of the variation in consumption with that in production gives some measure of the beneficial effects of seasonal inventories in stabilizing coal pro- duction. Seasonal inventories de-emphasize the effect of seasonal fluctuations in demand, but protective inventories emphasize or expand the effects of cyclical fluctuations caused by changes in business activity. Figure 4 illustrates the influence of inventories on the level of coal production when cyclical changes in EFFECT OF COAL INVENTORIES 75 75 25 20 CONSUMPTION PRODUCTION (Consumption +or- inventory change » Excludes miners' vacation 20 30 25 20 JAN. FEB. MAR. APRIL MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC. AVERAGE OF 1953-1957 Fig. 3. - Effect of seasonal changes in industrial inventories on United States coal production. consumption occur. In 1952, consumption of coal in the United States was almost 419 million tons, and there was no appreciable change in inventories. During the next year an 8 million ton increase in consumption, accompanied by a 4 million ton increase in inventories, caused a total production increase of 12 million tons. In other words, a 1.9 percent increase in consumption was accompanied by a 2.9 percent increase in production. The following year, during the recession of 1954, consumption dropped 15 percent, but production fell 18.3 percent. Two years later, in 1956, consumption had risen 69.8 million tons or 19.2 percent above the 1954 low, but production had risen 26 percent. Annual totals, as presented in figure 4, fail to show the rapid and severe fluctuations that sometimes occur during shorter periods of time due to business fluctuations. Study of monthly or other short-term changes resulting from busi- ness fluctuations, however, requires that the data be adjusted to exclude, inso- far as possible, those changes in consumption, production, and inventory levels that result from normal seasonal variations. In figure 5, changes in inventories, consumption, and production in electric utilities, coke, and "other industrials" have been adjusted for seasonal variation. The period from 1953 to 1958 was selected because it is the longest recent period in which coal production has not been interrupted by any serious strike. Furthermore, the period includes a complete cycle sequence (recession of 1954, the more prosperous years of 1955 and 1956, and the recession that began about the middle of 1957) . Consumption and production are given in millions of tons per month. Consumption, on a seasonally adjusted basis, declined from a peak of 28.3 million tons in July 1953, to 25.2 million tons in January 1954, and by ILLINOIS STATE GEOLOGICAL SURVEY 600 580 560 540 520 - * // x \ h> Production // \ g \\ x V \ - - if I/ U.S. Consumption \ / \ r> / \is 1 iW-" i \> 3 CONSUMPTION AND PRODUCTION ' ^i» - // 1 1 1 y * Production (Consurr pt \ / V' V on + or — inventory change) iiii