| June 24
June 24 Coal miners and power companies are both
suffering as railroads struggle to clear a backlog of coal stuck
in the Powder River Basin in Wyoming and Montana after the
harshest winter in over a decade.
The coal shortage is forcing utilities to burn more
expensive natural gas and eroding profits for coal miners.
Peabody Energy Corp 's first-quarter loss more than
doubled, while Arch Coal Inc's net loss widened 77
percent. Cloud Peak Energy Inc was pushed to a loss in
the three months ended March 31 after 2 quarters of profit.
The only way to get the coal out of the basin is by rail and
just two operators - Union Pacific Corp and Berkshire
Hathaway Inc's Burlington Northern Santa Fe (BNSF) -
transport coal from the region.
"Demand for PRB coal has been much stronger than the
railroads were prepared to handle and stronger than utilities
had expected going into this year", said Ted O'Brien, president
at coal analytics company Doyle Trading Consultants in New York,
referring to coal from the Powder River Basin, the source of
about 40 percent of U.S. coal supply.
Railroads are also handling rising shipments of oil and of
grain, limiting their capacity to ship coal.
"We have been constrained to 125 cars per train when we are
able to handle 136 train sets," said Curt Pearson, spokesman for
North Dakota-based utility Basin Electric Power Cooperative.
While railroads are buying more locomotives to ease
bottlenecks, analysts and investors said problems are likely to
persist until the end of the year.
"Coal producers are definitely constraining the amount of
volumes they are able to bring to market," said David Jackson, a
portfolio manager at Philadelphia-based Penn Capital Management.
Cloud Peak, all of whose three mines are in the PRB, cut its
forecast for full-year production by 2 million tons from the top
end of its earlier forecast of 86 million to 92 million tons in
Arch Coal Inc said in April that it could have
shipped 4 million to 5 million more tons of coal between the
fourth quarter and first quarter if it weren't for the rail
COAL & UTILITY WOES
"Our coal stockpile is adequate but it is certainly less
than desired and this is partially the result of the lowered
velocity of the coal trains," said Basin Electric Power
Cooperative spokesperson Curt Pearson.
Basin Electric is the managing partner and part owner of the
Laramie River Station, located east of Wheatland, Wyoming. The
plant has three coal-fired units.
"We would hope to see a renewal of more frequent and larger
train sets in summer or early fall, before the winter, we do
need to build our stockpile," Pearson said, adding that the
company was working with BNSF on a daily basis to resolve the
Coal advocacy group Western Coal Traffic League, which
includes utilities such as Berkshire Hathaway's MidAmerican
Energy Co petitioned the Surface Transportation Board
in March about what it called the "BNSF Railway Service Crisis."
It said it was "deeply concerned" about BNSF's ability to
deliver coal through the summer months and that many members of
the group feared they would run out of coal soon and force them
to shut many plants.
The U.S. Energy Information Administration forecast 108
million short tons (MMst) of power sector coal inventories for
August 2014. That would be the lowest monthly level since
February 2006 and nearly 46 MMst lower than last August's
stockpiles, according to its short-term energy outlook dated
June 10. (1.usa.gov/1eEZgbw)
Extreme cold affected the performance of air brakes,
resulting in shorter trains and fewer cars, while the snow
short-circuited electric motors, froze switches and kept crews
from reaching locomotives, according to a report by Wood
Mackenzie. Keeping coal cars outside as they waited to be
unloaded caused the coal to freeze, causing delays in getting
the coal off the cars, the report said.
Slow delivery of coal is also forcing utilities to cut back
on coal and preserve some inventories for peak summer months,
forcing them to use more costly natural gas.
Delivered coal prices are at about $2 per million British
thermal units (mmBtu), nearly half those of natural gas,
which is trading at about $4 per mmBtu.
Utilities are more likely to turn to natural gas instead of
buying coal from other basins as most plants are built to burn
one type of coal, said Matthew Preston, principal analyst at
Thermal coal demand is also expected to fall sharply, thanks
to a new U.S. mandate that requires the power sector to cut
carbon emissions by 30 percent by 2030. But the ruling is
unlikely to affect current demand given the long compliance
NOT THERE YET
To help speed up coal deliveries, BNSF has earmarked $5
billion as capital expenditure, a large portion of which will go
toward buying locomotives.
BNSF, which analysts say is the worst-hit railroad in the
region, also plans to add additional tracks and is targeting a
return to 2013 service levels by the fourth quarter.
"Railroads recognize the problems in terms of insufficient
labor and equipment to handle the volume, and they've pledged to
fix it, but they're not there yet," Alpha Natural said in an
Union Pacific's coal volume is up 5.5 percent year-to-date,
which the company said was higher than it had anticipated.
The company is planning to invest around $4.1 billion this
year, which is about $500 million higher than in 2013.
"Our train velocity is not yet back to normal or goal, but
we are working diligently to restore operations to normal,"
Union Pacific spokeswoman Stephanie Bissell Serkhoshian said in
(Editing by Sayantani Ghosh in Bangalore and John Pickering in