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Suppliers Feel Pain as Coal Miners Struggle

08/31/2015 | 07:05am US/Eastern

BROOKVILLE, Pa.?Workers in a rural warehouse here are restoring four machines: a locomotive for coal miner Consol Energy Inc., and three 1947 San Francisco streetcars.

By this time next year, the coal-mining equipment could be gone, and the workers at Brookville Equipment Corp. left repairing just streetcars.

So it goes in coal country, which has been bruised by competition from natural gas, regulation of coal's heavy carbon footprint, and economic forces like the strong dollar. As big coal miners struggle, their equipment suppliers?thousands of firms sprinkled throughout Pennsylvania, West Virginia, Ohio and Kentucky?are scrambling to find new customers anywhere they can, from gun shops to the San Francisco Municipal Transportation Agency.

For most, nothing will replace the massive scale of the coal-mining sector, and as the generational coal crisis ripples throughout the hamlets and hollows of Appalachia, economists are debating the region's most viable path for growth.

The plight of big coal is particularly bleak in Central Appalachia, where coal seams are thinner and costs have increased, and where the oil-price collapse has hurt natural-gas drilling and steelmaking. Alpha Natural Resources Inc., one of the nation's biggest miners, declared bankruptcy on Aug. 3, and other filings are expected.

"A lot of these mines that are closing?particularly the smaller ones?I think are gone for good," Paul Lang, president of another Appalachian miner, Arch Coal Inc., told analysts in late July.

The modern coal industry is heavily mechanized, and miners depend on a broad web of equipment makers and tool shops. The West Virginia Center on Budget and Policy estimates that four subsidiary jobs depend on every coal-mining job. "Coal mining requires tons of machinery and equipment," says Ted Boettner, the center's executive director. "And the problem is that coal companies tend to not be diversified. They're not also into solar panels."

Petra Industrial Services Inc. a small Lochgelly, W.Va.-based machine shop, has supplied Alpha, Arch Coal, Murray Energy Corp. and other big miners in the region with machine replacement parts for 30 years. But as many downsize furiously to cope with cheap natural gas, a global coal glut and tougher environmental rules, Petra is trying to adapt.

"It's been catastrophic," says Jerry Fredericks, whose family owns the business, and who recently laid off two of his 12 workers. "And there's nothing we can do about it; we're just part of the supply chain."

Mr. Fredericks says his business is looking at other potential customers. "We're looking at components for the ATV industry, gun accessories and some custom tooling for gas," he says. "But geographically, coal is just what makes this area run."

Princeton Machinery Services Inc., in Princeton, W.Va., which makes hydraulic pump parts, has already diversified. Owner Joe Stafford says coal miners account for 10% of his customers, down from half 10 years ago. "We saw the writing on the wall," he says. "When you live this close to the coalfields, everything revolves around it, so we started looking elsewhere a few years ago."

Brookville Equipment Corp. was started in 1918 by one of the nation's first Ford dealers. The firm built up an expertise in gas- and diesel-powered locomotives and railbuses, which it sold as far afield as Colombia. The McNeil family bought Brookville in 1975 and in the 1980s made a push into coal.

"Appalachian coal has low seams, which is perfect for embedded rail," says Joel McNeil, vice president of business development. "If the ceilings are higher, there's enough room to drive a jeep with tires in there, and you don't need rail."

Brookville pioneered battery technology that allows electrically powered rail vehicles to detach themselves from power cables and travel alone for short stretches. By 2011, with coal still going strong, 60% of the company's business was selling low-slung locomotive cars for coal miners to ferry people and equipment down into the mines.

But the coal crisis this decade has hit Brookville hard.

One of Brookville's biggest customers is Consol, which has been focusing more on natural gas and two years ago sold off five coal mines to Murray Energy. The Pittsburgh firm lost $603 million in the second quarter, and the amount of money it spent on running its coal business, which includes paying suppliers like Brookville, fell 20% from a year earlier to $393.7 million. A spokesman for Consol said the company was "continuing to successfully navigate the current market conditions" and its mines would "capitalize when prices begin to rebound."

Marion Van Fosson, president of Brookville, estimates the company has lost revenue of around $30 million a year, a significant part of its total revenue. The company now employs 200, down from a high of 300 in 2012. By next year, mining will only be a quarter of its business. "Coal is still an important part of our business, and we'd like it to come back, but we have to realistic," he says.

The company decided to expand into restoring and building new streetcars because it had in-house expertise in the public transit business, and because it saw growth in that sector.

"There's a huge move back to cities," Mr. Van Fosson says. "A lot of young folks don't even want driver's licenses, so that's an opportunity for us."

The number of Americans riding light-rail systems annually rose to 537 million in 2014, up 56% from 341 million in 2004, according to the American Public Transportation Association.

And thanks to its work for the coal business, Brookville had something extra to offer. The battery technology useful in coal mines also helps streetcars get over bridges in Dallas. "Brookville's the first to develop a car that can go some distance on battery power, and they're willing to fill a market niche," says Jeffrey Boothe, president of Boothe Transit Consulting LLC, a Washington consultancy.

Brookville, which has secured contracts for projects in Dallas, Detroit, San Francisco, Montreal and other cities, says it can compete with giants like Alstom SA and Siemens AG because it can more easily respond to niche requests, like restoring 16 old San Francisco street cars. That contract, which will add 20 years to the cars, is worth about $34.5 million.

Kenneth Troske at the University of Kentucky says that unless more companies can replicate Brookville's success at finding an alternative business, "the best thing to do would be to provide people with education and let them relocate."

Write to John W. Miller at john.miller@wsj.com

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