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Coal CEO sees 'worst of times' behind sector; railroad disruptions delay exports

A coal executive says U.S. coal is finding some relief despite some challenges at home, although producers trying to take advantage of vastly improved export opportunities have encountered obstacles from a railroad industry adapting to an increasingly volatile coal market.

Consol Energy Inc. President and CEO Jimmy Brock delivered his Dickensian assessment of today's coal market in a presentation titled "A Tale of Two Coal Markets" at a conference May 10.

The industry's "worst of times," Brock noted, were marked by a confluence of lower overall electricity demand, volatile export markets, cheap natural gas and the actions of the Obama administration, which Brock believes wanted to eliminate the use of coal. The conditions led to a wave of bankruptcies through the coal sector that is largely over.

"I am a firm believer that coal is going to be a viable part of the energy mix for the foreseeable future," Brock said on the sidelines of the conference. "But, we have to do things differently."

While many observers are expecting natural gas prices to remain low and continue to pressure coal-fired generation, Consol is thinking natural gas exploration and production companies will soon face the same sort of investor pressure to rein in volume that coal companies have experienced. If that were to occur, it could raise natural gas prices and offer a boost to coal producers.

Improved export opportunities and a focus on returning capital to shareholders in lieu of investment in volume growth were at the heart of most U.S. coal companies' conversations with investors in the first quarter.

Metallurgical coal markets are likely to remain strong and relatively balanced going forward, but the "new norm" will also be a good bit of pricing volatility, Arch Coal Inc. CEO John Eaves said May 17.

"I would tell you that pricing is going to be volatile. I don't think that changes," Eaves said. "What that means is anytime you get along with a couple million tons or you get short, you're going to have these massive swings in prices, and I think that's kind of the new norm."

Despite the strong international demand for coal, producers have reported railroads are having difficulty helping them reach those customers.

"It is no secret that the Eastern railroads have struggled to keep up with demand," Ramaco Resources Inc. CEO Michael Bauersachs said on a May 16 earnings call. "It is now pretty clear that the railroads took on more business than they can reasonably service. We understand that both [CSX Transportation Inc. and Norfolk Southern Corp.] railroads are attempting to address their performance issues, but it appears that the deficiencies will continue into the second and possibly third quarter of 2018."

Arch has also reported issues moving metallurgical coal to take advantage of seaborne markets.

In other coal transportation news, a federal judge in California struck down Oakland, Calif.'s ban on coal shipments, in a case between the city council and the Oakland Bulk and Oversized Terminal.

"The record before the city council does not contain enough evidence to support the conclusion that the proposed coal operations would pose a substantial danger to people in Oakland," U.S. District Judge Vince Chhabria wrote in a May 15 ruling for the U.S. District Court Northern District of California. "In fact, the record is riddled with inaccuracies, major evidentiary gaps, erroneous assumptions, and faulty analyses, to the point that no reliable conclusion about health or safety dangers could be drawn from it."

Opponents of the proposed coal export project are now weighing their legal options.

In Washington, the Association of American Railroads and the Western States Petroleum Association filed amicus briefs to support Lighthouse Resources Inc.'s lawsuit against state officials, arguing that the state's denial of permits to the $680 million planned export terminal of Lighthouse subsidiary Millennium Bulk Terminals-Longview LLC affects the national freight rail network and threatens to exclude U.S. commodities from foreign markets.

Ramaco Resources Inc. reported net income of $5.3 million, or 13 cents per share, in the first quarter.

Despite seasonal weakness in pricing, Ramaco Executive Chairman Randall Atkins said there have been signs of "structural strength" in international markets for metallurgical coal. He pointed to low metallurgical coal inventories, low steel inventories and domestic steel purchase interest as indicators metallurgical coal producers should benefit from market dynamics in the coming months.

Upcoming events:

Virginia Coal and Energy Alliance: The alliance will host its 39th Conference & Exposition on May 21-22 at the Meadowview Conference Center in Kingsport, Tenn.