Is Saving Coal a Fool’s Errand?

Written by Jim Blaze, Contributing Editor for

image description

Shutterstock photo

There is a great deal of passion about coal as a railroad commodity. Some suggest that the railroads have been in denial about coal’s decline as a business sector. Yet, I bore witness to an awareness of the risks of the coal decline a long time ago. Coal’s declining role was seen by two railroads about 25 years ago. It was a footnoted statistical analysis that only a few strategic rail planners saw as prudent due diligence.

David LeVan today.

Among the participants who probed the outlook regarding coal’s role in the energy mix were Conrail railroaders David LeVan, the last CEO before the Norfolk Southern/CSX split, and Al Braverman, a Senior Director . Baverman and I jointly worked on modernizing costing formulas used to rank capex projects, Authorities for Expenditures analytics, Activity Based Costing and merger and acquisition pre-merger benefit estimates.

Jim McClellan

The late NS strategic planner Jim McClellan confided that he also probed the changing landscape. Coal’s possible decline was a factor in NS’s market diversification strategy and the acquisition of 58% of Conrail. Coal was a high-margin legacy business for NS. Conrail offered more general merchandise and intermodal balance.

Photo courtesy AQT Solutions

While much of the strategic thinking almost three decades ago was beginning to be influenced by environmental issues, a few thinkers were concerned about the underlying economics of coal-fired electricity. Why worry specifically about coal-fired power stations? Because about 90% of the coal hauled in the U.S. was thermal coal for that purpose. Metallurgical quality coal used for the steel industry was often the highest profit margin coal for railroads. But the volume of metallurgical coal wasn’t as large as thermal coal used to generate electricity. Why the intellectual challenge to coal’s future so long ago? After all, coal hauled by rail continued to increase in volume for quite some time. The amount of Powder River coal hauled out of Wyoming and Montana continued to grow for another 15 years after the initial challenges were quietly discussed.

Inferential Thought Process

The thinking that brought on the strategic 1992-94 questions came from a contrarian look at future markets. Some call it “inferential thinking,” which large companies seldom practice. The essence is to challenge how political, economic or business forces are beginning to signal changes—even if things look normal. The changes are often so small that they only appear as footnotes on the back pages of technical journals and in the business sections of newspapers. (Recall that 1992-94 was when printed media was still the institutional way that news was circulated.) A so-called “outsider,” Andre W. Alkiewicz of Perception International, advanced the process of using inferential thinking and remote data points to assess the future at Conrail. Alkiewicz and his colleagues offered contrary thinking about future trends through their small company. There was a lot of resistance. After all, departmental and business unit empires are threatened by such thinking. The database supporting inferred conclusions was not as robust as those supporting traditional thinking. To be inferential, one had to be open to unconventional thoughts and outcomes. Others often resisted this quirky type of imagining unusual outcomes, in part because they couldn’t intellectually adapt to a different market-based future—at least not easily. However, note that within two years of the inferential thinking regarding coal, Conrail was split 58%/42% between NS and CSX. So what evidence was available prior to, say, 2000?

Figure 1: Changes in electric power generation have rippled through the coal and rail industries. Source: U.S. Energy Information Administration

If we look closely at Figure 1, we can see a small change in the slope of actual coal traffic growth. It occurred roughly between 1988 and 1995. It wasn’t very big. It was later offset by a rapid upslope pattern into 2006. The temporary slowing could easily be dismissed since the rate of growth then increased. In other words, it was easy to ignore the change. But for a long-life-asset sector like railroading, the return to higher growth from areas like the Powder River Basin seemed reassuring. Why worry?

Shutterstock photo

In large organizations, the majority of the managers in charge cling to status quo assumptions. Their fallback position is often, “even in a worsening case, we can milk the assets in place. Why worry? Inferential thinking is too speculative. Let’s carry on with the status quo.” Jumping ahead in time, prior to about 2010, several things were occurring. Little of this was front-page news. In 2000, coal-fired power plants generated more than half of U.S. electricity. Why worry in 2000? After all, new coal-fired plants were on the drawing board, and coal was usually the cheapest source of energy when converted to price per kilowatt hour of domestic electricity. But across the U.S., electric power companies began to slowly move away from coal. Who foresaw that coal-fired electricity would drop from about 52% in 2000 toward less than 25% by 2020?

