On March 13, the Western Coal Traffic League (WCTL) filed a letter of concern with the Surface Transportation Board (STB) entitled “BNSF Railway Service Crisis.” Its member utilities were expressing their concern that BNSF’s poor service was leading to precariously low coal stockpiles, while BNSF frustrated their attempts to get specific answers. Cloud Peak Energy reported in their fourth quarter report of 2013, “Demurrage costs were unusually high in the fourth quarter as rail interruptions slowed deliveries to Westshore, causing delays in loading vessels.” They reported that the problem, though diminished, still existed in mid-2014.
The service problems were not restricted to the coal industry. On June 20, the STB directed Canadian Pacific (CP) and BNSF to report their plans to timely resolve their backlogs of grain car orders, as well as respective weekly status reports pertaining to grain car service. How might this service concern be related to coal transportation service problems?
What was happening in the rail service business? Should there not be more locomotive power available now to serve the coal and grain businesses? The winter of 2013-2014 was exceptionally long; heavy snowfalls had caused delivery problems for the railroads, but were they the only reason for poor service? Could it be that the western railroads were focusing on the oil shale business to make up for the coal business they expected to continue losing?
In oil-starved California, two new oil-by-train terminals have been announced that would provide new capacity of 220,000 barrels per day in Bakersfield. In Oregon and Washington, BNSF serves five existing refineries and plans another four oil-by-rail facilities. As many as 19 BNSF unit trains of Bakken crude now traverse the state of Washington weekly.
During the same period that coal and grain shipments were declining, BNSF’s Bakken crude oil shipments and related investments were rapidly growing. A legitimate concern for coal-fired utilities is whether some rail assets normally used for coal transportation had been reassigned to develop the new Bakken crude business. Certainly the liquids would not use the same cars as coal, but could the coal train locomotives and crews be used to pull a unit train of crude oil?
New traffic on the rails will not be all crude oil. In 2013, UP hauled almost 200,000 carloads of frac sand, compared to 159,000 carloads in 2012. BNSF hauled 140,000 carloads of frac sand, up from 122,000 carloads in 2012. This business will never be lost to pipelines.
Since 2004, the STB chairman has annually requested the railroad industry to explain its plans to handle increased traffic volumes associated with the traditional fall “peak shipping season.” His current request for fall 2014 information must have been shaped by such service concerns as those expressed above. Coal transportation answers to the chairman’s request are summarized below for each of the four major coal-hauling railroads.
UP: Coal Customers Want to Ship More Than Planned
In December 2013, UP reported coal inventories were well below historic levels, and were down 31% from 2012. Power plant coal inventories fell further when prolonged extreme cold hit much of the U.S. last winter, increasing demand for electricity. Moreover, higher natural gas prices contributed to greater demand for coal-fired electricity generation. Through August 30, UP’s coal car loadings were up 2% compared to 2013. While the summer saw below-average temperatures for much of the country, utility stockpiles were still down more than 20% from their five-year averages. Accordingly, UP anticipates steady demand from utilities as they replenish and build coal stockpiles for the coming winter.
Responding to the demand for coal-fired generation, UP’s coal customers desired to ship much more coal in 2014 than they told UP to plan for last year. The railroad responded by activating its surge resources, acquiring more locomotives, and hiring more employees. They added coal train sets and increased train size where they could, so that its customers were receiving more coal. UP is closely monitoring its deliveries and maintaining service logs to track customer issues, including low inventories. It is also proactively communicating with its customers and updating them on their efforts to deliver more coal.
Tower 55, near Fort Worth, Texas, is one of the nation’s busiest rail intersections. The Tower 55 capacity project is of particular importance for the peak season. As many as 100 passenger and freight trains pass the area every day. The new configuration can accommodate up to 135 trains per day, compared to a maximum of 110 a year ago. Now that this project is complete, 20-plus trains per day no longer require regular rerouting. Most of the extra crews needed for rerouting trains returned to their regular service units. The completion of this project also means that UP has freed-up network capacity where the Tower 55 rerouted trains were operating. (WCTL is specifically opposed to this project, claiming it will disrupt traffic flows by routing loaded coal trains through Kansas City and empty coal trains south and west around Fort Worth, thereby lengthening already slow cycle times.)
BNSF: Is Not, Will Not Meet Coal Demand
BNSF is currently moving large volumes of coal, agriculture and crude oil across its network, particularly in their northern operating region. Even though corn prices are down sharply from 2013, BNSF expects these large volumes to continue for the rest of the year and into 2015. They also expect that the customary seasonal demand patterns seen in previous years will continue. Through August, BNSF units were up 1.8% compared to the same period a year earlier.
Industrial products volumes have grown about 5% this year through August compared to the same period last year, primarily driven by the strength of energy-related commodities, most notably crude oil and frac sand. Volume growth is expected to trend upward in the remaining months of the year led by the aforementioned commodities. BNSF currently serves a number of crude oil unit train facilities servicing several western shale plays — 31 origin facilities and 34 destination facilities — with several more origin/destination facilities under development. They currently have about 180 active crude unit train sets in service; these are expected to exceed 200 by the end of the year. A visit to their website (www.bnsf.com/shale) will show how seriously BNSF has committed itself to the oil shale business.
