Coal-to-gas fuel switching by U.S. electric utilities is proving to be a game changer for the nation's railroads, many of which derive significant revenues from hauling coal from mine sites in Appalachia, the Midwest and the West to power plants across the country.
CSX Corp., the nation's largest hauler of coal with a base of operations in the East, said in a conference call with investors yesterday that coal revenues for the first half of 2012 are down 10 percent, while total volumes delivered are down 14 percent from the same period in 2011.
The declining coal shipments are attributable to a variety of industry "head winds," said Chris Jenkins, vice president of CSX's coal and automotive service groups, most notably a glut of inexpensive natural gas that has prompted many utilities to burn gas instead of coal at their fossil units.
"The domestic utility coal business has fallen substantially from its peak in 2006," said Jenkins, who divided the company's shifting coal fortunes into three distinct periods: "business-as-usual" conditions up to 2006-2007; a steep drop in energy demand during the Great Recession of 2008-2009; and the most recent period, characterized by fuel switching and regulatory pressures on power generators to shrink their coal portfolios in favor of less-polluting fuels like gas, nuclear and renewables.
The same forces driving down coal shipments for CSX are affecting other Class I railroads, including Norfolk Southern Corp., CSX's primary competitor in Eastern coal markets, and Union Pacific Corp. in the West. Norfolk Southern and Union Pacific reported second-quarter year-to-year declines in coal volumes of 12 percent and 17 percent, respectively.
A spokeswoman for BNSF Railway Co., a privately held subsidiary of Berkshire Hathaway Inc., declined to disclose figures on the company's coal shipping activity, but she noted that BNSF and Union Pacific deliver the lion's share of coal from the Powder River Basin, the nation's most productive coal region, to power plants, export terminals and other endpoints nationwide.
According to the Association of American Railroads, which represents the nation's major freight carriers, coal still accounts for the largest share of commodity traffic on U.S. railways, with 42 percent of all car loads moving coal to industrial plants or export terminals.
Slump during what should be peak month
And railroads carry far more coal than any other mode of transportation, accounting for 70 percent of all coal shipments in 2010. But coal's dominance in rail freight is shrinking, according to the trade group's latest "Rail Time Indicators" report.
Last month, coal shipments by rail accounted for 465,445 carloads, a number that stacks up favorably against all other bulk commodities, including petroleum and chemicals (156,705 carloads); agricultural and food products (136,734 carloads); and nonmetallic minerals such as gravel, sand and stone (125,533 carloads).
But measuring year to year for July, generally a peak month for power demand, coal is faring poorly against most other commodities, with an 8.9 percent reduction in carloads over the period from July 2010 to July 2012 and a comparable 16.5 percent drop from July 2008, when 697,174 coal cars rumbled across the United States, according to AAR figures.
The multibillion-dollar question facing railroads now is whether the trend is temporary or permanent, and to what extent emerging coal markets such as China, India and other fast-developing countries can help reverse what many project will be a long-term decline in domestic coal consumption.
In its most recent earnings call last month, Norfolk Southern reported that shipments of coal to domestic users were down 21 percent, but shipments to export facilities grew 6 percent, with especially strong gain in steam coal exports from Atlantic ports.
Wick Moorman, Norfolk Southern's chairman, president and CEO, described the short-term outlook for the railroad as "cloudy," noting the importance of coal shipments to the company's overall revenue stream. But, he added, "the weather will normalize and gas prices will eventually go up," leading to a rebound for domestic coal.
CSX sees fundamental market changes
But even as recessions end and prices for natural gas moderate, CSX's Jenkins said certain fundamentals within the U.S. utility sector are beginning to shift in ways that don't bode well for coal.
Most notably, he said, a growing number of the roughly 90 power plants served by CSX are redeploying their fleets so that noncoal units such as nuclear and gas-fired generators are being relied on for baseload power, while coal units are increasingly deployed to provide intermediate or even peaking power during periods of high demand.
As evidence of the shift, Jenkins pointed to statistics showing that only 17 percent of CSX's deliveries this year have gone to U.S. plants relying on coal for 60 to 80 percent of their electricity output. Two years ago, 56 percent of the railroad's coal deliveries went to utilities with 60 to 80 percent coal capacity factors, the statistics show.
"Much of the business base we serve is not functioning in a baseload mode" with coal, Jenkins said. "We do see a greater proportion of the coal units we serve operating on an intermediate and peaking basis, especially when we're seeing" natural gas under $3 per million British thermal units.
Executives at Norfolk Southern, however, took a different view of the domestic coal market, saying their utility customers continue to rely on coal for baseload power, especially as summer temperatures go up and power use surges to meet demand for air conditioning.
For Appalachian coal, which accounts for the bulk of CSX's and Norfolk Southern's deliveries, CSX's Jenkins said natural gas would have to climb to between $5 and $6 per MMBtu for coal to become competitive again.
Brighter prospects for Western coal?
Meanwhile, Western coal, including low-sulfur coal from the Powder River Basin of Wyoming and Montana, is expected to fare somewhat better than Eastern coal among domestic power plant users, and it is expected to become an increasingly important part of the U.S. export market as port facilities on the West Coast are permitted and built.
Even so, as a percentage of revenues for Union Pacific, which operates the largest rail network in the country from Omaha, Neb., coal declined by 9 percent in the second quarter of 2012, even as other commodities such as industrial products, chemicals and even agricultural products saw rising revenues.
According to the railroad's weekly coal loading reports, published online, Union Pacific loaded 13 percent fewer trains with Powder River Basin coal in the first seven months of 2012 compared with the same period in 2011.
While Union Pacific calculates its coal shipments by trains -- not cars -- company spokesman Mark Davis estimated that an average train length for Powder River Basin shipments is 130 cars. Based on those estimates, total carloads of Powder River Basin coal are down by roughly 114,000 for the first six months of 2012 over last year. Union Pacific shipments of coal from Colorado and Utah mines, however, were slightly higher this year than last year for the January to July period.
"Looking ahead to the second half of the year, the global economic outlook has become more uncertain and coal volumes remain a challenge," Union Pacific's CEO, Jack Koraleski, told investors last month on the railroad's quarterly earnings call.
Waterborne traffic down, too
While accounting for a much smaller share of coal transport, barge operators on the nation's inland waterway system have also reported declines in total coal volumes, particularly to power plants in regions where last year's mild winter allowed for significant stockpiling of coal.
Martin Hettel is senior manager of bulk operations for St. Louis-based AEP River Operations, which delivers coal to both American Electric Power's rate-regulated coal plants and other utilities on a contract basis. He said that the division expects to deliver all the coal it is contracted to supply for 2012, but that export coal is accounting for a larger share of its traffic.
"Our coal export tons have gone up, no doubt. But we're not displacing coal that goes to our own power plants," he said.
For 2012, AEP expects to move between 8 million and 10 million tons of coal to export terminals, mostly along the Gulf Coast, up from an estimated 6 million tons of total exports in 2011, Hettel said.
Coal shipments have also declined 6 percent on the Great Lakes, according to the Lake Carriers' Association, which represents 17 marine operators that deliver coal to power plants in the region. In 2006, Great Lakes carriers carried 25.3 million tons of coal on Lakes Erie, Michigan and Superior, according to the group's latest annual report. In 2011, that figure dropped to 20.2 million tons.
The decline in Great Lakes coal shipments is partly due to the planned phaseout of all coal-fired electricity in Ontario by 2014, the group's president, James Weakley, said in a letter to member companies.