University study outlines short, long-term plans for coal production

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CSXcoal
A CSX Transportation 150-car unit coal train loads at Patriot Coal's Lick Mine in Greenwood, W.Va., on CSX's Pond Fork Subdivision in southern West Virginia.
Chase Gunnoe
CHARLESTON, W.Va. — West Virginia University’s Bureau of Business & Economic Research has released a study outlining the future of coal production in the Mountain State. Published earlier this summer, the report outlines short-term and long-term expectations with coal production and price targets in West Virginia.

And so far, the report’s short-term outlook aligns with CSX Transportation’s most recent second quarter earnings report.

While coal production hit rock bottom in 2016, a recent surge in export shipments has helped rebound a troubled economy throughout the state. Continued declines in utility shipments were offset by an increase in export demands resulting from Cyclone Debbie, a record-setting tropical cyclone that disrupted Australia’s coal mines and export facilities in late March and early April.

Those outages caused China to rely on the United States to pick up the slack while Australia’s infrastructure rebounded, causing a temporary boon for CSX and other railroads.

“Total coal volumes for CSX increased 7 percent in the second quarter of 2017 compared to the same time period last year,” says CSX spokesman Rob Doolittle in a statement to Trains News Wire.

“CSX’s export coal volumes increased in the second quarter as global supply levels and pricing conditions extended strong demand for U.S. coal exports, particularly in the metallurgical portfolio,” he adds.

And most of that coal came from the hills of West Virginia and neighboring Appalachia.

“These broader network trends are indicative of what CSX has observed in central Appalachia, where the preponderance of West Virginia coal is mined,” he says.

Doolittle says that based on the railroad’s volumes from this region throughout the first half of the year, central Appalachia accounts for approximately 25 percent of the railroad’s domestic coal volumes and nearly 50 percent of its export coal volumes.

The railroad now expects to export about 30 million tons of coal for the year.

CSX isn’t the only railroad seeing an increase in coal volumes and revenue.

Norfolk Southern’s recent quarterly report saw a 32-percent increase in coal revenues for the second quarter compared with the same period in 2016. The railroad generated $447 million in revenues from coal shipments in the second quarter of 2017, compared to $339 million in 2016’s second quarter. Coal outperformed all of NS’ other commodity revenues with the exception of merchandise freight and intermodal shipments for the second quarter of 2017.

CSX and Norfolk Southern’s information compliments the university’s report, which calls for moderate improvements in 2017 and 2018.

According to the report, total state coal production should increase to an annual total of more than 89 million short tons for calendar year 2017 – an 11-percent increase from 2016’s production levels.

This year could, in fact, be the best year for production in the short-term future with production estimated at slightly more than 87 million tons in 2018 as metallurgical coal exports recede to normal levels and other domestic, coal-fired power plants reduce their intake of thermal coal, say report writers.

Even though the state’s projected volumes for 2017 are far less than volumes recorded as recently as early-2015, an increase in global steel markets and restructured coal operations in West Virginia is helping contribute to a healthier outlook for the rest of 2017 in comparison to 2016’s volumes.

The university’s research team cites regulatory unknowns and natural gas pricing as potential risks in the short-term, especially with regard to domestic coal production for utility customers.

Doolittle confirmed with Trains News Wire that the railroad did see a decline in domestic volumes.

“In the second quarter, domestic utility coal declined as the competitive loss of short-haul interchange traffic more than offset underlying growth at existing facilities,” says Doolittle.

While the university’s report did shed light on projected volumes for 2017 and 2018, its research team also provided long-term forecasts through 2040.
AugCoalsnapshot
Beyond 2022, the university predicts that coal production will steadily decline from the mid-80 million-ton range in 2025 to around 78 million tons by 2040.

Not only will the volume of coal production shift, but the university also expects to see a transition in where coal is mined, as well.

While the state’s southern coalfields, including former Chesapeake & Ohio, Norfolk & Western, and Virginian Railway branch lines have typically dominated the coal scene, the university is seeing a transition that places more emphasis on coal operations in the northern part of the state.

Coal operations on CSX’s former Baltimore & Ohio lines, including its Grafton, W.Va., terminal have seen an increase in coal shipments and more investments in coal infrastructure. Former Monongahela Railroad territories served by both CSX and Norfolk Southern continue to see unit coal trains on far more predictable schedules than some of the state’s more obscure operations in the southern coalfields.

According to the report, both the northern and southern regions of West Virginia were producing equivalent levels of coal tonnage and the university’s long-term forecast expects northern coal operations to outperform southern facilities even more so by 2040.

The university attributes that transition in part to technological and regulatory factors. The cost of installing utility smokestack scrubbers, or systems that remove sulfur dioxide, nitrogen oxides, and other components have decreased in recent years.

As a result, utility companies can burn lower cost coal mined in northern West Virginia and the Illinois Basin that still meets federal regulations concerning power plant emissions.

While West Virginia’s coal decline is inevitable in the long-term, it appears that 2017 is poised to outperform 2016’s record lows and that the coal industry could be stabilizing, at least marginally, in the coming decade.

As railroads remain in a wait-and-see approach, it seems that the bulk of coal branch line rationalization and declines have taken a backseat in 2017, as railroads find ways to use their existing infrastructure and fine tune their operations to adjust to changes in the coal industry.

See West Virginia University’s full report online with a PDF download.

NEWSWIRETrains News Wire

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