Is coal on a comeback?

With utility losses stabilizing and global demand still strong, carloads are edging upward.

It seems like yesterday that railroads were crying the blues over sharp losses in one of their chief business sectors, coal. U.S. Class I railroads originated a record 7.71 million carloads of coal in 2008, but that figure dropped to 5.95 million carloads in 2013, the lowest level in 20 years. Much of this decline occurred as power plants switched from coal to natural gas—or shut down completely—in the wake of stricter federal air quality standards. After a decade in which America’s use of coal exceeded one billion tons annually, consumption dropped to less than 890 million tons in 2012, according to the U.S. Energy Information Administration.

But while coal usage was entering its downturn in the U.S., exports of U.S. coal made noticeable gains, rising from a mere 40 million tons in 2002 to an all-time record 126 million tons exported in 2012. The majority of that export growth, says the EIA, was in thermal coal. China is still the world’s leading coal consumer. Europe is also increasing its demand, as a hedge against uncertainty with natural gas supplied by Russia, and as a means to phase out some of its nuclear power plants.

That strong global market, plus a more stabilized domestic market, became more apparent on U.S. railroads during 2014, with monthly coal carloads increasing by as much as 6% over the previous year. Several international trends are helping to drive that business. In 2009, China went from being the number three coal exporter to being a net importer, taking in 126 million metric tons that year, and more than 320 in 2013. So far, the U.S. has played a minor role in China’s coal imports compared to Australia and Indonesia. However, Asia is where most of the world’s new demand for coal has appeared in recent years, and with coal now producing only 38% of the electricity in the U.S. but 81% in China, it’s no wonder mining companies and railroads in the U.S. are working to make their supply lines more competitive in the Pacific Rim.

A decline in manufacturing has slowed China’s demand for metallurgical coal, while predictions for its need of thermal coal have been all over the chart. But some reports have suggested that China’s newfound campaign against air pollution is leading to investment there in renewable energies, which could result in less demand for coal. Beginning January 2015, the toughest of China’s new rules will apply to its coastal areas and northern cities, where coal must not exceed 16% ash and 1% sulfur content.

Bottom line: Anyone who has judged the viability of coal by its downward trajectory among some (but not all) American utility companies is not looking at the big picture. 

Which brings us to the Powder River Basin. Having some of the lowest ash and sulfur content on the planet puts PRB coal in high demand for power generation at home and abroad. That includes China, where the new 1% limit on sulfur content can easily be satisfied by any of the PRB mines, whose sulfur content is mostly in the 0.3% to 0.5% range.

Getting PRB coal to China and the rest of the Asian market has been the challenge. The only coal export terminals currently operating on the West Coast are in California, but their throughput is miniscule compared to coal terminals on the Atlantic and Gulf coasts. Opening new coal terminals in Washington and Oregon was thought to be the simple solution, especially since both states already have unit train export or offloading facilities for grain and other bulk products. But efforts to develop coal ports in the Northwest have been hindered by opposition from environmental groups.

Of the various port plans, the one that came closest to reality was Ambre Energy’s rail-to-barge terminal at Port of Morrow in Boardman, Ore. After offloading from unit trains at Boardman, coal would travel some 200 miles by barge down the Columbia River to an export terminal just beyond Portland. In February 2014, the Oregon DEQ approved Ambre’s permits for air and water quality. But in August 2014, Oregon’s Department of State Lands denied the Boardman project over concerns for tribal fisheries on the Columbia River. The region’s two remaining coal port projects, both in western Washington, currently hang in limbo, with all parties involved wondering “what next?”

One answer came on Aug. 21, when Canada’s Port Metro Vancouver approved a new $15 million rail-to-barge coal terminal on the Fraser River at Surrey Docks that is expected to begin receiving PRB coal via BNSF by late 2015. Barges will float coal to a ship-loading facility on Texada Island in Canada’s Straight of Georgia. Fraser is expected to handle two million metric tons of coal in the first year of operations, increasing to four million within two years.

BNSF and predecessor Burlington Northern have hauled export PRB coal through Canada for a quarter century. The main terminal of choice has been at Roberts Bank, just outside Vancouver, which now ships well over 30 million tons of coal annually, more than 40% thermal, at an average rate of four trains per day, two of those from BNSF.

During a spike in Asian demand in 2011-12, additional PRB coal was shipped through Prince Rupert, B.C. BNSF interchanged Prince Rupert-bound coal trains to CN at Thornton Yard, B.C.; and to Canadian Pacific at Sweetgrass, Mont./Coutts, Alta. From Coutts, CP forwarded PRB coal north to a CN connection at Edmonton.

