By Lee Buchsbaum
A few coal operators are experiencing critical mass. With coal export markets mushrooming and port capacity constrained, Peabody Energy, Arch Coal, CONSOL Energy and several other major producers, along with coal shippers (railroads, barges, terminals, etc.), are looking at the logistics of developing more coal traffic lanes to Asian, South American and European buyers.
While the coal industry considers more exports, a larger question remains: will the railroads and terminal operators be willing to risk additional capital to chase a market that has proven rather volatile long term? Projections for 2011 are for near record volumes, maybe exceeding 100 million tons. But over the last decade and more, few railroads and terminals have operated at anything like full capacity. Export markets have fluctuated for years.
While 2008 saw huge volumes and pricing increases, the next two years were busts. In 2009, pricing for metallurgical coal for Pacific Rim markets declined from $300/metric ton (mt) to $129/mt a year later. Export volumes of met coal were 27.5 million tons in 2006, increased to 42.5 million tons in 2008, and then dropped by about 12% in 2009. In early 2010 it looked like it was going to be quite a bit worse, but the export market rebounded toward the end of the year. And as demand exploded, all parties labored to stay ahead or abreast of demand.
The falling dollar and Asian financial expansion have been critical to the reemergence of the U.S. as a significant coking coal exporter. All parties seem to agree the market is sustainable for both met and now increasing amounts of thermal coal. The question is what to do next. To take most of the risk out of making large investments in fixed assets requires long-term contracts and floor pricing, this is especially true for port terminals. Investing in improvements often becomes a chicken and egg scenario. Railroads also have to question how much they want to invest in purchasing locomotives and hoppers while training new locomotive crews for an export market that could fizzle in a year. But after first quarter numbers were reported to Wall Street, it seems investors are starting to belly up to the bar as all indications point to a sustained run.
Eastern Railroads Try to Untangle as the Rivers Rise to Swamp Them
Both Norfolk Southern (NS) and CSX have reported huge increases year over year (25% and 47% respectively) in coal exports during the first quarter of this year. During the first quarter of 2011, CSX moved more than 11 million tons of export coal and now expects to move 40 million tons into the export market for the full year. First quarter shipments were 47% higher year over year and set another all time quarterly record. About 70% of the export coal is met coal. Last year, CSX shipped more than 30 million tons (mt) into the export market, a record year.
Led by a nearly 50% increase in shipments from its Baltimore terminal, export shipments for NS—virtually all (98%) of which was met coal—were up 25% year over year. Baltimore is the shipping port for most of CONSOL Energy’s PCI coal. “The demand for Pennsylvania higher sulfur coals that are being blended in the world market were high, the capacity for production out of the Pittsburgh No. 8 seam was there, and we were very pleased to handle them,” said Donald Seale, executive vice president and chief marketing officer, NS.
Export shipments for NS totaled 71,000 loads, up 25% or 14,000 loads over the first quarter of 2010. “The convergence of flooding in Australia, a 10% increase in global steel production and robust demand for met coal in Asia resulted in our highest export volume since 1999,” said Seale. At Lamberts Point, volume for the quarter reached 51,000 loads, up 16% while shipments over Baltimore were up 49%, both due to high demand for U.S. met coals in Asia, Europe and South America.
But from late 2010 through the first quarter of 2011—from the producer’s perspective—railroad performance “stunk.” Hampered by poor equipment availability and reliability as well as tough winter weather, train availability, nebulous at best, has been impossible to predict and extremely challenging to prepare for.
Though both eastern railroads believe they have the capacity in their systems, they are working on improvements. For its part, CSX is acquiring additional high capacity coal cars as it trains new crews while taking locomotives out of storage. The company is definitely betting on what it sees as a long-term growth opportunity for the railroad.
NS has also purchased new AC locomotives and will begin to take delivery of 1,500 new coal cars in May. Short-term coal car leases are also being used to boost capacity. At its Lamberts Point coal terminal in Norfolk, Va., the railroad has also upgraded additional tracks inside the support yard. Bringing track back into service created about 1,100 car spots at the terminal. Lamberts Point, unlike any other large coal export facility in the U.S., has no ground storage. Adding storage tracks improves efficiencies at the pier and throughout the system.