Back in 1992, few foresaw the extreme drop in eastern U.S. Appalachian coal mining. And it is likely that almost nobody forecast a competitive threat from natural gas—not in 1994. Few energy sector experts saw the fracking revolution even as late as 2007. Now, about 37% of the nation’s electricity is natural-gas-sourced. How and why is interesting. Perhaps as much as 25% of the nation’s natural gas is an offshoot from crude oil production. That’s created a huge natural gas supply—far greater than the nation’s natural gas market demand. The result? A huge discount in the price of natural gas. Who saw that outcome early on, before it was front-page news?

For the railroads, the impact is that customers are shifting away from coal-fired, rail-supplied power stations. Between 2010-2019, some estimate that more than 500 coal-fired power stations were closed or announced as closing soon. Most were or are supplied with coal by rail. The drop translates to the range of 100 gigawatts of electric generating power that was at one time powered by rail-delivered coal.

BNSF unit coal train on Walker Hill, Powder River Basin. Photo courtesy BNSF.

Rail-hauled coal probably will not recover those market location losses. One reason is that once a power station converts its boilers to natural gas (or even to oil), it is too expensive to redesign and/or replace those modernized units—not without a subsidy or a radical and unexpected coal technology breakthrough (i.e. so-called “clean coal”). Conclusions Looking toward 2030, here are a few inferential conclusions: The volume of coal hauled by rail is unlikely to return to pre-2010 levels. No one is predicting that. This has a continuing impact upon the railroad car fleet and its replacement rate. The Big Seven Class I railroads have managed to survive the coal losses, and even improve their financial results, mostly by rationalizing their physical assets, storing locomotives and coal hopper and gondola cars, and cutting the size of their workforces. The decline in coal has created a virtual parking lot of used coal gondolas hoppers that are in good condition. These excess railcars are a potential bargain for international coal shippers that could use the railcars on foreign standard-gauge railroads. For a little more the scrap price, plus shipping charges, a foreign railway can buy railcars with perhaps 25 years of remaining life. That’s a great deal, since new railcars cost more than $100,000 each. In the wake of coal’s decline (and other structural changes), the railroads reduced their fixed asset base (balance sheet assets) and lowered their variable costs of crews, fuel and overhead. But can they continue cost cutting indefinitely? There will be practical limits. And the railroad supply industry will be impacted. What is their strategic plan? On the upside, we can inferentially conclude that coal movements are not vanishing. There is still a great deal of coal moved by rail. What is your inferential thinking telling you about coal and railroading’s future?

Independent railway economist, Railway Age Contributing Editor and FreightWaves author Jim Blaze has been in the railroad industry for more than 40 years. Trained in logistics, he served seven years with the Illinois DOT as a Chicago long-range freight planner and almost two years with the USRA technical staff in Washington, D.C. Jim then spent 21 years with Conrail in cross-functional strategic roles from branch line economics to mergers, IT, logistics, and corporate change. He followed this with 20 years of international consulting at rail engineering firm Zeta-Tech Associated. Jim is a Magna cum Laude Graduate of St Anselm’s College with a master’s degree from the University of Chicago. Married with six children, he lives outside of Philadelphia. “This column reflects my continued passion for the future of railroading as a competitive industry,” says Jim. “Only by occasionally challenging our institutions can we probe for better quality and performance. My opinions are my own, independent of Railway Age and FreightWaves. As always, contrary business opinions are welcome.”

Photo by Jim Allen, FreightWaves.
Updated: January 28, 2020 — 11:15 AM

Leave a Reply

Your email address will not be published. Required fields are marked *

Auto and Homeowner’s Insurance Program for TCU/IAM members!

TCU/IAM members take advantage of discounted activities with Union Plus!

  • Up to 25% on Car Rentals with Avis, Budget, Hertz, Dollar, Thrifty and Payless
  • Book flights and hotels together and save with Expedia
  • Tours and restaurant discounts
  • Discounts for water/theme parks, concerts and sporting events tickets
  • Save up to 24% on movie theater eTickets

Start Your Savings Here!

December 2023