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US coal producers report railroad service issues impede access to export upturn

U.S. coal producers trying to take advantage of a vastly improved export market for coal have encountered obstacles from a railroad industry adapting to an increasingly volatile coal market.

Overall, coal production in the country has been declining since 2008 but dropped sharply in 2015 and 2016. Railroad companies, some of which have their financial future heavily entwined with that of the coal sector, began shifting their strategy to adapt to less demand for coal. Now, as demand for certain types of coal from the U.S. has rebounded, particularly abroad, coal companies 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 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."

The railroad issues, Bauersachs said, delayed one shipment by six weeks and a shipment originally planned for early April was just now loading in mid-May. The company is serviced by CSX Corp. and Norfolk Southern Corp., but Ramaco reported issues with Norfolk Southern's service had been particularly challenging.

Arch Coal Inc. has also reported issues moving metallurgical coal to take advantage of seaborne markets earlier in the year due to railroad transport issues. Arch President and COO Paul Lang said on an April 26 earnings call that "CSX has really come around" in terms of resolving logistical challenges but noted Norfolk Southern is "still struggling pretty hard."

Neither rail service immediately responded to a request for comment but recently addressed service challenges at an industry event.

Norfolk Southern said on an April 25 earnings call that "reduced velocity" of its rail service had negatively impacted its ability to service customers. At a May 15 transportation conference, Norfolk Southern President and CEO James Squires said there was a plan in place to fix issues with its slow network velocity.

"Customer service is not where we wanted it to be and I want our customers to feel fully satisfied with the service that they're getting from us, and right now, many of them don't," Squires said.

CSX Executive Vice President and CFO Frank Lonegro said at the same conference that the rail line has benefited from other service providers' challenges despite its own delayed shipments in the winter. He said coal exports, which represent about half of the coal CSX moves, are currently in a "good cycle" and provide good business for the railroad. After a wave of retirements of U.S. coal-fired generation, CSX expects a relatively stable coal environment for a few years as most of the anticipated utility retirements affecting the rail service are mostly completed.

The plants that remain, operating at lower capacities due to low natural gas prices, are expected to function at a somewhat predictable level even as U.S. coal consumption may continue a secular decline. However, there may also be some room for future growth through the same customers CSX already serves.

"If you have a big spike in natural gas prices, you're going to see the utilization rates in your coal-fired power plants go up," Lonegro said. "When you get hot weather, cold weather, you see some nice uptick in domestic coal."

The rail provider has been exploring ways to work with coal producers, particularly utility customers, where margins may be thinner than metallurgical coal, but also more reliable. CSX President and CEO James Foote said at a March 1 investor day the company is looking to be more productive and effective at servicing utility coal, particularly shipments coming from the Powder River Basin and Illinois Basin where thermal coal volumes are high.

"It's in our advantage to try and improve the margins in that business if for no other reason that we can participate with the customers to stay competitive in the market," Foote said. "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."

The challenges cited by U.S. coal producers have largely weighed on the eastern United States. Meanwhile, some western producers have praised existing access routes to the Asian market, with Cloud Peak Energy Inc. CEO Colin Marshall saying on a first-quarter earnings call, "Our export business ran well, with strong demand from our Asian customers and good performance from the rail and port system."