The outlook for U.S. coal traffic on U.S. railroads next year looks slightly better than in 2012. Granted, the U.S. government forecast is far from robust, but railroads would welcome any improvement, or even stabilization, considering rail traffic of the key commodity through early December is down about 10.5 percent from 2011.
Total U.S. coal consumption in 2013 is expected to expand 5.6 percent year-over-year to about 956.6 million tons, as higher natural gas prices will make this year's dramatic shift in fuel sourcing less attractive, according to the U.S. Energy Information Administration. Coal consumption this year is expected to fall 10.7 percent from 2011, as utilities turned more to natural gas power and a warm winter exacerbated the decline in coal demand.
Taking a signal from the market, coal mines are expected to keep production flat in 2013, as inventories shrink about 3.2 percent to 231.1 million tons, according to the EIA. Considering the forecast of shrinking inventories and flat production against increased production, it’s unclear how much more business will translate to the rails, said Walter Spracklin, an analyst for the Royal Bank of Canada. But the outlook does look a bit better for coal volume on the railroads, he said. Not only would such improvements bring more domestic coal revenue to the carriers, but any increase in traffic also could instill confidence in investors that the market has bottomed out, Spracklin said.
The margins on coal traffic in 2013, however, look less favorable. The prospects for export coal, a small share of railroad’s coal business but a major money earner, look dim for the next year, he said. Coal exports in 2013 will decline about 16 percent year-over-year to 104.1 million tons, according to the EIA.
“Continuing economic weakness in Europe, lower international coal prices, and increasing production in Asia are primary reasons for the expected decline in coal exports,” the agency said in a recent report. “U.S. exports could be higher if there are significant supply disruptions from any of the major coal-exporting countries.”
The impact of the export businesses on railroads' bottom lines was evident earlier this when a sharp drop in volume in September spurred Norfolk Southern Railway to issue a fourth profit warning, Spracklin said. The railroad also cited weak merchandise shipments and lower fuel surcharge revenue as reasons for the negative announcement.
Although railroad volume will likely be healthier in 2012, the long-term outlook could be anything but. With President Obama re-elected, the Environmental Protection Agency’s tighter regulations on carbon emissions likely won't let up. Although natural gas prices are rising, utilities still have a long-term incentive to shift more production from coal to the alternative fuel darling. Exxon Mobil expects coal utility use to plunge 33 percent between 2010 and 2025.
The declines in coal traffic, which historically accounts for about 40 percent of the major railroads' volume, has hit the major eastern railroads, CSX Transportation and Norfolk Southern Railway, the hardest. Canadian coal volume has been far healthier, with volume up 5.5 percent year-over-year in the first 49 weeks of 2012.
Despite the more upbeat EIA estimates, CSX doesn’t expect much of an improvement in coal business in 2013. The fourth quarter has been the most challenging for the Jacksonville, Fla.-based railroad, with export coal down 5 percent in the fourth quarter through mid-November, Fredrik Eliasson, CSX's executive vice president and chief operating officer, said during a conference call in November. The railroad’s utility coal traffic fell 25 percent in the same period.
CSX coal exports are expected to be lower than in 2012, and the railroad has lower rates for metallurgical coal exports to keep them globally competitive, Eliasson said. CSX and archrival Norfolk Southern are cutting rates on export coking coal by about 15 percent, sources told Platts, an energy information provider. Norfolk Southern's total coal traffic declined 14 percent year-over-year in the third quarter and export traffic fell 7 percent.
“Dramatic changes in the export coal market, due to weaker demand for both met and steam coal into Europe and Asia, will continue to present a challenging environment for export volume and export pricing,” NS's Chief Marketing Officer Donald Seale told investors on Oct. 23. “We expect domestic met coal to show only moderate strength ahead, as demand for steel to support automotive production continues in the fourth quarter, but will be partially offset by weaker pipe markets.”
Meanwhile, environmentalists are waging a fierce fight against efforts to export coal from the West Coast, a move that could benefit Union Pacific Railroad and BNSF Railway. There are five proposed coal export terminals in Washington and Oregon, and proponents say they could have the capacity equal to that of East and Gulf Coast facilities. The terminals likely would be able to offer cheaper pricing to Asian buyers because of the shorter water transport distance, but the will of politicians, not logistics, looks to be the deciding factor whether they get the chance.