Rising Coal Prices May Benefit Railroads

Trains magazine reported this week on its website that rising coal prices may lead to increased coal traffic by rail.

The article said the coal supply is tight, which may prompt mining companies to tap into their reserves.

Spot prices of Illinois Basin coal have increased 225 percent compared with a year ago while Northern Appalachia prices are up 84 percent. Other coal mining regions have also seen rising coal prices.

Association of American Railroads figures show that through early May coal traffic on U.S. railroads had increased 7 percent in a year-over-year performance comparison. Through that date railroads had hauled 1.1 million carloads of coal.

Although coal traffic is up on Union Pacific and BNSF, it has been down on Norfolk Southern and CSX.

The article can be read at https://www.trains.com/trn/news-reviews/news-wire/coals-comeback-perseveres-through-mid-2022-analysis/

Coal Exports Seen as Likely to Rise in 2022

Coal exports for steelmaking are expected to be strong in 2022, Trains magazine reported this past week in an analysis posted on its website.

Steel makers use metallurgical coal and the U.S. Energy Information Administration projects that export demand for that coal will increase 16 percent this year with the leading buyers being located in Brazil, India and China.

Exports to China were up sharply last year, which accounted for an estimated 26 percent of the 87 million short tons of export coal. Of that 47 million short tons was metallurgical coal.

EIA forecasts predict U.S. coal exports this year will be 50 million short tons this year and potentially 55 million short tons in 2023.

Most export metallurgical coal is hauled by CSX and Norfolk Southern through ports in the Virginia Tidewater region.

For more information, see https://www.trains.com/trn/news-reviews/news-wire/overseas-demand-for-metallurgical-coal-likely-to-bolster-u-s-coal-carloadings-in-2022-analysis/

U.S. Coal Benefits from China-Australia Rift

A rift between Australia and China has benefited U.S. coal companies, Trains magazine recently reported on its website.

China stopped buying coal from Australia after top government officials there were critical of China’s handling of the COVID-19 outbreak.

The Trains article noted China is heavily dependent on imported coal for steel making and power generation.

The U.S. Energy Information Administration found the United States has exported 5.4 million tons of coal to China in the first six months of this year, a 920 percent increase over exports in the same period in 2020.

The article can be read at https://www.trains.com/trn/news-reviews/news-wire/analysis-chinas-ban-on-australian-coal-is-benefiting-u-s-railroads/

Rising Gas Prices Prove to be Boost to Coal

If you’ve been paying attention to the weekly rail traffic reports put out by the Association of American Railroads you may have noticed that in recent weeks and months coal traffic has been on the upswing.

In part that has followed in the wake of higher natural gas prices that have prompted some utilities to resume using coal to generate electricity.

Thus far this year, coal traffic has increased by 11.7 percent compared with the same period in 2020.

The U.S. Energy Information Administration predicts that coal will be used to create 24 percent of electricity generation in 2021 and 2022, up from 20 percent in 2020.

It is not, though, that utilities are giving up on natural gas, whose price has increased by 95 percent over the past six months. Natural-gas futures have risen to $5.10 per million British thermal units in recent days compared with $2.61 per million BTUs six months ago.

Instead, utilities are using coal as a supplement to natural gas for power generation as a hedge against higher gas prices.

And to be sure, coal loadings remain below 2019 levels. However, the evidence points toward greater use of coal at least in the short term.

Natural gas still accounts for a higher percentage of power generation, a projected average of 35 percent this year and 34 percent in 2022. In 2020, 39 percent of power generation came from natural gas.

Aside from higher gas prices, the supply of natural gas has been adversely affected by infrastructure issues.

Severe weather, including ice storms in Texas, hot and dry conditions in the West and damage caused by Hurricane Ida on the Gulf Coast last month has reduced natural gas production.

In mid September more than a third of the gas production in the Gulf region remained offline.

That comes at a time of year when utilities are  stockpiling the natural gas supplies.

The federal energy administration said in mid September that U.S. storage gas supplies are 3,006 billion cubic feet, which is 231 BCF below the five-year average and 595 BCF lower than last year at this time.

That could drive natural gas prices even higher as utilities approach winter peak demand periods.

