West Virginia governor James C. Justice II seeks to fill the Senate seat left open by Joe Manchin’s retirement. “Big Jim” Justice, like Manchin, is a coal executive and former Democrat. But in contrast to Manchin’s run-of-the-mill crony capitalism, Justice has pursued innovative business practices that pushed the mines of West Virginia deep into the grasp of global financial capital.
Justice did it, he says, to keep his mines open and his businesses out of bankruptcy. But Justice’s strategy has meant that a string of unrelated third parties — JPMorgan, a Russian steel oligarch, Credit Suisse — get a little bit richer every time a coal miner goes to work for Justice. And West Virginians — local governments, Justice’s miners, small businesses, and local banks — hold the bag. If this is the way to stay out of bankruptcy, Justice’s prescribed treatment is worse than the illness.
How did Big Jim make such a big mess, and why? To be fair, it is not all his fault. Jim Justice’s business fortune, like the fortune of West Virginia itself, is impossible to understand without reference to the ups and downs of global commodity markets. Dealing with these commodity cycles has been the central preoccupation of the coal business for several decades. If the unemployment rate is the most important economic indicator for the world’s industrial regions, the price of commodities is the most important economic indicator for its resource-extraction regions.
Justice is a creature of resource extraction. Justice’s money comes from two sources: coal and agriculture. He inherited his stake in both the coal and agriculture industries from his father. Both coal and farming are commodity businesses.
The price fluctuation of coal has several implications for those who want to make money mining it. Coal mines are not all created equal and can be broadly sorted into two classes. There are mines that are highly productive, typically meaning that they are highly mechanized with expensive “longwall” mining machinery imported from Germany. These mines usually continue to operate when coal prices drop because their labor inputs are low and their capital costs (interest payments) remain the same whether the price is high or low. High-productivity, mechanized mines are typically operated with union labor.
Then there are low-productivity mines — sometimes called “doghole” mines. Smaller and less mechanized dogholes tend to shut down when the price of coal drops. Doghole mines close because their marginal cost (that is, the cost that they have to spend to mine an additional ton of coal) is higher than that of the high-productivity mines. The existence of doghole mines ensures that the price of coal does not rise too high. Doghole mines don’t require large investments, which means that when the price of coal rises above normal, a whole host of them open up. Doghole mines are typically nonunion.
Throughout most of the twentieth century, many large, high-productivity mines were owned and operated by large industrial corporations that consumed coal, like US Steel, Ford, and others. When demand for their goods increased, they didn’t open new mines; rather, they turned to the market and purchased coal from the doghole mines. During the industrial downturn of the 1970s and 1980s, this system of major, company-owned mines began to break down. Changes in the geography of world industrial production led to the decline of domestic coal-consuming industries. US Steel and similar companies stopped investing in coal production and shed their coal assets.
A new class of coal companies stepped in to develop and operate the expensive, high-productivity mines. Pure-play coal companies like Massey and Peabody expanded rapidly into central Appalachia in the 1980s. Bluestone Industries, owned by Big Jim’s father, was part of this growth.
Unlike the older major producers, the new companies engaged in both high-productivity and doghole mining — a business strategy that mitigated against the fluctuations in the price of coal. Owners of high-productivity mines had never been able to see the full benefits of their investments because the doghole…
Read More: Jim Justice Tied West Virginia Coal to Global Financial Capital