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Railroads—Integral to the US coal industry’s distribution channel

Xun Yao Chen

A must-know overview of the US thermal (steam) coal industry (Part 6 of 12)

(Continued from Part 5)

Transportation cost

Although mining cost is cheaper in the Interior and Western basins, electricity usage is concentrated on the eastern side of U.S. That means a large percent of the value difference between the more expensive higher-ranked coal in the East and cheaper lower-ranked coal in the West is captured by transportation companies.

Transportation methods

The most efficient way to transport coal from PRB (Powder River Basin) is through Burlington Northern Santa Fe and Union Pacific railroads. Due to high transportation costs, most PRB coal is largely delivered to electricity producers situated west of the Mississippi river. For instance, it costs about ~$30 per short ton to ship coal from the Powder River Basin to Ohio in 2010 (right on the left side of the Appalachia basin). While the additional ~$30 per short ton of transportation cost still makes PRB coal cheaper than Appalachia’s on a short ton basis, recall that PRB coal is of lower rank and heating value.

Transportation east of Mississippi

For deliveries to eastern states, Appalachia coal, supplied primarily by companies such as Arch Coal (ACI), Alpha Natural Resources (ANR), and Consol Energy (CNX), have historically been more competitive than PRB coal. Norfolk Southern (NSS) and CSX Transportation (CSX) are the two main railroads used for transportation, although railroads made up just 56% of total coal transportation east of Mississippi. In cases where sellers and buyers are located near water channels east of Mississippi, barge transportation is often cheaper than rail, while trucks are used for shorter distances.

Pricing dynamics

Because there are few alternatives for companies such as Cloud Peak (CLD), Peabody Energy (BTU), Arch Coal (ACI), and Alpha Natural Resource (ANR) to transport coal more efficiently, coal miners lack leverage over these rail companies. It seems that eastern railroad operators have more pricing power over coal miners because most mines are linked to just one railroad, while there are two railroads connected to the Powder River Basin. That means Appalachia coal miners are placed at a disadvantage, although Powder River Basin and Interior operators will probably be subject to higher pricing power once coal reaches eastern states.

Continue to Part 7

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