Coal units are up 1.4% through August compared to the same period last year. This is a continuation of higher volumes that BNSF began to experience in June 2013 as demand for Powder River Basin (PRB) coal increased with a rise in natural gas prices and utilities returned to greater coal-fired generation as the best value. The increase in PRB burn took place against the backdrop of declining inventories that was already under way prior to natural gas price increases. During the first half of 2014, PRB burn was up almost 25 million tons, or 13%, over the same period in 2012; it was up 6 million tons, or 3%, over 2013. Even though BNSF has under-delivered against this coal demand through the winter and spring, it has continued to grow the number of coal sets across its coal corridors and is operating nearly 500 sets.
The railroad expects this higher demand to continue for the rest of 2014 and into 2015, as it is not meeting current coal demand due to service challenges. BNSF is focused on meeting its contract obligations and working with those customers who want more volume than their contact declaration, but there are also customers for whom it is not meeting its customer declarations. BNSF will move more coal the latter part of this year and next year as capacity is added. It will continue rebuilding stockpiles in 2015, with some completing in 2016.
The central region has continued to be a challenge as a result of weather impacts in the north. These have necessitated volumes being rerouted on to the coal routes during the continued high demand for coal. As the rerouted traffic moves back to the north, BNSF will see more gradual improvement; the number of coal sets in operation will continue to be very high. As velocity improves the number of coal sets will decline; the railroad will be able to move more volume with fewer sets. This will also improve customer service as stockpiles are rebuilt.
The northern region will see incremental improvement as track maintenance concludes, but should see larger improvements as track expansion projects come online. Specifically, the subdivisions from western North Dakota to the West Coast should perform much better in the latter part of the year as key capital projects come into service. These projects will provide added throughput, which will increase velocity for grain, crude oil and coal volumes.
A Bitter Irony
BNSF has worked for almost 10 years to saddle coal producers and coal-burning utilities with the sole responsibility for stopping rail borne coal dust. The railroad has recently found it necessary to build a surfactant respraying facility in Pasco, Wisconsin, in an effort to reduce coal dust from trains entering the Columbia River Gorge. Possibly the result of a Sierra Club lawsuit, the facility is scheduled to open in December.
CSX: Actively Preparing to Haul More Coal
In the first quarter, CSX pulled approximately 5,000 rail cars out of storage to accommodate growth, with an emphasis on coal, grain and metals. In addition to aggressive car purchases over the past three years, CSX is now undertaking the largest car rebuild program in its history, including 470 stainless steel Coke Express cars and 1,400 stainless steel triple hoppers that have been refurbished and are now hauling freight.
In addition to the rebuilt equipment already in over-the-road service, another 1,100 triple hoppers are expected to be complete by the end of the year. Work will soon begin on approximately 3,000 coal gondolas that will be converted from traditional carbon steel into hybrid stainless steel-aluminum cars and placed into service in 2015. CSX is investing in a new facility in Kentucky that will support the grain harvest and increases in Illinois Basin coal shipments.
The export coal market continues to show volatility as global supply outpaces demand and pressures global market pricing for both thermal and metallurgical coal. Expectations for CSX export coal movements in 2014 remain in the mid-30-million-ton range. Following three years of transition in the domestic coal market, the extreme winter conditions forced utilities to draw down their coal inventories, revitalizing the domestic coal market in the first half of the year. Domestic shipments increased 7% in the first quarter and 15% in the second quarter. CSX expects growth to continue in the double-digit range. The company is investing in a new coal unit train processing facility in Kentucky that will support the increased growth of coal from the Illinois Basin as well as increased movements of grain unit trains.
Due to the closure of mines in Northern Appalachia, CSX lost $295 million of coal revenue in 2013 after losing over $500 million in 2012. The company seeks to offset the loss of coal traffic with a 6-8% annual increase in intermodal traffic.
Norfolk Southern: Seeing Unexpected Steady Coal Traffic Increase
Norfolk Southern’s (NS) internal projections for 2014 generally predicted flat growth, with increases in intermodal and crude oil shipments partially offsetting expected declines in coal. Volumes began to increase in late March, which NS initially thought reflected pent-up demand from the severe winter. However, volume increases have been sustained and reflected across nearly every business segment and have run well ahead of the pace of the overall economy.
For the second quarter of 2014, traffic was up 8% over the second quarter of last year, which includes double-digit increases in intermodal along with gains in both merchandise and coal traffic. To put the volume growth in perspective, NS’s weekly volumes averaged about 153,000 loads in the second quarter of this year, compared to 141,000 the year before. NS only saw volumes exceed 150,000 loads in two weeks of all of 2013.
Overall coal volume increased 3% in the second quarter of 2014 over the second quarter of last year. Utility coal shipments are expected to be flat throughout the remainder of the year due to mild summer weather and falling natural gas prices. Coal volumes will be tempered by weaker export metallurgical and thermal coal market conditions along with lower domestic metallurgical coal shipments. In sum, NS expects continued volume growth across most of its intermodal and merchandise market segments, but reduced coal volumes in the second half of 2014.
Dave Gambrel, a private transportation consultant, is the former director of transportation for Peabody Energy. He may be reached at david.gambrel@gmail.com.
