News headlines are often just the tip of an iceberg, when, like an iceberg, about 90 percent of the story is still below the surface. This has been especially true with recent news stories related to the coal sector, which read like front line battlefield dispatches.
Examples include “Coal Firm to Shut Mines, Shed Jobs,” and “Coal-Fired Plants Mothballed By Gas Glut.” The implications of this for transport providers like railroads and barge lines that are dependent on coal are significant.
The news trickling in for the coal sector, particularly for the Appalachian sector but also for Western coal, is mostly bad. Natural gas prices continue to remain near $3 per million cubic feet, well below the $8 price of several years ago that made coal-fired generation plants look secure. If depressed gas prices continue, large-scale dismemberment of coal-fired plants will continue to affect not only small peaking plants but larger base load plants as well.
For example, the W.H. Sammis plant on the Ohio River, FirstEnergy’s largest power generation facility in Ohio, is a base load coal plant that is being idled to a standby capability because of lower cost gas. At current gas prices, utilities can generate electricity for about two cents a kilowatt, less than half the cost of a coal plant. The idling of the W.H. Sammis plant appears to be the tip of the iceberg. More utilities plan to idle big base load coal plants and rely on natural gas.
The effect on coal producers has been severe. One domestic operator declared bankruptcy while others have seen stock market values plummet along with coal prices and production. Domestic coal demand is expected to decline by 10 percent this year, or about 100 million tons.
For barge lines, the effect from a decrease in coal shipments are like the unexposed part of an iceberg. Most barge lines are not publicly traded, so we won’t get to see their financials.
However, the effect on railroads is quite visible. Expect major coal sector railroads to struggle as they announce decreased earnings from coal transport and the weak economy. It’s likely that barge lines will quietly follow.