Mine to port efficiency

While coal producers and shippers have sought to develop new export terminals, BNSF and Montana Rail Link have looked for new ways to maximize efficiency in moving coal from mine to port. In Montana, variations in the number and placement of locomotives assigned as head-end and distributed power were tested, along with determining the right balance of manned helper power on steep grades over the Bozeman and Mullan passes. In Washington, BNSF took another look at its three route options for moving coal westward from Spokane. The two shortest routes cross the Cascade Mountains using 2.2% grades on Stevens Pass and Stampede Pass, while the longest route—adding more than 280 miles to the trip—follows much easier grades along the southernmost edge of the state. BNSF tested loaded grain trains over both Cascade passes using a combination of head-end, DPU, and manned helper power during 2008-09, but concluded it was more practical to run high-tonnage unit trains the long way around with fewer locomotives.

With more coal, oil, and other traffic moving north of Seattle, BNSF plans to add at least four miles of siding or second main track between Bellingham and Blaine, Wash., on its line approaching the Canadian border. Those improvements are scheduled to begin in 2015, but in the meantime, BNSF has other track work under way on the Blaine route, and that has prompted the company to detour a number of its empty coal trains over a nearby secondary route that drops down from the Canadian border through Sumas, Wash.

BNSF is also working to alleviate concerns about coal dust being released during transit. Plans have been announced to build a coal re-spray center at Pasco, Wash.—a voluntary measure responsive to a request from Port Metro Vancouver as part of its permitting process for coal export facilities located in British Columbia. The center will be enclosed, and there will be no run-off. BNSF expects the center to be operational by late 2014.

The vast majority of coal from the PRB and other regions still moves east or south toward generating plants and export terminals elsewhere. As of Sept. 20, 2014, BNSF had moved 1.63 million coal loads year-to-date, an increase of 0.67% over 2013. UP had moved 1.25 million YTD, a 2% increase.

At Norfolk Southern’s annual Investor and Financial Analyst Conference in September, Vice President Coal David Lawson said, “We believe the largest known headwinds are behind us, as we saw this past winter how quickly the market can turn in coal’s favor.” Lawson pointed out that powerplant closures since 2010 “have impacted our utility volume 12 million tons to-date,” but that the remaining impact by the end of 2015 will be a loss of only two million more tons. NS moved just under 50 million tons of utility coal in the first half of 2014, putting it on track to mirror 2013’s total of nearly 100 million tons. Lawson predicted that export coal appears headed for only a mild recovery in 2015, but that global supply and pricing should spur stronger growth in 2016.

“Over the next two years, we will be building 1,500 additional coal cars for replacement,” said NS Vice President Strategic Planning John Friedman. “As Southeastern utilities have increasingly turned to the Illinois Basin [ILB] as a cost-effective fuel source, demand for our services out of the basin has increased. We’ve mostly seen that traffic coming eastward on our line out of St. Louis.” On a 20-mile segment of that line, Friedman said, “We identified three projects—a siding, a siding extension, and two radio-controlled switches leading to a major mine—that will produce the greatest bang for the buck.” NS CEO Wick Moorman said, “We have been talking about a shift to ILB coal sourcing for Southeast and Mid-Atlantic utilities for a number of years. And we got something of a head start as we have really seen that shift start to take hold in a meaningful way in the past 18 months.” Indeed, ILB coal went from being 8% of NS’s coal business in 2010 to 20% in 2014. Appalachian mines still account for 64% of the coal moved on NS.

Coal traffic for domestic power generation is performing admirably for CSX, which said it is seeing “robust growth spurred by a macro economy that continues to expand. For domestic coal specifically, after a brutally cold winter and a cooler than normal summer, we are seeing inventories just around normal or a bit higher. As a result of the stockpile drawdown, as we look into 2015, domestic coal demand will be predominately impacted by natural gas prices. Half of our portfolio is ILB and PRB coal, up from about 25% in 2010, and we expect that proportion to continue to grow. If natural gas is at or above $3.50, we’ll see those coals dispatched. ILB coal is growing both in tonnage and as a percentage of our portfolio, so we’re investing in a handling yard in Kentucky to stage and inspect unit trains. We saw 15% growth in domestic coal in the second quarter and expect to again see double-digit growth here in the third quarter.” However, for export coal, CSX expects to ship somewhere in the mid-30-million-ton range in 2014, down from 44 million tons in 2013.

There are mixed signals for coal’s future. But numbers for the tonnage moved by rail, consumed by utilities, and exported indicate there is stability and growth potential for a commodity that many thought was down for the count.