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Railroad prices might come down if coal industry struggles continue, report says

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Essential Energy Insights - September 17, 2020

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Railroad prices might come down if coal industry struggles continue, report says

Flexible railroad transportation prices might provide some windfall for the coal industry if a carbon tax is put into place, according to a recent report.

Louis Preonas, a graduate student finishing his doctorate and the author of a recent report released by the University of California, Berkeley's Institute of Energy at Haas called "Market Power in Coal Shipping and Implications for U.S. Climate Policy," told S&P Global Market Intelligence that most models that examine the price coal power generators pay and the costs of production ignore the other important element the railroads that often transport the commodity and account for a large portion of coal's final cost.

He said the prices coal customers pay are often inflated by the railroads, which charge high rates to some of the power plants that are captive to a single rail company.

However, if demand for coal decreases due to a carbon tax that inflates its price, or due to competition from low natural gas prices, the railroads might help the prices by lowering their cost of transportation.

"You'd rather sell something than sell zero," he said of the railroads, adding that if a carbon tax were instituted, the railways would likely have more to lose than coal generators or producers.

Lowering the price of transportation could provide a cushion that would give coal demand more resiliency, he said.

Matthew Preston, research director of North American thermal coal markets for Wood Mackenzie, told S&P Global Market Intelligence that Preonas' theory is interesting and his conclusion might be roughly correct, but that there are some problems with his calculations.

One thing Preonas did not address, Preston said, is that gas prices are also subject to drop if coal prices go down too much.

"They're not independent variables," he said.

Coal prices also change very slowly and are set months and years in advance, Preston said, and railroad prices even more so.

"They can't respond to gas prices as quickly as he would suggest," Preston said, adding that in his experience, railroads are generally very reluctant to cut transportation rates.

While lower shipping prices are unlikely to provide a cushion for the coal industry in the short term, Preston said there may be some flexibility in the long run.

"It could happen, but probably not in the time frame that he's looking at," Preston said.

Major railways did not respond to a request for comment or opted not to comment on the study.