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Railroads consider discounts to help stave off decline in coal demand

Major U.S. railroads are considering dynamic freight pricing tied to natural gas markets that would help coal compete in the power generation market.

While railways benefited from a strong export market and tax reform in their fourth-quarter earnings, planned and executed coal retirements represent a threat.

"It makes no sense for us to watch the utility shut down so we can protect some high-margin coal business that's going to be gone in six months if we don't react to the marketplace," CSX Corp. President and CEO James Foote said March 1 at an analyst and investor day. He said the railroad would be aggressive in helping its utility coal business stay competitive, and mentioned longer trains as another way to achieve that goal.

Russ Epting, vice president of coal sales and marketing at CSX, said at the event that the railroad has lost more than 113 million tons of coal freight since 2008 as power plants close. Fewer of the units served by CSX are shutting today, he said, but with another 2 GW worth of capacity scheduled for retirement, coal shipments will decline by about 1 million tons this year.

"We're trying to develop market strategies to incent, if you will, incremental burn where it's necessary, where possible," he said.

William Wolf, vice president of business and market analysis at John T. Boyd Co., said his biggest takeaway from Epting's comment is that CSX "is fully aware that if they stick with the traditional fixed price tariff, they run the risk of seeing their coal delivery business dry up entirely," and that the railroad needs to implement a natural gas-indexed pricing plan to preserve remaining coal business in key market areas.

Foote said the coal network is benefiting from lowered costs under CSX's new precision railroading system. However, not all producers see these changes as positive, and coal producers and customers are likely to be the losers in CSX's plan, according to an industry analyst.

Norfolk Southern Corp. is also exploring the possibility of adjusting its transportation pricing level to help utility coal customers.

"We look at every opportunity individually. We look at price. We look at productivity," Executive Vice President and Chief Marketing Officer Alan Shaw said March 14 at the JP Morgan Aviation, Transportation and Industrials Conference in New York.

Shaw doesn't foresee more coal plant retirements on Norfolk Southern's network, at least in the short term, but "if there is anything that mutes my optimism within the coal franchise, it's utility coal," he said.

Jamie Heller, founder and president of transportation consulting firm Hellerworx Inc., has urged railways to consider making price contracts more sensitive to gas markets as energy demand shifts.

Building dynamic contracts that work, he said, involves lowering freight prices when natural gas prices drop, though a number of other considerations come into play. The railroad has to consider the level of discount at which it can maintain a profit, whether decreasing transportation prices for coal will actually mean a significant increase in volume, and whether other coal deliveries might be affected. It would also want opportunities to share margins when power prices are high.

Wolf said that while transportation costs may have some move to maneuver, there is only so much that railroads can do to help coal compete. At low gas prices, "coal will continue to struggle to be dispatched — despite cooperation from all stakeholders."