At the Canadian National Railway (TSX: CNR) (NYSE: CNI), domestic thermal coal movements are in secular decline, with coal producers losing power generation share to abundant cheap long-term shale gas supply, said CN officials during an April 23 first-quarter earnings call.
At CN, domestic thermal coal is already less than 2% of total company revenue, the company pointed out.
On the earnings call were officials including Claude Mongeau, President and CEO; and J.J. Ruest, Executive Vice President and Chief Marketing Officer.
Ruest noted that coal revenue in the first qaurter was sequentially improved from the fourth quarter of last year and was up 18% in revenue from the first quarter of last year. There is a permanent shift in the coal business from short-haul domestic movement to long-haul export, he added. Therefore, in the first quarter of this year, CN’s coal carloads were down 11%, while its total revenue per ton mile volume was up 19% for the quarter since the average length of haul increased 32%. Export is the story for the CN coal franchise, through long-haul export of thermal and coking coal via Vancouver and Rupert in British Columbia, and Convent in Louisiana.
CN last year sold the Convent terminal to coal operator Chris Cline, but its Illinois Central rail unit has the right to run coal into the terminal out of Cline’s rapidly-expanding mines in Illinois.
Mongeau said what really drives a lot of dollars is the longer haul. Like Powder River Basin coal coming to CN via the interchange at Edmonton or via Vancouver. The export facility at Rupert is expanding and has had some issues but it’s still “cranking a whole lot more product than it used to, and the future is bright for Ridley,” he added. The terminal in Vancouver is also expanding.
“And don’t forget also our terminal in Convent,” Mongeau said. “When we sold that terminal, we sold it to a very good operator, Cline and Foresight Energy. They’re actually running this terminal harder than we did ourselves. And because the domestic market is weakening, like it is for everybody else, they have low-cost high-Btu coal. And they are making efforts to sell some of that in Asia, and we saw some of that in the first quarter.”
Asked whether exports are coming under pressure due to some weakening demand and prices, Mongeau said: “Well, what we see is that any commodity market goes up and down. And I think the price of met coal, for example, at some point was probably higher than what it could be sustained at. And as you would see in any market, whether it’s the potash or any other world commodities, it was up and down.” He said the price of coking coal is still at a level where the mine operator can still make a “decent profit.”
One analyst noted that PRB coal stockpiles are above normal, while Canadian met coal and thermal coal exports are very strong. Ruest was asked for comment on coal revenues per ton mile (RTMs) and pricing going forward, and any impacts on PRB coal shipments via Prince Rupert.
“When you look at the CN coal business, looking at the carload is somewhat misleading because our real story is in RTM,” Ruest said. “So you look at the RTM, you really get a sense of where our revenues are heading. While at looking at carload, you won’t get that. The PRB coal, your number 2 question, PRB coal is still moving via Rupert for export, mostly into Asia and obviously, China.” As for whether there might be any lowered rail haul prices to respond to the weakening market, Ruest said simply “we are not on that page.”
Canadian National Railway and its operating railway subsidiaries span Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mexico, serving the ports of Vancouver, Prince Rupert, B.C., Montreal, Halifax, New Orleans and Mobile, Ala.
In August 2011, the company sold substantially all of the assets of IC RailMarine Terminal Co. (ICRMT), an indirect subsidiary of the company, to Raven Energy LLC, an affiliate of Foresight Energy and the Cline Group (Cline), for cash proceeds of C$70m (US$73m) before transaction costs. ICRMT is located on the east bank of the Mississippi River and stores and transfers bulk commodities and liquids between rail, ship and barge, serving customers in North American and global markets. Under the sale agreement, the CN will benefit from a 10-year rail transportation agreement with Savatran LLC, an affiliate of Foresight and Cline, to haul a minimum annual volume of coal from four Illinois mines to the ICRMT transfer facility.