NS claims the current capacity throughput at Lamberts Point is between 30 to 35 million tons per year (tpy). But the railroad is taking initial steps to improve that figure. “One of the things that we have in the mill to generate more throughput is we are hiring in not only transportation but also engineering and the mechanical side in order to support more two-side operation,” said James Squires, CFO and executive vice president of finance, NS. “Up to now, for the most part, we can pretty well handle the business that’s going through there, dumping on one side. We occasionally have two-side operation, but just to make sure that we can handle more going forward, which we think is a likelihood, we are gearing up to be able to handle two-sided operation much of the time if necessary.”
At the latest earnings call in April, NS batted away queries on export capacity limitations. “The limiting factor is the availability of coal on a given basis. Central App production was up 2.4% in the first quarter. And I think coal pricing is favorable, with favorable coal pricing, comes coal production,” said Seale.
Since March there have been some signs of improvement as CSX and NS work through the logistics of moving more coal to eastern ports. However, one producer insider expressed the mounting frustration by asking at what point will miners begin petitioning the Surface Transportation Board and other regulatory officials to better regulate the industry?
“If the railroads don’t get their damn act together and create some predictable shipping reliability, we’re going to lose the market,” said an industry source. “I don’t want to see our relationship with our eastern carriers degenerate into what has happened with some of the non-coal shippers in the west like the chemical shippers who have gone to the STB and Congress because rail service in their eyes is so bad. I don’t think we’re at that point yet, but the consistent poor service is starting to strain our relationship.”
Increased shipping tariffs only serve to rub salt into the wounds. Now the most profitable individual cargo sector for NS and CSX, export coal rates have gone up each year for the last three and CSX has gone to quarterly pricing, thus adding to the volatility in the market. “The reason that we went to quarterly prices is we expect that volatility to be at an up position for the remainder of this year, very positive in pricing for the rest of the year,” said Clarence W. Gooden, executive vice president of sales and marketing and chief commercial officer, CSX. Its eastern rival, NS, is also considering going to quarterly pricing as well.
Record Midwestern Floods Take a Toll on the Illinois Basin
Increasing amounts of Illinois Basin coal are heading by train and barge down the Ohio and Mississippi for transit out of the Gulf of Mexico and now Western Bituminous and Central Appalachian met coals are also being shipped to Gulf ports. Severe flooding along the river systems, however, is hampering both rail, barge and transloading services.
“Due to high water conditions affecting our customers and us, we have suspended dock operations at a number of our facilities along the Mississippi, but our landside operations continue to operate normally,” said Joe Hollier, manager of media for Kinder Morgan, which operates several major coal transloading facilities up and down the river system. “The water conditions change daily and we continue to monitor it closely. We expect to make up some of the lost volumes when the waters recede.” Kinder Morgan’s recently expanded Cora Illinois facility, a key shipping point for both Illinois Basin and PRB coal, “never did shut down” and has been operating for weeks despite high water adjacent to the Mississippi River terminal.
Foresight Energy which ships several million tons to New Orleans for European consumers has seen the Canadian National/Illinois Central reel from high water throughout its system. Flooding over the Ohio River Bridge at Cairo, Ill., has knocked out its primary route south and trains are detouring over the Bluford subdivision of the former Illinois Central (IC) main line. Flood waters continue to recede slowly, and track repairs are under way. CN optimistically said service would gradually resume by the middle of the May. Flooding in Memphis and, as of press time, in New Orleans and southern Louisiana, is also taking a toll on railroads and terminals in those areas. The long-term affects have yet to be determined, but costs will be in the billions and coal producers will be impacted.
With East Coast Ports Swamped, More Coal Travels Out of the Gulf
Despite taking more than 45 days to reach Asia, coal shipments from the U.S. have surged into Asia. But with huge queues off the busy East coasts ports of Newport News and Baltimore, shippers and producers are developing new capacity out of the Gulf of Mexico. Shippers will have to contend with a few more sailing days instead of accumulating additional demurrage charges while waiting to load.
In recent weeks Massey Energy and Peabody Energy have both announced plans to begin shipping more coal through the Gulf of Mexico. Massey has entered a 15-year agreement with Kinder Morgan to ship through its Inland Marine Terminal (IMT) in Myrtle Grove, La., on the lower Mississippi near New Orleans. Peabody will be adding volume to the Western Bituminous coal it is already shipping from the Twentymile mine in Colorado. This new tonnage will go through a new facility being developed by Kinder Morgan at the Houston Ship Channel.
