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Downturn in coal means unused tracks, cars for rail industry

Railroads are struggling to find ways to use tracks and other assets that have fallen into disuse from the downturn in the coal industry.

"You now have assets that were put in the ground that are stranded out there that literally have no use," said Ed McKechnie, executive vice president and chief of global strategies for Watco Companies LLC, at an April 6 Rail Energy Transportation Advisory Committee meeting at the U.S. Surface Transportation Board in Washington, D.C. "It is unlikely in the foreseeable future to see a commodity move over that line that was built specifically for coal," he said,

He said that a railroad tie is expected to last for 20 years while rail itself could last 50 years or more, depending on use. "When you invest that, put that in the ground, it's a 10-, 20-, 40-year asset," he said.

He said that 10 years ago at an STB meeting, the collective understanding was that coal consumption would grow 25% over the next decade and stakeholders were discussing what needed to be done to address this growth.

Now railroads are wondering what to do with rail lines sometimes double or triple tracks that served the Powder River Basin area during coal's peak market moments that have little use without a robust coal industry.

"The country keeps evolving, railroads keep evolving with it, but there are some coal lines that are out there in Appalachia and the Mountain West that you're not sure what use they're going to be," he told S&P Global Market Intelligence in a follow-up call.

In some cases, new material like frack sand that did not make much of an impact for shipping is filling in gaps, but questions remain for other areas. "On a line where you're only moving coal, you hope that something else gets invented out there," McKechnie said.

At the recent STB meeting, coal and railroad industry representatives and an analyst said that weather and other factors were affecting the steady business that the railroads and coal industry rely on.

McKechnie said commodities like grain and other shipments have traditionally been more seasonal or varying than coal. During the 20th century, he said, when a class 1 railway lost its coal franchises, it often ended up merging with another company.

"It's hard to find a railroad that didn't have a coal franchise on it," he said, pointing to examples such as the Chicago and North Western Transportation Co., which was absorbed by Union Pacific Corp. He said the Missouri-Kansas-Texas Railroad, often known as Katy, mostly relied on agricultural shipments, but when its coal franchise declined it could not survive on the former alone.

"There's so much seasonality and variability in what we do in the rail industry," he said.

In the grand scheme of things, coal shipments still provide some reliability for railroads, he said, but a change in the regulatory regime could help improve steadiness. "We just need to have a regulatory reset that allows coal to be a part of the equation."

One potential way the Trump administration could help with this, he said, is by requiring new agency regulations to be approved by Congress.

Unused cars and juggling locomotives

Languishing tracks are not the only stranded costs, according to McKechnie. Coal cars generally cannot be used for other commodities. He said at the meeting that in the past seven years, the industry is down by 2.7 million carloads, and many of these are not being used.

Locomotives, on the other hand, can be shifted around to ship other commodities, although a surplus can still affect the rail business.

"Track and coal cars are the two biggest things," he said. "You can get some use for locomotives somewhere else, but they're still sitting on your books."