CSX Corp. President and CEO James Foote said the railroad is trying to come up with strategies that will prevent U.S. utilities from continuing to retire coal-fired power plants, even as a recent uptick in export demand has kept miners and rail providers busy.
The company has not decided how much it is willing to lower rates to keep plants open, but there is room to reduce costs and adjust rate structures, Foote said at a May 23 transportation conference.
Despite a recent uptick in demand for coal exports, domestic utilities — the coal industry's core business — have cut back on coal shipments as they retire aging facilities in favor of natural gas-fired plants or renewable energy sources.
"I think our corporate line on what's going to happen to our utility coal in five to 10 years is we don't have a clue. It's under pressure because of the economics of burning natural gas versus burning coal," Foote said, according to a transcript of the event. "Our challenge right now is how to work with all the parties involved — the coal mines, the utilities and us — to find a solution that makes these coal-fired plants competitive on the grid and have the ability to generate electricity ... that's competitive with natural gas."
At an event in March, Foote said it does not make sense to watch a utility shut down to protect higher-margin metallurgical coal business that could be gone if volatile markets for that commodity take another turn.
Demand increase brings challenges
Coal executives have indicated that increased demand for coal moving abroad caused issues for producers trying to tap into foreign markets. Ramaco Resources Inc. CEO Michael Bauersachs told S&P Global Market Intelligence that CSX service improved, but he noted that problems with service from Norfolk Southern Corp. had significantly delayed recent coal shipments.
"We've seen this any number of times. A downturn will cause them to make overreactions and unfortunately when things pick up, they just aren't able to react," he said. "It's been really frustrating actually. It's had a negative impact when you're sitting there trying to manage your company and your receivables and all that."
An Arch Coal Inc. executive also noted during a recent earnings call that his company faced logistical issues. He said Norfolk Southern, particularly, was struggling with increased demand.
Bauersachs said he thinks the third quarter is likely the best-case scenario for sorting through some of those challenges.
At the transportation conference, Norfolk Southern Executive Vice President and Chief Marketing Officer Alan Shaw was asked if Norfolk Southern had more volume than it could handle. He said the railroad was hiring crews and investing in its service product to improve service.
"Customers want to do business with Norfolk Southern," he said. "We're not delivering the service product that we need to deliver. We understand that and we are focused on getting that fixed."
