The melting market for eastern coal

Posted by Fred Frailey
on Monday, February 6, 2012

A brisk market for export coal masks the fact that the demand for domestic use is as soft as melting butter.  There are two reasons. The one you hear about most often is Lisa Jackson. Ms. Jackson is administrator of the Environmental Protection Agency, and under her leadership the EPA is moving on several fronts to severely limit pollutants that result from coal being burned to create electricity. Older, smaller plants that are uneconomic to equip with scrubbers will be a thing of the past within a few years, and these lie mainly in the eastern half of the country. And is this a terrible thing? Probably not. I don’t like to breathe mercury particles any more than you do.

What ought to give railroads nervous chills is the second reason. Natural gas is cheap. Dirt cheap, in fact, and getting cheaper. Its price has fallen by half in the past year and shows no sign of reviving. Natural gas is the competing fuel to coal at power plants, and oceans of it are being discovered, thanks to the twin technologies of horizontal drilling and hydralic fracturing. Proven reserves have ballooned the past few years, but there’s so much of the stuff that I don’t think anyone really knows how much we have beneath our feet. It’s a lot more than officially tallied, because the reserves just get bigger every year.

Let’s look at the economics. The price of coal bituminous coal in the eastern U.S. is roughly $60 per ton. The price of natural gas is about $2.56 per thousand cubic feet (mcf). The price of oil is about $100 per barrel. Six thousand cubic feet of gas is the energy equivalent of a barrel of oil. So about $15 of natural gas gives you the oomph of a barrel of oil, which is why I yearn for a car conveniently fueled by natural gas.

But I digress. What about the cost of coal versus natural gas? As best I can determine, about 16,000 mcf of gas equals the energy from one ton of coal. So doing the math, you pay $60 for the coal that can be replaced by natural gas costing.$41. Plus, you don’t have to pay the huge cost of installing scrubbers. You are CEO of an electric utility. Which way would you go?

Ed Wolfe at Wolfe Trahan & Co., the transportation-research boutique on Wall Street, reports this week of two sizable losses of coal business by CSX and Norfolk Southern. Alpha Natural Resources will cut coal production by some 4 million tons a year, in large part due to utilities switching from coal to gas. Wolve estimates that CSX handles 75 percent of this coal, and this amounts to almost 2 percent of CSX coal volume.

Meanwhile, says Wolfe, Patriot Coal is also cutting production of metallurgical coal, due to weak export demand. Again, CSX is the major railroad moving Patriot’s output, and Wolfe estimates this will reduce CSX coal volume by another 1.4 percent.

Finally, looking at the short term, a very mild winter is further depressing coal demand.

These aren’t huge hits. But the hits, small as they are, keep on coming. On the west coast, BNSF is moving about two trainloads a day of Powder River Basin coal to export terminals in Roberts Bank (Vancouver) and Prince Rupert, B.C., and new export terminals have been announced in Bellingham and Longview, Wash. The opposition from environmentalists to both terminals is so furious (and illogical, sometimes) that you have to question whether either will ever open for business.

Bottom line is this: If you’re running an eastern railroad, it sure pays to be looking for new sources of business to replace the coal traffic that is leaking away. Norfolk Southern is trying to do this on the Crescent Corridor between Memphis and New Jersey, one of the most heavily-trafficked track corridors anywhere, so crowded the trucking companies are begging NS for competitive service. I wonder what CSX has up its sleeve? — Fred W. Frailey

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