Strong Demand for Coal Transport to Continue
Railroads can expect to see a continued strong demand for coal shipment. The US coal industry is expecting a stable, increasing demand for coal for some time to come. The state of the coal industry and the effects of the rising demand for coal were debated at the National Coal show in June.
Fueling the growth in the coal industry is a strong demand for electricity, expected to nearly double in the next two decades, according to government estimates. Coal burning power plants provide more than half of the electricity produced in the U.S and the Energy Department expects this to continue. In addition, China’s strong economic growth has led to a drop in Chinese coal exports, as the country is consuming greater quantities to fuel its own development. Countries that were importing coal from China, such as Japan and Korea, have turned to the US market for coal.
According to a Times-Dispatch article, July 3 2005, this trend toward growth in the coal industry is here to stay. Michael Quillen, president of Apha Natural Resources Inc of Abingdon, believes that coal companies will not be able to oversupply the market, as they have in the past, because an increase in production will necessarily take time. Coal companies are currently expecting a wait of 3 years in the permit process to open mines and 18 months for the delivery of new equipment. Quillen also stated that “the inability of U.S. railroads to react quickly to the increased demand for coal has held the industry back.” To illustrate this point, the article quotes Katharine Kenny, a spokesperson for Massey Energy Co of Richmond as stating that her company could have shipped almost 5 million more tons of coal except for the lack of rail service.
For the railroads, the immediate question is one of capacity. Coal transport is already an issue in the Appalachians, and the railroad industry is moving quickly to meet the demand. A June 9th Associated Press article quoted Norfolk Southern vice president of energy and properties, Danny Smith as he outlined the challenges facing the railroads. Millions of dollars would need to be invested by the railroads in employees, equipment and construction and repair of the rail lines. “This thing needs to come quickly. When I say quickly, you’ve got to plan at least five years out there…This is not equipment that you go down to Wal-Mart and buy, this is something that is obviously heavy equipment,” Smith said.
The railroads have positioned themselves to profit from strong demand in the coal transport sector. Class 1 railroads have shown a strong increase in net income from the coal industry, especially Norfolk Southern which is estimated to carry approximately 60 percent of the coal shipped in the U.S. NS first quarter revenues from coal increased by 17 percent over the same year ago period. Rate increases and fuel charges have been increasing and utilities have taken steps to challenge some of the rate increases with the Surface Transportation Board. Norfolk Southern recently settled a rate challenge with Progress Energy involving an undisclosed cash payment by Norfolk Southern and a multiyear transportation contract. NS expected the settlement to increase this quarter’s income by $24 million.