Coal traffic has increased this year and two reports examining that trend attribute it to an unexpected demand for exports and an easing of the prices of pollution control equipment.
Both reports see the coal market stabilizing in coming years. However, a report issued by the West Virginia University Bureau of Business & Economic Research still projects that the decline of the coal industry in the state is inevitable.
Railroad industry analyst Tony Hatch also sees positive signs for coal traffic in the intermediate term. Writing in Progressive Railroading, Hatch said, “the intermediate term outlook for U.S. domestic utility coal transportation must be revised upward. Not the five-straight months of double-digit growth, up 19 percent YTD (year to date) through April kind of ‘upward,’ but I had been looking for a flat/stable outlook over the next five-plus years.”
Hatch said much of the increase in coal traffic can be attributed to highly profitable export coal, which he said, “distorts the broader picture similar to the way the U.S. export coal strength at the end of the commodity ‘super cycle’ in 2010-2013 — and its margin-fueled boost to coal revenues in total — disguised the secular drop in U.S. domestic utility coal.”
The demand for export coal rose early this year after Cyclone Debbie disrupted Australia’s coal mines and export facilities in late March and early April.
That in turn prompted China to rely on U.S. coal while Australia’s coal export infrastructure was being rebuilt.
Hatch believes the burst of coal traffic that CSX and Norfolk Southern enjoyed this year is unsustainable and in the scheme of things the increase in export coal is insignificant because 93 percent of U.S. coal goes for domestic energy consumption.
The WVU report noted that the state’s coal production hit rock bottom in 2016 but is expected to increase by 11 percent this year to 89 million short tons.
But the rising tide is expected to crest and begin falling in 2018 when slightly more than 87 million tons are expected to be mined as metallurgical coal exports fall to normal levels and other domestic, coal-fired power plants reduce their intake of thermal coal, the report said.
Beyond 2022, the WVU report predicts that coal production in the state will steadily decline from the mid-80 million-ton range in 2025 to around 78 million tons by 2040.
The report said the wild cards in coal’s future include regulatory unknowns and natural gas pricing.
In recent years the costs of installing utility smokestack scrubbers or systems that remove sulfur dioxide, nitrogen oxides, and other components has fallen, which has meant that utility companies can burn lower cost coal mined in northern West Virginia and the Illinois Basin that still meets federal regulations on power plant emissions.
The WVU report indicated that there is underway a shift in the Mountain State of where most coal is being minded.
At present, the northern and southern regions of West Virginia are producing equivalent levels of coal tonnage, but the long-term forecast expects northern coal operations to outperform southern facilities by 2040.
As for how NS and CSX have been faring in all of this, a CSX spokesman told Trains magazine that the railroad’s coal traffic increased 7 percent in the second quarter of 2017 compared to the same period in 2016.
“CSX’s export coal volumes increased in the second quarter as global supply levels and pricing conditions extended strong demand for U.S. coal exports, particularly in the metallurgical portfolio,” said CSX’s Rob Doolittle.
Most of the increased coal that CSX carried came from West Virginia came from central Appalachia, which accounted for approximately 25 percent of the railroad’s domestic coal volumes and nearly 50 percent of its export coal volumes.
CSX expects to handle 30 million tons of export coal this year.
NS saw a 32 percent increase in coal revenue in the second quarter of 2017 when compared with the same period of 2017.
The carrier earned $447 million from coal shipments in the second quarter of 2017, compared to $339 million in 2016. Coal outperformed all other NS commodity revenues with the exception of merchandise freight and intermodal shipments.
Doolittle said that CSX continues to see a decline in domestic volumes. “In the second quarter, domestic utility coal declined as the competitive loss of short-haul interchange traffic more than offset underlying growth at existing facilities,” he said.
Hatch wrote in Railway Age that the 2017 coal boom is already showing signs of abating.
U.S. coal volumes were up 18 percent through June but by early July those volumes were closer to being flat.
He cited a reported issued by Columbia University’s Center on Global Energy Policy that found that coal is down 25 percent since 2011 due to a drop in U.S. electricity/energy demands, increased use of shale-gas, and the growth of renewable energy.
The Columbia researchers found that under the Obama administration’s Clean Power Plan, domestic coal use would still grow from its low 2016 base to 2020 then decline slowly.
A rollback of Obama administration regulations by the Trump administration is expected by the Columbia researchers to provide a boost to the use of coal for domestic energy needs.
Under the Obama administration rules, the use of coal for domestic energy was expected to be 704 million short tons by 2025 compared with about 750 million short tons in 2016.
The actions by the Trump administration are projected to increase domestic energy coal use to 815 million short tons by 2020 and 834 million short tons by 2010.
Those figures would still be well below the 1 billion short tons of coal used in domestic energy production in 2014 and the peak of 1.1 billion short tons used in 2008.
Hatch wrote that changes in environmental policy in regards to coal are, in a vacuum, good for rail at least in the intermediate term.
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