Market Overview

Is The Death Of Rail-Hauled Coal True, Or Premature?

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Is The Death Of Rail-Hauled Coal True, Or Premature?

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Coal is fundamentally "sedimentary rock that burns." Formed  by the decomposition of plant matter, coal is a complex substance that is marketed in four classes – anthracite, bituminous, sub-bituminous and lignite. Elemental analysis gives empirical formulas such as C137H97O9NS for bituminous coal. For high-grade anthracite, the formula is likely C240H90O4NS.

Anthracite coal is a hard, jet-black color rock. It contains between 86 percent and 98 percent carbon by weight and when burned it produces very little smoke. Anthracite coal was considered a premium home heating coal used throughout the northeastern United States into the early 1950s. Yes, I vaguely remember stocking an anthracite-fired furnace with my dad.

Soft, or bituminous coal typically contains between 69 percent and 86 percent carbon by weight and is the most abundant form of coal.

Sub-bituminous coal contains less carbon and more water. It is typically a less-efficient source of heat.

Lignite coal, or brown coal, is soft coal that contains up to 70 percent water by weight.

Coal deposits are often found in remote locations far from major population centers. In the ground, coal has a low marketplace utility value. Moving it to places of human use is what creates a higher value. Transportation of coal was first done by horse and wheeled wagons, then by water barge. The primary mode of transportation of coal for more than 100 years, though, has been by rail.

Coal and railroads have been linked for more than 150 years

It was the advent of railway lines and steam-powered locomotives that fueled the Industrial Revolution. Railroads, coal and sources of water in proximate locations were a natural market combination that powered the expansion of the U.S during the 19th and early 20th centuries.

U.S. coal production between 1870 and 2015

Coal deposits and selected water springs allowed the Union Pacific Railroad (NYSE: UNP) and the Central Pacific Railroad to cross the great desert (treeless) frontier 150 years ago. Linking the two railroads created the Transcontinental Railroad in 1869.

With that introduction, let's evaluate the strengths and weaknesses of coal as a railroad business in the 21st century.

After being mined and often resized in a crusher, then perhaps washed, most coal moves to markets by rail, using either high-side gondola cars or open-top hopper cars.

Railcars filled with coal are emptied primarily in one of two ways. The coal is dumped using gravity, or it is dumped using rotary couplers that allow the freight car to be tipped over. Rotary couplers allow the car to be rotated (tipped) while still coupled to the cars on either side. Railcars with rotary couplers are clamped to the rails and then rotated/tipped about 135 degrees so that the coal comes out of the railcar. Often there is a railcar shaker that is part of the dump mechanism.

A BNSF railcar with rotary couplings.

How big is the railway coal freight business?  

It comprises about 14 percent of total U.S. rail freight carloads. But that volume has been shrinking since 2008 at about 25 percent year-over-year. The long-term shows a negative slope. However, month-to-month and year-to- year coal volumes by rail are up and down. The short-term demand pattern is irregular.

During 2018, the Association of American Railroads (AAR) economic group cited just a 0.10 percent increase in coal carloads over 2017's totals. That represents an increase of fewer 6,000 carloads. As a comparison, the total of all commodities increased by 2.2 percent, and numerically by just under 392,000 units. Of that, crude oil and petroleum by rail increased approximately 20 percent, or by more than 176,000 carloads.

For all of 2018, just over 4.8 million carloads of coal were moved. That's about 13,000 to 15,000 railcars loaded daily.

Out along the main line tracks, U.S. coal trains are very long. Out west, coal trains average 130 or more loaded cars. That's more than 12,000 net short tons per train.

On a tonnage basis, the AAR reports that coal accounts for close to one-third of the entire U.S. rail tons (1.6+ billion tons) of all commodities and goods ‘originated' by Class 1 railroads.

Information courtesy of American Association of Railroads

Coal is still an excellent gross revenue business sector for the railroads. On average, shippers pay U.S. railroads more than $2,000 per loaded railcar to get the coal delivered to utilities and other key destinations. That totals about $10 billion to move coal, which is about 15 percent of total U.S. gross railway company revenue.

Coal used to be the most profitable rail freight segment depending upon how your rail costing systems measure railroad profits. Five decades ago, a few eastern railroad companies like the Norfolk & Western Railway (now part of Norfolk Southern Railroad (NYSE: NSC)) might have earned more than two-thirds of their entire profits from the coal business. Hauling chemicals, boxcars and intermodal was incremental "gravy," but not strategically essential to their business plan.

That's no longer the case. Chemicals are now the most profitable rail freight commodity market segment.

Over the past three decades it became clear to senior rail managers of the older coal-based rail companies that future business prospects required a more diversified commodity mix than just "black gold" coal. Replacing coal with an expanded mixed carload and intermodal service network was part of the Norfolk Southern and CSX Corporation (NASDAQ: CSX) railroads strategic planning that then resulted in the split-acquisition of Conrail's industrial rail network.

Market geography of U.S. rail-moved coal

Since about 1988, the Powder River Basin  (PRB) area of eastern Wyoming and south central Montana has been the nation's largest mining region. That one area accounts for more than 45 percent of all U.S. electric-generating coal.

Why? The Clean Air Act of 1970 created a surge in demand for coal out of the PRB region.  Before those air pollution regulations, Wyoming coal production never exceeded 20 million annual tons. That region came to dominate domestic rail-originated coal.

Data courtesy of U.S. Energy Information Administration

However, it is clear from numerous sources, including a 2019 report by the Institute for Energy Economics and Financial Analysis (IEEFA), that there has been confirmation of what many economists believed. The title of the report says it all – "Powder River Basin Coal Industry Is in Long‑Term Decline."  

There might be unforeseen technology, energy price competition or geo-political changes that lead to renewed coal growth. But that reversal seems "a reach."

Need more evidence? Here is a closer look at the PRB coal market.

Approximately 130 power stations in the U.S. bought PRB coal in 2018 – from just 16 PRB mines. A decade earlier that customer base was about 200 users, spread over 23 states.

That's a significant decline of about 35 percent. Failure to find new markets will likely result in  a slow reduction towards 300 million or fewer tons mined annually in the coming five years.

Competition is an endless economic force. Is there an upside?

Yes. Here are several possibilities.  

Global trade and or sub-regional war conflicts could favor some restoration of coal as a key source of energy.

Energy and logistics companies have plans for as many as five ports in Washington and Oregon that could possibly sell and export PRB rail-hauled coal to Asia markets. However, the obstacles to those plans are western state environmental and safety regulations.

Another upside is possible coal liquefaction. That is a process in which coal is dissolved in a solvent at high pressure and temperature followed by hydrogen treatment to create liquid fuel.

The U.S. has proven coal reserves that could last 1,000 or more years if liquefaction technology and market demand commercially expands.

Key players in market liquefaction include DKRW Energy, Envidity Energy Inc. and TransGas Development Systems. However, the timeline to large-scale production is uncertain.

Would liquefaction require more rail coal movement? Or more tank car or pipeline movement? No one is sure.

In closing, the long-term trend line slope for coal is down. The angle of the slope isn't yet certain. Unchanged, the pattern suggests lower coal demand and a market for building fewer coal railcars and coal train locomotives.

Image sourced from Pixabay

Posted-In: coal Freight Freightwaves Logistics Railroads IndustryNews Markets General

 

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