(Reuters circulated the following article by Nick Carey on March 16.)
NORTH PLATTE, Neb. — Cameron Scott has no doubt about what comes first in his job as superintendent of the busiest rail yard in the United States.
“Coal is king,” he said.
Union Pacific Corp.’s yard in North Platte handles up to 170 trains a day. It expects coal to account for 70 percent of freight volume coming through there this year, up from 64 percent in 2005.
Forty percent of all of the Omaha-based company’s business passes through this western Nebraska yard, which employs 2,700 people. Checking every foot of rail in sight, Scott said he must accommodate growing demand for coal as the No. 1 U.S. railroad tries to expand capacity.
Higher fuel prices — which hurt the trucking industry more than railroads — are prompting U.S. companies to shift ever more cargo to trains, while rising U.S. imports have further swelled orders. Customers have complained about the resulting delays.
Scott, 43, said he must balance utilities’ need for coal with other services coming through the yard, but added his orders were clear from the day he started this job in November 2004.
“My main task was to keep the coal constantly moving,” he said.
Union Pacific loads and sends out 35 to 40 full coal trains daily at North Platte, compared with five per day in 1985. To increase capacity, the company is laying a third through-line at the yard at a cost of $20 million, which will go into operation in October.
The coal moving though North Platte comes from the Powder River Basin in Wyoming and is popular with U.S. utilities because its low sulfur content helps them meet U.S. government emission requirements. It is also easier, thus cheaper, to mine than coal from other U.S. basins as its thick seams are close to the surface. High natural gas prices have made this coal even more attractive.
Demand for Powder River Basin coal doubled from 200 million tons in 1990 to 400 million in 2005.
Bottlenecks on Union Pacific’s network, exacerbated last year by derailments on a 100-mile stretch of track out of the Powder River Basin that the company operates with No. 2 U.S. railroad Burlington Northern Santa Fe Corp., have led to complaints from customers — including utilities — of delays and unreliable service.
Superintendent Scott said that even more than rail capacity, he was short on locomotives. Union Pacific plans to add 200 to its fleet of 8,000 this year.
SURPRISING TURNAROUND
Chief Financial Officer Robert Knight said U.S. rail companies, which once had been plagued with overcapacity, scaled back their networks in the two decades following industry deregulation in 1980.
And since 2003, U.S. imports have been growing at double-digit annual percentage rates as manufacturers send more work to developing economies like China and India.
High fuel prices, plus a shortage of drivers, made the U.S. trucking industry less attractive. This pushed traffic onto the rails and raised Union Pacific revenues by 11 percent to $13.6 billion in 2005.
“We were surprised by how quickly things turned around,” Knight said.
The company is not alone. Stephen Brown, a corporate finance director at rating agency Fitch Ratings, said for years the four main U.S. railroads – which also include CSX Corp. and Norfolk Southern Corp. — couldn’t justify making significant capacity investments because the returns weren’t there.
“With the revenue picture improving dramatically over the past couple of years railroads are now in a position to make investments … but it’s going to take some time to get those investments in place,” he added.
Union Pacific Chief Executive Jim Young said the company planned to ease network congestion by targeting the worst bottlenecks.
“If we focus on our (bottlenecks), we should see congestion easing across the entire network” Young said.
The company will invest $2.75 billion in maintaining and expanding capacity in 2006, compared with $2.7 billion last year.
Analysts say Union Pacific is taking the right approach.
“It’s clear that UP takes the issue seriously,” said Tony Hatch of ABH Consulting. “It takes time and money to lay new track, so they have to be sure of long-term returns.”
CFO Knight said it cost the company between $1.5 million and $2 million to lay a mile of track, an investment that lasts decades, and $1.8 billion annually just to maintain the network.
Officials at both Burlington Northern and Union Pacific said they were boosting capacity to meet utilities’ demand for Powder River Basin coal, but they were also looking at how that demand would change long term.
“We can’t make investments (in new track) based just on demand today, but how it will look 10 years from now and beyond,” said Thomas Kraemer, head of Burlington Northern’s coal business.
While waiting for new capacity, Union Pacific managers like Scott say they are working with what they have to increase efficiency.
“I have to squeeze every inch of capacity out of the rails I have before I can ask for more,” he said. “And although as superintendent I would always argue I need more rails, I have room to squeeze.”