Rethinking coal in current context — analysis by Tony Hatch

(Source: Progressive Railroading 08/11/2017)

By Tony Hatch

Coal boomed in first-half 2017. Does that mean coal is back? U.S. coal volumes, dominated by steam (utility) coal, were up 18 percent through June. Of course, it was against easy comparisons, and June numbers were “only” up 13 percent. By early July, they were closer to flat. Export coal — a low volume/high margin product with a high exposure to the thermal (steel) markets — also was up big in the first half due to a surprising surge in Chinese demand (even if that isn’t the U.S. product’s end market) and weather issues in Australia. What is the sustainability of this boom? How can we separate the hype (“50,000 coal miner jobs created” — it was more like 1,000) from reality?

The year’s second half should give us a more normal comparison. But perhaps it’s time for me to reconsider some of my longer-term projections and the impact on rail based on the new political reality.

Shouts and yelps

The “war on coal” has not been reversed — it is all over but the shouting, although those yelps may now go on longer than I had anticipated. The environmental side isn’t giving up, either, on state, local, international or corporate levels. But it has become increasingly clear that as the new rules are being written (or unwritten, depending on your point of view), the intermediate term outlook for U.S. domestic utility coal transportation must be revised upward. Not the five-straight months of double-digit growth, up 19 percent YTD through April kind of “upward,” but I had been looking for a flat/stable outlook over the next five-plus years. Now, that is looking more and more conservative.

High-margin export coal is up this year. This distorts the broader picture similar to the way the U.S. export coal strength at the end of the commodity “super cycle” in 2010-2013 — and its margin-fueled boost to coal revenues in total — disguised the secular drop in U.S. domestic utility coal.

The burst of growth for the U.S. eastern rails in the year’s first half looks unsustainable. Predicting U.S. eastern exports has always been a mug’s game, given how far we sit from the actual growth source. But the revival there so far, with all its attendant publicity (“miners back to work”) and recent small-mine IPOs, is more an act of God (typhoons in Queensland) and issues in China than anything to do with U.S. policy — and with 93 percent of U.S. production going to U.S. energy, from a volume perspective, anyway, it’s not important. From a revenue perspective, it represented almost two-thirds of the drop since 2011. Longer term, the shifts in the Chinese economy look to be a real limiter on coal export growth.

A deeper dive

Even so, a rethink on intermediate term steam coal outlook is needed. A recent academic report may have done the best deep dive that I have seen.

In April, Columbia University’s Center on Global Energy Policy issued “Can Coal Make a Comeback?” The report’s writers see a few reasons why coal is down 25 percent since 2011:

•flat-lining U.S. electricity/energy demand
•the shale-gas revolution
•real renewables growth and maturation
•U.S. regulation/legislation — listed by the Obama administration’s EPA at about 4 percent of the reason for the decline.

Would a retreat even matter?

So, would a retreat from the “war on coal” even matter? Columbia researchers found that under the Obama administration’s Clean Power Plan, domestic coal use would still grow from the low 2016 base to 2020, then decline slowly but steadily. And overall, coal has grown; it’s up 19 percent YTD.

By 2025, U.S. steam coal would be leveling at about 704 million short tons vs. ~750 million last year, according to the EIA. Under a Trump rollback analysis by Columbia using EIA natural gas pricing estimates as a constant, that number would be 815 million by 2020 and 834 million by 2030. That would still be below 2014 (~1 billion) and the 2008 peak (1.1 billion), but it would represent a meaningful change.

Often, what’s good for (North) America is good for freight railroads, and vice versa. Whether the Trump administration’s withdrawal from the Paris climate agreement is good for America (or anyone) is not for me to say. However, it does seem that it — combined with other changes to prior environmental policy in regards to coal — is, in a vacuum, good for rail. At least in the intermediate term.