(Casper Star Tribune, July 3) – Coal faces myriad challenges these days. Competition from natural gas, reduced demand and government regulation are the most popular reasons cited for the industry’s decline.
But there’s one challenge that rarely gets mentioned in the litany of long-term issues facing the industry: shipping costs.
Transportation costs have increased in recent years, even as the price of coal itself has declined. The cost of average annual rail shipments from the Powder River Basin climbed nearly 20 percent between 2009 and 2014, the last year for which statistics are available. Spot prices on Powder River Basin coal are down 31 percent since the start of 2011.
The issue is of particular importance for miners in the Powder River Basin, who are half a continent away from many customers. Shipping costs generally account for two-thirds of their delivered cost. Put differently, shipping costs play a large role in determining whether coal is cheaper than its chief competitor, natural gas.
Rail companies’ earnings have slumped on account of reduced coal shipments. BNSF profits fell from $1.05 billion in the first quarter of 2015 to $784 this year after recording a 33 percent decline in coal shipments. Union Pacific’s first-quarter earnings were $979 million, down 15 percent from the same period last year. The Omaha, Nebraska-based railroad said coal shipments were down 34 percent over that period.
Neither railroad has shown signs of offering concessions to coal companies, despite some calls for them to do so. When financial analysts asked Union Pacific Vice President Eric L. Butler about the subject during a recent earnings call, Butler declined to comment. The railroad does not talk about specific contract negotiations, Butler said.
“I will say we negotiate aggressively and assertively, and we’re in a very competitive environment,” he said. “And for any particular contract negotiation, we probably have dozens, if not hundreds, of terms that we’re negotiating. And like always, as markets change and we look to be competitive, we evaluate a bunch of those terms and conditions and what works for us and works for our customer base.”
A BNSF spokesman could not be reached by press time.
Railroads have cut deals for coal companies in the past, said Matt Preston, an industry analyst at the consulting firm Wood Mackenzie. Norfolk Southern and CSX have offered lower shipping rates to protect eastern coal exporters, he noted. BNSF also offered improved terms to Powder River Basin producers around 2012, prompting a shift away from Union Pacific in the basin.
Still, Preston said he did not expect to see railroads make wide concessions to coal companies.
“My feeling is they are more interested in protecting their margins in general than aiding the coal industry,” he said. “They make money shipping frack sands to gas drillers, too.”
Both major railroads have likely paid off their infrastructure investments in the Powder River Basin, Preston said, reducing their incentive to protect the coal market.
“The railroads’ business is shipping stuff, not just coal,” Preston said. “They’re moving onto some other market.”