Coal exports may account for less than 10 percent of U.S. production, but strong demand from overseas buyers proved critical for domestic mining companies facing weak utility markets in 2011.
The international market is likely to be just as important in 2012, as the coal industry braces itself for federal clean-air rules industry observers believe will further eat into demand from power producers already idling coal-fired plants in favor of cheaper natural gas facilities.
“What would have ended up as higher inventories at utilities and lower pricing — that coal ended up overseas,” said Bill Burns, a New Orleans-based coal industry analyst for Johnson, Rice and Co. “That could have ended up as excess supply.”
U.S. coal exports have nearly doubled over the last three years, with steelmakers such as Brazil, Japan, India and China increasing purchases from U.S. producers of the metallurgical coal that makes up the majority of international purchases.
After shipping 59 million tons overseas in 2009, the U.S. coal industry increased to 82 million tons in 2010. When the counting’s done, Burns expects companies to have shipped 103 million tons in 2011 and for another 91 million tons to move in 2012. The increased volumes have been accompanied by higher prices for metallurgical coal that has pumped up the top line of coal companies, particularly eastern producers such as CONSOL, Alpha Natural Resources and Walter Energy.
“We’ve always been a strong exporter,” Burns said. “What we’re seeing is the United States, which used to be a swing player, is moving more into the mainstream.”
There may be more attention to intermodal shipping and other commodities that form a foundation for industrial production, but coal clearly is king for U.S. railroads. For the major carriers, coal volume makes up almost half the carload traffic, and more than half as the coal winter months approach. It’s also remarkably steady: Coal volume at the U.S. Class I railroads grew 0.1 percent in the first 11 months of 2011 over the previous year.
The industry’s pivot into the international market has meant railroads, particularly CSX and Norfolk Southern, are spending more time and money increasing capacity at East Coast export terminals strained by high demand.
NS reported export coal volume grew 25 percent for the first nine months of 2011 compared to a year earlier, while CSX shipped 36 percent more coal bound for international markets.
Both companies say the increases are accompanied by strong prices, and industry analysts generally agree that export coal is the most profitable business segment for freight railroads. “It’s a huge uplift for CSX and Norfolk Southern,” said Walter Spracklin, an analyst for Royal Bank of Canada. “We should see steady volumes at these prices through next year.”
For NS customers, the high transportation prices track congestion accompanying the boom that led some coal companies to seek alternatives to the largest terminals in Baltimore and Norfolk, Va., which are largely booked. Coal producers such as Massey Energy, acquired last year by Alpha Natural Resources, snapped up barge-loading facilities along rivers in Appalachia to secure throughput capacity, while other companies partnered with or outright purchased export facilities along the Gulf Coast.
CSX still expects to haul as much as 42 million tons this year, and Chief Marketing Officer Clarence Gooden sees indications the historically volatile export market could maintain a more significant role in rail business. “We have talked to both our producers and to our receivers. They are looking very robust for their export coal markets going forward,” Gooden told investors at the end of the third quarter.
It’s a different picture for the domestic side of the business, which is dominated by electric utility buyers. Coal prices and volumes have been down in recent years as eastern coal-fired power production competes with cheaper natural gas generation, at the same time that overall electricity output has been slow to recover from the nadir of the 2009 recession, affecting both eastern- and western-produced coal.
Utilities, coal companies and railroads say further uncertainty comes from federal regulations aimed at cutting mercury emissions, as well as proposed reductions in ozone and fine particulate matter in 27 states known as cross-state air pollution rules and nicknamed CASPR. Republican lawmakers and industry backers say such rules could lead to blackouts. Democrats, including the Obama administration, dispute that.
But there is no argument over some key facts: Coal contributes 20 percent of the world’s greenhouse gas emissions, according to the Center for Climate and Energy Solutions, and the same group notes coal accounts for 50 percent of the electricity generated in the United States. Any attempt to address climate change must address those statistics, and the impact of policies on utilities will govern the direction of coal carloads for the railroads.
“The coal markets are trying to digest what choices utilities are going to make in terms of their fuel and sourcing,” said Stevan Bobb, BNSF Railway’s group vice president for coal.
BNSF shares the enormous volume of coal that comes out of the Powder River Basin, the huge region that spans across Wyoming and Montana and, essentially, powers the country.
“I would say it’s not impacting every ton of PRB, but it’s impacting things on the margin,” Bobb said of the CASPR rules. “Normally, we would be walking down our 2012 plan on a plant-by-plant basis with a fair amount of uncertainty about what the year will hold.”
Contact Peter Gartrell at firstname.lastname@example.org.