COLUMN-Coal demand set to drive new U.S. rail boom: John Kemp

-- John Kemp is a Reuters columnist. The views expressed are his own --

By John Kemp

LONDON, Nov 4 (Reuters) - Warren Buffett's investment in the Burlington Northern Santa Fe (BNSF) railroad is a shrewd move and highlights the tangled relationship between coal, rail and electricity industries. [ID:nN03483590]

It gives Berkshire Hathaway exposure to an industry with formidable entry barriers and pricing power, where capacity constraints will quickly emerge as the economy picks up, and could become severe if coal demand continues to grow in the decade ahead.

* For U.S. railroads, coal is their biggest customer by both tonnage and revenue. It accounted for 44 percent of the total tonnage moved by rail in 2007, and 21 percent of the gross revenue for the major Class I railroads, according to the Surface Transportation Board (STB), which regulates rail rates.

* For miners, rail is the most important mode of transport, taking 71 percent of the total tonnage shipped, far ahead of road (11 percent) and water-based vessels (11 percent).

* Power producers depend on both. Coal-fired plants generated 50 percent of all U.S. electricity last year, far ahead of natural gas (21 percent), nuclear (20 percent) or conventional hydro (6 percent). In most cases, coal moved from the mine to the power plant on a railcar.

UNDER-INVESTMENT, RISING RATES

Before the financial crisis, severe capacity constraints were emerging in the industry. The volume of coal shipped each year rose almost a third between 1995 (625 million tons) and 2007 (850 million tons). Despite efforts to boost efficiency by using larger railcars, running 24 hours per day, and loading coal into "unit trains", the number of railcars originated grew almost a quarter from just over 6 million a year to 7.5 million.