However, the coal industry has its own issues, including tight supplies and transportation constraints. The pandemic has caused delays in coal deliveries.

Industry observers don’t expect the number of unit coal trains to significantly increase nor do they expect many closed coal mines to reopen.

What they expect is for coal traffic to remain at a consistent above-average volume over the next several months. They don’t foresee an unprecedented rise in rail coal volume.

Railroads have stored some of the equipment once used to move coal and management may be reluctant to spend to put it back in service to handle what they view as a short-term opportunity.

Still the demand for coal is expected to rise next year by 100 million short tons and export coal is expected to increase by 21 million short tons.

Fewer Mines Seen as Needed to Boost Coal Industry

A common theme in recent investor calls discussing Class 1 railroad quarterly financial results and the weekly and monthly freight data provided by the Association of American Railroads has been the steady downward trajectory of coal traffic by rail.

Class 1 railroad executives and many industry observers have adopted a pessimistic attitude toward coal, saying that it will continue to lag due to low prices of natural gas used to generate electricity and the closing and planned closing of power plants using coal.

The coal industry itself is undergoing a transformation with some saying there are too many mines for the size of the market.

“There are too many mines and too few customers,” said Rob Godby, an economics professor who is deputy director of the University of Wyoming’s Center for Energy Regulation and Policy, in an interview with Trains magazine.

He said the best thing that could happen to improve the financial health of the coal industry would be a permanent closure of a mine in the Powder River Basin, where there has been little consolidation of operations.

That has resulted in less profitability for the owners of those mines. Some have sought bankruptcy in the past few years.

That included St. Louis-based Arch Resources, which emerged from bankruptcy protection in 2016 and is one of the major players in the Powder River Basin.

Arch said this week it is seeking a buyer for its mines and if can’t sell them it will wind down production in the Power River Basin.

The company said during a third quarter earnings call that it is transitioning away from thermal coal used to generate electricity and instead focusing on metallurgical coal used in steel making.

Coal was used to generate 48 percent of U.S. electricity as recently as 2008.

But the U.S. Energy Information Administration said that has fallen to 20 percent this year.

Last year Arch’s mines in the Powder River Basin produced 75 million tons of coal. It expects to produce 55 million tons this year.

A month ago Arch and one of its chief competitors, Peabody Energy, called off plans to combined operations in the Powder River Basin and elsewhere.

The Federal Trade Commission had opposed the due based on competitive concerns.

Export Coal Markets Are Falling

In the facing of declines in the domestic coal market, U.S. railroads had made up some of the slack with export coal.

In 2017, the amount of coal exported from the United States rose by 61 percent.

But that market now is in decline due to lower natural gas prices an analysis released by investment bank Morgan Stanley has found.

The report said coal exports are expected to fall by 15 percent this year.
Not only are natural gas prices falling, but shipping of liquefied natural gas has also increased.

In the meantime, banks, other lenders, and insurance companies are no longer supporting the coal industry as they once did with more than 100 of those institutions have withdrawn from the market since 2013 said a report by the Institute for Energy Economics and Financial Analysis.

The Morgan Stanley analysis said that financial institutions have cited climate issues for reducing their investment in coal companies.

“The globalization of natural gas is set to usher in a new energy transition,” said the Morgan Stanley report. “A wave of investment in LNG, which can be easily transported, is unleashing this cheap energy resource and creating a new global commodity market.”

The Association of American Railroads said that U.S. and Canadian carloads of coal averaged about 7 million annually between 2009 and 201.

In the past three years, that has fallen to 5.25 million in 2015 and 4.5 million between 2016 and 2018.

Norfolk Southern and CSX both noted falling coal exports in their second quarter financial reports.

Reports indicate that it coal exports have fall to Europe and Asia.

Some Asian nations had in recent years seen increased demand for steam coal from 10 million short tons in 2016 to 20 million tons in 2017.

But during the first five months of 2019, Asian markets have reduced their coal purchases by 11.5 percent to Indiana, 31.6 percent to South Korea and 66 percent to China.

Coal Firm Served by NS, CSX Files for Bankruptcy

A Kentucky coal operator whose mines in the eastern region of the state are served by CSX and Norfolk Southern has filed for bankruptcy protection in what is viewed as a step toward the sale of the company.

