Tuesday, June 30, 2009

Dahlman Rose: Rail coal traffic rebound isn't imminent

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U.S. coal exports are showing “signs of life,” though the U.S. still trails other coal exporting nations, but those signs won’t generate a strong enough rebound for U.S. rail freight coal traffic in 2009, according to the “Coal and Rail Quarterly” report issued by New York-based Dahlman Rose & Co.

"We have seen reports of contracts for delivery from the east coast to India in the last week. U.S. met[allurgical] coal exports were only 1.3 million tons in May, with none to India, while June saw 2.8 million tons booked, according to McCloskey’s,” the report says. “Chinese imports, both met and thermal, have reignited the Pacific market, but repercussions have been slow to reach the United States due to anemic electric and steel demand in the West."

Dahlman Rose also notes, “The thermal coal export story to Europe remains dormant outside of delivery of legacy business.” The report adds,  “Like their domestic counterparts, European utilities are suffering from high inventories and recession-impacted electric demand."

In the U.S. itself, political maneuvering, and not legal action, is complicating coal production, particularly mountaintop mining, Dahlman Rose says. “Legal developments have generally favored the coal industry this year, with the most recent development comingfrom the U. S. Supreme Court ruling that the Army Corps of Engineers has authority over 404 valley fill permits, not EPA. The administration recently announced that it would seek modifications to the practice through an end to expedited reviews and tightened federal oversight. While the road to issuing permits is theoretically open, we believe the Army Corps continues to bend to political pressure, and do not expect a meaningful resumption of permit issuances. At risk is approximately 70 million tons/year of Central Appalachian low-cost production."

That puts additional pressure on freight railroads counting on a resurgence in coal traffic. “After seeing their volumes drop more than 15% during the first quarter, railroad carriers hopedthe worst was over. Unfortunately, the rail industry was betrayed by one of its most historically stable commodities. Indeed, coal volumes have plummeted nearly 12% in 2Q as both domestic and export demand for coal slumped drastically. Demand for domestic coal fell off due to the lack of demand from steel producers and a falloff in electrical demand from utilities,” the report says.

"Not only did utilities have slumping demand for power generation in the first quarter, but the rapidly falling price ofnatural gas compounded the difficulties for coal demand due to switching. This scenario led to a build up in stockpiles at domestic utilities with current stockpiles nearly 30% above normalized levels. Hence, even with increased burn from a hot summer we believe volumes to utilities will continue to remain under pressure for 2009.  As a result, we do not see a rebound in rail emerging in 2009,” Dahlman Rose warns.