Low Prices and High Waters Backing Coal Railcars Into Storage

Utilities picking natural gas over coal keeping railcars west of the Mississippi,
and floods not helping either.

By Michael Angell, FreightWavesBulk and Intermodal Editor

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Historic flooding in the Midwest and poor demand from electric utilities are stranding coal hoppers west of the Mississippi, pushing up prices for storing railcars.

The American Association of Railroads said last week that weekly coal volumes were down 16 percent from a year earlier to 71,526. The week prior number of 70,737 railcars marked the second-lowest number of weekly loadings this year.

Weak export markets are one of the major causes for the decreased rail traffic. Likewise, U.S. power plants are also using less coal.

The South Atlantic electricity market, which stretches from Delaware south through Florida, is typically the second largest market for coal-fired power generation. But the number of megawatt hours generated from coal in the South Atlantic fell 29 percent through the end of March, according to the Energy Information Administration. That’s the biggest decline year-to-date seen in a major U.S. coal-consuming region.

The drop in coal usage comes as the Southeast enjoys some of the lowest natural gas prices in three years, according to the Federal Energy Regulatory Commission.

Other major coal consuming regions are showing similar declines. The East North Central utility market, which goes from Michigan down through the Ohio Valley, saw a nearly 10 percent drop in coal usage. The West South Central, which includes Texas, saw a 6 percent drop in coal consumption.

“Coal burn across the U.S. is down this year,” said Martin Lew, Chief Executive Officer of railcar marketplace Commtrex. “In the Midwest, Southwest and Atlantic markets, natural gas prices and power prices are low, and coal is getting hit hard by renewable generation that continues to be added.”

In fact, renewables such as wind and solar are starting to put pressure on natural gas generation. As renewable electricity generation becomes cheaper and cheaper this issue will only be exacerbated over time.

Lew, who previously worked in coal trading at J.P.Morgan, said seasonality typically dictated utilities to stockpile coal in late spring and early summer, leading to higher railcar loadings.

Power plants typically run harder thanks to increasing air conditioning demand going into summer. Despite periodic bouts of high temperatures in the region, coal-fired plants in the Southeast “are not even running that hard because gas-fired and renewables plants are running harder,” Lew said.

Instead, coal consumers “are trying to push back demand,” he added. “The coal producers are calling on the utilities urging them to take coal deliveries.”

The problem is particularly acute for coal producers in the western states. Cloud Peak Energy, which mines coal in Wyoming’s Powder River Basin, filed for bankruptcy protection partly due to the current challengesfacing the coal market.

Even if utilities were stockpiling, those producers face the added pressure of actually getting coal to markets east of the Mississippi. Both Arch Coal (NYSE: ARCH) and Peabody Energy (NYSE: BTU) cited flooding as a problem in moving railcars during the first quarter.

With Midwest rains ongoing into May, producers faced still more hurdles in getting coal to market.

“Midwest floods have trapped a lot of coal in the upper Mississippi and upper Ohio Rivers,” Lew said. “Barge coal is not moving because of the floods. And railcars are stuck at terminals and ports in the Midwest.”

But the “flooding is helping out the demand side because they would prefer not to take the coal,” he added.

Rail shippers will likely face a tighter storage market as coal producers and consumers park railcars ahead of better demand. Commtrex’s Railcar Storage Price Index for U.S. (SONAR: RCSP.NACE) is moving for June after falling for much of May.

The U.S. Southeast is also seeing tighter storage market with that index also hitting a seasonal high. (SONAR: RCSP.NASE).

At the same time, the lack of demand is also keeping a lid on railcar leasing prices. Commtrex’s Railcar Leasing Price index for coal hoppers (SONAR: RCLCH.USA) is declining in June. Lew said typical seasonality would usually show leasing prices on the rise ahead of stockpiling.

As for a turnaround in the market, Lew said it will depend on the ability of railroads to repair flood-damaged tracks and the course of natural gas prices over the summer. But with record amounts of natural gas being injected into storage, “it looks very bearish for coal,” Lew said


 
 

     Commtrex is the #1 online marketplace facilitating business between Rail Shippers, Storage Providers, Asset Owners, Railroads, and Service Providers. Commtrex has the rail industry’s first exchange-based pricing index for rail storage and leasing rates.


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