Norfolk Southern weathers warm Q1 that froze U.S. coal burn

Norfolk Southern Corp. (NYSE: NSC), like other U.S. railroads, saw a sharp fall in domestic thermal coal movements in the first quarter as power generators cut back on coal usage due to coal-to-gas switching and a mild winter that cut into coal burn for winter heating.

Norfolk Southern Chief Marketing Officer Don Seale said during an April 24 earnings call that coal revenue for the first quarter of $766m was down $50m or 6% due primarily to a 12% decline in volume. Utility coal loads were down 17% during the quarter. NS is one of two major railroads in the eastern U.S. and hauls a lot of coal to power generators in that region and to export facilities around Norfolk, Va., and Baltimore, Md.

“This was the warmest first quarter on record according to NOAA, with records dating as far back as 1895,” Seale said. “You’ll note that heating degree days within the NS service region were down 27% for the quarter as compared to 2011, and also down 26% compared to the normal range. March, in particular, was a very warm month, officially the warmest on record in the contiguous U.S., and heating degree days during March alone were down by 47% versus last year.”

On the plus side, NS handled over 600,000 tons of new export steam coal business during the first quarter. Low domestic demand for steam coal and excess inventories led coal producers to opt to ship thermal coal to overseas markets, he noted.

Export metallurgical coal moves on average about 480 miles, while domestic met moves about 40% fewer miles. Conversely, in the utility segment, coal to southern utilities averages nearly 200 more miles per load than coal to the northern utilities served by NS. Obviously, changes in volume between the market segments will impact revenue per car for coal in the network, Seale noted.

In the coal segment, NS does not anticipate the need for appreciable inventory replenishment in it utility market during the shoulder market months since stockpiles remain at target levels across the region. “But we do expect offsetting demand in our robust domestic metallurgical market due to increased domestic steel production,” Seale added. “And on the export front, we expect new steam coal opportunities to partially offset weaker demand in the European met market. We are also encouraged by recent improvement in high-end world met coal prices, which may be signaling a tighter supply chain for this product. But clearly, in the short run, post April 1 of this year, we are pricing transportation service in this sector in a weaker international met coal market than existed last year.”

Based on recent generation trends within the NS service region, the railroad estimates that weak electricity demand accounted for roughly 75% of the volume decline in its utility market, while competition due to natural gas had less of an impact. Coal burn at eastern U.S. utilities was down over 28% through the first two months of the year, primarily as a result of this very mild weather pattern and competition from 10-year lows in natural gas prices. Within the NS utility network, volumes to the longer haul southern utility plants were down 24%, while loads to Northern utilities were down 11%. Higher demand in the domestic met coal market, up 19% for the quarter, helped to partially offset the decline in utility coal. Domestic met volumes were up in response to increased domestic steel production, which was up 7% in the quarter.

Seale, asked if NS might have to re-work domestic thermal coal haul prices this year to account for the weak market, said: “[W]e do not have any utility coal contracts that will be renegotiated this year. So we will have to wait to see what the market looks like when those contracts are renegotiated.”

Asked about the market coal mix for first-quarter export movements, Seale responded: “The steam coal component and the met coal component in the first quarter, we were 93% metallurgical coal going into the export market. The steam coal that we are targeting is predominantly Western Europe. Some could make its way to Asia as well. And it originates in much of the same production territory that we originate the met coal in. So it would be Central App, Northern App, Illinois Basin.”

Seale also fielded a question about whether met coal prices have stabilized around $210 per ton, and whether the trend within the first quarter was either up or down on volume. “Our January export numbers were pretty close to our January 2011 numbers,” Seale said. “We were down in February significantly, and then back up close to 2011 numbers in March. So it was a choppy distribution of traffic. To the first part of your question, we have seen in recent weeks the metallurgical coal price in the world market move from $210, an increase of about $10 a ton, back up to about $220 on the high-end of met coal coming out of Australia, so that is encouraging. The second thing we’re seeing in Australia is that during the latter part of March, we had heavy rains, floods and labor disruptions and we’ve seen some force majeure of metallurgical coal for BHP and others coming into the market. So we’re not declaring that the market is turned, but those signals are positive for us.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.