* EPA rules seen prompting more coal exports
* Railroads seen benefiting too
* Coal, railroad stocks drop
By Lynn Adler and Steve James
NEW YORK, March 28 Tougher emission rules at
U.S. power stations will likely force coal companies to make up
for lost domestic customers by exporting more to countries in
Asia where environmental regulations are less stringent,
Railroads, which haul about 70 percent of U.S. coal, could
also try to mitigate the damage from lower shipments to
utilities by carrying more coal for exports.
Proposed rules that will limit new power plants' CO2
emissions, the first move by the world's largest economy to
regulate the gas blamed for contributing to global warming, were
announced Tuesday by the Environmental Protection Agency
(EPA).. Currently, coal-fired plants produce
about 44 percent of U.S. electricity
Wall Street saw the rule change as a short-term negative for
coal and stocks fell on Wednesday. Arch Coal's stock
dropped 4 percent to close at $10.80 and Peabody Energy
fell 3.4 percent to $28.83 on the New York Stock Exchange. Alpha
Natural Resources was 4.1 percent lower at $14.87 and
Consol Energy was off 1.9 percent at $33.33.
Railroad shares also declined. CSX Corp fell 2.4
percent to $21.52 and Union Pacific dropped 2.3 percent
Michael Dudas, a coal industry analyst at Sterne Agee, said
the EPA rules, likely to come into effect in a year, will force
the coal industry to cut production, but also ramp up exports.
Last year exports accounted for about 10 percent of total U.S.
coal production of 811 million tons, according to the Energy
"The U.S. will become a much more important supplier to the
world," he said, noting that demand was high in Asia for both
thermal coal, used in power generation and metallurgical coal,
which is used to make steel.
"We have the capacity to export more and the industry is
trying to develop more ports on the West Coast for the coal from
the Powder River Basin (of Wyoming and Montana)," Dudas said.
Lucas Pipes, of Brean Murray, Carret & Co, agreed coal
companies could compensate for lost domestic customers through
exports, but said a U.S. west coast coal terminal was essential.
Currently, there are no U.S. west coast coal ports and the
Canadian one at Ridley, British Columbia, was not competitive
for U.S. producers.
"The biggest potential for exports to Asia would be PRB coal
through the west coast," he said. "That's where the focus is,
but that won't happen before 2016."
He noted Peabody has an agreement with a developer for a
port in Washington state that could handle 25 million tons.
Pipes said there were adequate rail lines to the region but
the bigger issue would likely be permitting for the port because
of strong environmental opposition to "exporting climate
EPA RISK ALREADY "DISCOUNTED"
U.S. railroads will carry less domestic utility coal under
the EPA plan to cut carbon emissions, but analysts believe they
too can make up for lost volume by carrying more export coal.
CSX's Chief Financial Officer Fredrik Eliasson eased market
fears this month by forecasting record first-quarter and 2012
earnings even as its utility coal volume was slumping as much as
30 percent in the first quarter.
Export coal would likely match last year's record 40 million
tons, he said. Export coal volume in the first quarter is
running about 5 percent above the year-ago pace.
CSX and Norfolk Southern gained about 30 percent of
their total revenue from coal shipments, while Union Pacific's
coal-based revenue is nearer to 22 percent.
"The EPA risk is discounted and the incremental risk of low
natgas can be offset by export coal opportunities as well as
additional volume opportunities from the production of more gas
domestically," said Benjamin Hartford, senior research associate
at Robert W. Baird in Milwaukee.
Peter Nesvold, a Jefferies & Co analyst, said although
people think the decline in coal is a new dynamic. "It's not."
He said even before this winter's mild weather and low
natural gas prices, coal volumes for CSX Corp were
one-third below their previous peak, yet the company reported
record 2011 earnings and expects similar results this year.
"Coal is not the only commodity the rails haul, and they are
able to resize and/or adjust the network to accommodate the fact
that some types of coal, such as Central Appalachian coal, is
likely in secular decline."
Canadian National Railway hauls thermal coal from
mines in Illinois to utilities in the Midwest and Southeast
United States. To the extent that business has already been hurt
by low natural gas prices and a mild winter, the regulations
could add insult to injury, said Canaccord Genuity analyst David
In 2010, the last year for which the breakdown is readily
available, 43 percent of CN's coal revenue was from shipments
that originated in the United States. In 2011, coal represented
about 7 percent of its total revenue.
Rival Canadian Pacific Railway will not be similarly
affected, because it mostly transports metallurgical coal,
Tyerman said. But there could be an upside for both railways if
the new rules boost exports to Asia.
CP and CN were not immediately available to comment.