Cambrian Holding Company filed for Chapter 11 bankruptcy protection in U.S. District Court in Lexington, Kentucky, and subsequently issued a statement saying that is “will explore a sale process under court supervision.”

The company is based in Belcher, Kentucky. The bankruptcy filing said Cambrian has nearly $21 million. S&P Global said Cambrian lists assets of $10 million and $50 million, and liabilities between $100 million and half a billion dollars.

Cambrian President Mark Campbell attributed the bankruptcy to falling coal prices and financial complications following its purchase of Teco Energy.

In a statement, Campbell said Cambrian’s mines will continue to operate.

Coal Booster Plans Quietly Dropped

The Trump administration has quietly set aside its plans to bolster the coal industry amid opposition from within and outside the administration.

Politico reported that various ideas to force utility companies to keep coal-fired generating plants operating were opposed by members of the National Security Council and National Economic Council.

The report did not say whether President Trump, who campaigned in 2016 on a pledge to revive the coal industry, agreed with or made the decision himself.

Coal remains the single-largest commodity by carload volume hauled by Class 1 railroads, but that traffic has sharply declined in the past decade as utility companies have retired coal-fired plants or switched them to burning natural gas.

The Politico article said the coal industry has been frustrated by lack of progress in the administration’s effort to boost coal production and use.

In particular, they have been hoping for economic assistance, but that has met with fierce opposition from oil and gas producers, consumer groups worried about rising energy costs, environmentalists, and conservatives fighting federal intervention in markets that might cost billions of dollars.

Michigan Utility Wins Rate Case Against CSX

A Michigan utility company has won a rate case against CSX before the U.S. Surface Transportation Board.

The STB recently sided with Consumers Energy of Jackson, Michigan, against CSX in a case filed in January 2015 that challenged the rates CSX charged to haul coal to the utility’s J.H. Campbell generating plant near West Olive, Michigan.

CSX picked up the Powder River Basin coal from BNSF in Chicago and hauled it 235 route miles to the power plant. The STB agreed with the utility company and set a lower rate.

However, CSX has asked the Board to extend the proceeding to Feb. 20 during which time it will decide whether to ask the board to reconsider its ruling.

Trains magazine cited an unidentified attorney who was said to be familiar with the case as saying that it has become rare in recent years for shippers to win rate challenge disputes.

The attorney said most rate cases have involved chemical companies, but the volumes of cars in question and the varied distribution of chemical products makes it difficult for the STB to determine if the rates charged by the railroads are reasonable.

In the Consumer Energy case, the STB said that CSX was the “dominant” carrier in the market and the utility was a captive shipper.

The STB staff used the “stand-alone cost” method to determine if CSX’s revenue unfairly exceeded the cost of hauling the coal.

In response, CSX argued that Consumers Energy had an alternative to rail, including by water because the generating plant was close to the shore of Lake Michigan.

CSX said that a nearby generating plant operated by Consumers Energy on the lake receives coal by boat.

In rejecting the CSX arguments, the STB determined that the railroad had an unusually high revenue-to-variable cost ratio because of the costs of moving coal through the Chicago gateway and maintaining the rail line along the eastern shore of Lake Michigan.

R&N Set Freight Traffic Records in 2017

Rising coal traffic helped the Pennsylvania-based Reading & Northern set a traffic record in 2017.

The Class II railroad said it handled 31,175 carloads in 2017, a 15 percent increase over 2016.

The figure is a 50 percent increase over the past five years.

The company credited 40 percent growth in anthracite coal traffic for playing a major role in the traffic increase.

“This unprecedented growth came across all of the many commodity lanes handled by R&N,” the railroad said. “Once again, R&N is ‘The Road of Anthracite.’”

Much of the increase in coal traffic involved hauling Pennsylvania anthracite bound for markets in the Ukraine, where it replaced Russian coal.

R&N said that during 2017 it added hundreds of new cars of business at its transload facilities and warehouses. The forest products group handled more than 10,000 carloads in 2017.

“At year end, we had more employees, track, locomotives, freight cars, facilities and customers than at any point in our history,” said CEO/Owner Andy Muller, Jr.