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EPA rules may push coal companies to boost exports
March 28, 2012 / 10:00 PM / in 6 years

EPA rules may push coal companies to boost exports

* EPA rules seen prompting more coal exports

* Railroads seen benefiting too

* Coal, railroad stocks drop

By Lynn Adler and Steve James

NEW YORK, March 28 (Reuters) - Tougher emission rules at U.S. power stations will likely force coal companies to make up for lost domestic customers by exporting more to countries in Asia where environmental regulations are less stringent, analysts said.

Railroads, which haul about 70 percent of U.S. coal, could also try to mitigate the damage from lower shipments to utilities by carrying more coal for exports.

Proposed rules that will limit new power plants’ CO2 emissions, the first move by the world’s largest economy to regulate the gas blamed for contributing to global warming, were announced Tuesday by the Environmental Protection Agency (EPA).. Currently, coal-fired plants produce about 44 percent of U.S. electricity

Wall Street saw the rule change as a short-term negative for coal and stocks fell on Wednesday. Arch Coal’s stock dropped 4 percent to close at $10.80 and Peabody Energy fell 3.4 percent to $28.83 on the New York Stock Exchange. Alpha Natural Resources was 4.1 percent lower at $14.87 and Consol Energy was off 1.9 percent at $33.33.

Railroad shares also declined. CSX Corp fell 2.4 percent to $21.52 and Union Pacific dropped 2.3 percent to $107.91.

Michael Dudas, a coal industry analyst at Sterne Agee, said the EPA rules, likely to come into effect in a year, will force the coal industry to cut production, but also ramp up exports. Last year exports accounted for about 10 percent of total U.S. coal production of 811 million tons, according to the Energy Dept.

“The U.S. will become a much more important supplier to the world,” he said, noting that demand was high in Asia for both thermal coal, used in power generation and metallurgical coal, which is used to make steel.

“We have the capacity to export more and the industry is trying to develop more ports on the West Coast for the coal from the Powder River Basin (of Wyoming and Montana),” Dudas said.

Lucas Pipes, of Brean Murray, Carret & Co, agreed coal companies could compensate for lost domestic customers through exports, but said a U.S. west coast coal terminal was essential. Currently, there are no U.S. west coast coal ports and the Canadian one at Ridley, British Columbia, was not competitive for U.S. producers.

“The biggest potential for exports to Asia would be PRB coal through the west coast,” he said. “That’s where the focus is, but that won’t happen before 2016.”

He noted Peabody has an agreement with a developer for a port in Washington state that could handle 25 million tons.

Pipes said there were adequate rail lines to the region but the bigger issue would likely be permitting for the port because of strong environmental opposition to “exporting climate change.”


U.S. railroads will carry less domestic utility coal under the EPA plan to cut carbon emissions, but analysts believe they too can make up for lost volume by carrying more export coal.

CSX’s Chief Financial Officer Fredrik Eliasson eased market fears this month by forecasting record first-quarter and 2012 earnings even as its utility coal volume was slumping as much as 30 percent in the first quarter.

Export coal would likely match last year’s record 40 million tons, he said. Export coal volume in the first quarter is running about 5 percent above the year-ago pace.

CSX and Norfolk Southern gained about 30 percent of their total revenue from coal shipments, while Union Pacific’s coal-based revenue is nearer to 22 percent.

“The EPA risk is discounted and the incremental risk of low natgas can be offset by export coal opportunities as well as additional volume opportunities from the production of more gas domestically,” said Benjamin Hartford, senior research associate at Robert W. Baird in Milwaukee.

Peter Nesvold, a Jefferies & Co analyst, said although people think the decline in coal is a new dynamic. “It’s not.”

He said even before this winter’s mild weather and low natural gas prices, coal volumes for CSX Corp were one-third below their previous peak, yet the company reported record 2011 earnings and expects similar results this year.

“Coal is not the only commodity the rails haul, and they are able to resize and/or adjust the network to accommodate the fact that some types of coal, such as Central Appalachian coal, is likely in secular decline.”

Canadian National Railway hauls thermal coal from mines in Illinois to utilities in the Midwest and Southeast United States. To the extent that business has already been hurt by low natural gas prices and a mild winter, the regulations could add insult to injury, said Canaccord Genuity analyst David Tyerman.

In 2010, the last year for which the breakdown is readily available, 43 percent of CN’s coal revenue was from shipments that originated in the United States. In 2011, coal represented about 7 percent of its total revenue.

Rival Canadian Pacific Railway will not be similarly affected, because it mostly transports metallurgical coal, Tyerman said. But there could be an upside for both railways if the new rules boost exports to Asia.

CP and CN were not immediately available to comment.

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