Coal trains rumble back on US rail network

Coal is hitching a ride on US rails again. 

The bulky fossil fuel has been under siege by environmental rules and competition from cheap shale gas. Railroads, the only practical way to haul coal across land, suffered collateral damage. 

But the story has shifted in the past few months. The amount of coal carried on trains has climbed nearly 50 per cent from an April nadir, according to the Association of American Railroads. Operators have confirmed the bump in traffic in new quarterly results. 

Investors want to know whether the worst is over for the railroads’ coal businesses, which once comprised nearly a third of revenues.

“They’ve rebounded off the bottom. As to how durable that situation is, that’s a different question,” says Larry Gross of FTR, a freight transport consultancy. 

Volumes are below levels of previous years. But CSX railroad, whose tracks weave through the struggling coal fields of Appalachia, collected $467m in coal revenue in the third quarter, up 12 per cent from the previous quarter. Union Pacific, which draws coal from Wyoming’s Powder River Basin, enjoyed a 47 per cent quarter-on-quarter jump in coal revenue to $728m. Norfolk Southern on Wednesday reported $397m in quarterly coal revenue, a 17 per cent rise from the previous quarter.

An abnormally hot summer was an important factor. Power stations ran hard to meet demand for air-conditioning, drawing US coal stocks down by more than a fifth from a record high 197m short tonnes in December to 151m short tonnes, the government estimates. More trains were needed to replenish coal piles at power plants. 

The “power burn” also pushed natural gas prices from $2 to $3 per million British thermal units — a level at which coal begins to compete with gas as a fuel to make electricity. The number of megawatt-hours generated by gas will be more than from coal this year and next, but the gap will be smaller in 2017, the US Energy Information Administration forecasts. 

Finally, a sharp rally in international coal prices caused by falling supplies in China could reinvigorate coal exports from the US, especially of the type used to make steel. 

Railroads have acknowledged the rise in coal volumes but sound reluctant to declare a turnround. At CSX, chief sales and marketing officer Fredrik Eliasson said the company has lost about $2bn in coal revenue in five years, including more than $500m in 2016. 

“So based on what we’re seeing right now, we think next year’s decline will be significantly less than that,” he told analysts this month. 

Michael Ward, CSX chief executive, said the railroad aimed to make more money carrying merchandise and containers as coal “becomes a smaller part of CSX going forward”. 

The transformation has been difficult. “This industry was built on coal. It was built running on coal and it was built to serve coal,” says Anthony Hatch of ABH Consulting. 

CSX last year closed facilities in Tennessee and Kentucky, affecting 500 jobs, as coal movements thinned out in Appalachia. Norfolk Southern has identified 1,500 miles of track to cut and idled a steep line in West Virginia coal country to save money. The main freight railroads in the US east are starting to “manage the network for a decline instead of hoping for recovery”, says Brian Ossenbeck, analyst at JPMorgan.

Coal revenues for the biggest railroads in the west — Union Pacific and BNSF, a division of Warren Buffett’s Berkshire Hathaway — have not shrunk as sharply as their eastern peers, according to data provided by Mr Ossenbeck. 

On its earnings call last week, Union Pacific outlined a case where higher natural gas prices and an improving economy would spur greater coal shipments. “We are positive that the use of coal should be increasing in the midterm,” said Eric Butler, the company’s chief marketing officer. 

Dan Klein of PIRA Energy Group, a consultancy, says that coal stockpiles in Texas and the US south-west have declined to cover only about 52 days of electricity demand as of September, down from 79 days a year before. Rebuilding those stocks could increase traffic on Union Pacific and BNSF, as both have lines linking the Powder River Basin to the south-west. 

However, the outlook is tempered by plentiful natural gas, the rise of renewable energy sources and shutdowns of older coal-fired power plants. 

“The fact that volumes are up is good for business,” says Anthony Hatch of ABH Consulting, “but it should not be interpreted in any way as ‘coal is back’.” 

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