To the east, Alabama Coal producer Walter Energy has recently acquired the assets of Mobile River Terminal Co. in Mobile, Ala. New met producer Cline Mining, which is taking the closed New Elk metallurgical mine in southern Colorado back into production, has also entered into an agreement with the Port of Corpus Christi to lease 18 acres of land and develop a port with approximately 2 million tons of coal capacity.
Walter’s newly acquired Mobile River Terminal facility is located at the Port of Mobile, less than 4 miles from the McDuffie Terminal where Walter Energy had been shipping all of its export coal to customers in South America and Europe. Walter Energy Interim CEO Joe Leonard said the Mobile River Terminal is of significant strategic importance to the company. “This acquisition will help ensure that we will have unconstrained shipping capacity to support our long-term coking coal production plans in Alabama. In addition, this facility should help maintain low mine-to-port costs and make us less reliant on third parties,” Leonard said.
Walter shipped about 6.5 million tons through McDuffie in 2010. Mobile River Terminal’s loading rate for the existing equipment is 10,000 tons a day, and throughput capacity should be 2 million to 2.5 million tpy. McDuffie also announced plans to add a new ship loader to Berth No.1. enhancing overall throughput.
On Massey’s side, most of the coal the company intends to ship through IMT will be metallurgical coal originating from Massey’s Central Appalachia mines destined for the export market. River barges will transport the coal from various upriver origins to IMT where the cargo will be offloaded and stored before being loaded onto ocean vessels. The term of the agreement is 15 years with a minimum anticipated throughput tonnage of 4 million tpy. With the pending merger with Alpha Natural Resources, the new company may have more shipping flexibility overall. To fulfill the contract, Kinder Morgan will invest more than $70 million to rebuild IMT to allow Massey to ship up to 6 million tpy of coal. Prior to suffering a shiploader failure, the IMT facility shipped more than 9.4 million in 2010.
To accommodate the additional tonnage, Kinder Morgan will expand the ground storage yard to between 2 to 2.2 million tons, add conveyor belts, new environmental control systems and make other improvements. These upgrades should be completed by mid-2012.
Partially driving much of the recent Gulf investments is the new Panama Canal still scheduled to come on-line in 2014. Shipping out of the Gulf may dramatically impact shipments to Asian economies. Given the challenges railroads are facing in the East coupled with ports bursting to capacity, Massey’s decision to invest heavily in both mid-streaming and barging into the Gulf is either less expensive, more reliable or both.
Peabody Energy, during its recent earnings call, related the company has been exporting “quite a bit of tonnage” out of its Twentymile mine suggesting its desirability for European customers. Kinder Morgan’s agreement with Twentymile is to handle up to 2.2 million tpy of Colorado coal through its Houston bulk terminal, Hollier said without naming the producer. Though Peabody Energy has yet to formally announce shipments through Houston or an agreement with Kinder Morgan, Arch Coal has denied being the producer involved. Wherever the coal may originate, Kinder Morgan plans to invest $18 million in expanding the Houston terminal to handle the new export stream, which is a first for the Port of Houston, Hollier said. Twentymile, which produced more than 7 million tons in 2010, has been experiencing geologic challenges in 2011 hampering production.
During its quarterly earnings call, Richard Kinder, chairman and CEO, described the magnitude of the burgeoning coal export opportunity. Combined, both the IMT and Houston Ship Channel investments will be more than $90 million and result in an additional “8.2 million tons of coal which is obviously a lot of coal. That’s 6 million max at IMT and 2.2 million on the Houston Ship Channel,” Kinder said. Demand for export coal capacity remains very large and Kinder Morgan has more opportunities at other terminals on both the East Coast and the Gulf Coast to handle additional volumes. “We estimated it could be as much as 28 to 30 million tons of additional coal export capacity on top of this 8.2 million that we’ve already locked in on,” said Kinder.
Buchsbaum is a Denver-based freelance writer and photographer specializing in industrial subjects. He can be reached through his Web site at www.lmbphotography.com or by phone at 303-746-8172.
