The economy and competition from natural gas is dealing coal production a one-two punch, and that will hurt railroad traffic, according to the latest Dahlman Rose & Co. forecast. “U.S. coal demand is set to decline year over year on the back of anemic electric demand and cheap competing natural gas,” said Dahlman Rose Director Equity Research and Railway Age Contributing Editor Jason H Seidl. “Production has responded rapidly, yet current pricing is well below marginal cost. We expect domestic coal production will fall by more than 50 million tons year over year, with Central Appalachia and the Powder River Basin bearing the brunt.”

As well, coal exports are headed lower. “U.S. coal exports (metallurgical and thermal combined) were 45 million tons in 2006 and 54 million tons in 2007 before spiking up to 74 million tons last year,” said Seidl. “Most of the incremental growth came from thermal coal bound for Europe. We would not be surprised to see total gross exports drop well below 2006 levels, comprised of legacy metallurgical coal that hasn’t been deferred and thermal contracts to Europe signed in 2008. The high Atlantic Basin coal prices that drove the thermal coal export story of 2008 are gone for the time being. While recent strength in the API2index (an estimate of the current 90-day price for steam coal delivered into Europe) has nudged the price back up near $80/metric ton, U.S. producers would need closer to $100/metric ton, even with the heat content advantage, to be in the money.”

Environmental activism could be a factor. “The ongoing struggle between the coal industry and environmentalists continues with regard to mountaintop mining,” Seidl noted. “A decision favoring the coal industry earlier this year is unlikely to lead to a rapid increase in issued permits, and we expect further challenges ahead in both the courts and the legislature. At risk is roughly 70 million tons of production that could dramatically phase out over the next two years.”