(The following article by Christopher Dinsmore was posted on the Virginian-Pilot website on November 9.)
NORFOLK, Va. — The stream of black gold that once flowed steadily from the mountains of Appalachia to the port of Hampton Roads trickled to its lowest level last year.
Coal volumes shipped through Hampton Roads’ three coal terminals fell to 21.9 million tons, a third of the volume handled a decade ago. Norfolk Southern Corp., the railroad based in Norfolk and the region’s biggest player in the coal export business, saw its export shipments slip to 11.3 million tons, the lowest level in decades.
But the tide may be turning, particularly for Norfolk Southern, which owns the sprawling Lamberts Point coal terminal in Norfolk. The railroad’s export coal tonnage was up 42 percent in the third quarter and 15 percent through the first nine months of the year.
One quarter does not a turnaround make. Still, several trends could make U.S. coal competitive in the important European market again, including a weakened U.S. dollar, China’s surging economy and a leap in ocean freight rates.
David R. Goode, Norfolk Southern’s chairman, president and chief executive officer, voiced optimism about export coal for the first time in several years in meeting 11 days ago with rail stock analysts in New York.
“I think we’re coming out of the trough,” Goode said.
The railroad isn’t alone in expecting a rebound.
“It ought to swing the other way a bit,” said Bill Watson of the U.S. Energy Information Administration’s coal information team.
The biggest problem may be finding the coal to export given domestic demand, production problems and changes in the business as a result of export coal’s decline.
“There are some challenges getting a supply of U.S. coal to meet that market.” Goode told the analysts.
Not so long ago, steel makers in Europe, South America and Asia prized central Appalachian coal for its quality. Coal colliers stacked up at anchorage in the Chesapeake Bay waiting to load.
Shipments of coal through Hampton Roads peaked at 65 million tons in 1991.
With high demand came high prices, and international competition began to whittle away at American coal’s market.
Environmental pressures also kept U.S. mining costs high.
Cheaper coals from Australia, South Africa and China, low ocean freight rates and the strength of the U.S. dollar from the mid-1990s to last year all contributed to the steady erosion in exports of Appalachian coal.
The loading volume at Norfolk Southern’s Lamberts Point terminal fell from a high of 39.5 million tons in 1990 to 9.9 million tons in 2002. Employment there dropped from about 1,200 to 450 workers.
The decline in exports also led to less work for the region’s tug boat operators, coal testing labs, ship suppliers and other support businesses.
Coal is also shipped through two terminals in Newport News — Dominion Terminal Associates and Pier IX Terminal — both served by Norfolk Southern rival CSX Transportation.
Norfolk Southern’s apparent rebound this year may be a rearrangement of the deck chairs on a sinking ship, however. While its export volume is up, Dominion Terminals’ is down.
And the port’s total coal tonnage is essentially flat at 17.6 million tons through October compared with last year, according to a report by T. Parker Host Inc., a Norfolk shipping agency.
Last year, Dominion Terminal shipped 6.4 million tons of coal; this year, it might handle 5.5 million tons, said Charles E. Brinley, Dominion Terminal?s president. “All that reduction of business is in the export arena,” Brinley said.
But Brinley acknowledged signs of positive trends that may make U.S. coals attractive again, including the rise in ocean freight rates and the decline of the U.S. dollar compared with the Australian dollar.
“Things are definitely on the rise,” said Mark H. Bower, Norfolk Southern’s assistant vice president for export and metallurgical coal marketing. “There are some forces out there that have the potential to make things look pretty good for the U.S. I’m not saying we’ll go back to 30 million tons a year, but we’ll be up.”
Like other trends in the global economy and world trade, the shift began with China and its economic boom.
A rapidly industrializing China is growing at 8 percent a year. In the past few years, it doubled the size of its steel industry.
A few years ago, Chinese metallurgical coal and coke — a coal by-product used for making steel — was being exported inexpensively. Today, it’s either not being offered for export or it’s expensive, Bower said.
China’s economic expansion also is boosting ocean freight rates.
“Because so much raw material is being sucked into China, ocean freight rates have tripled in the past 18 months,” Bower said.
There’s essentially a shortage of the bulk ships used to carry coal as a result of the boom in China.
It now costs about $40 a ton to ship Australian coal to northern European ports, while the rate from Norfolk to those ports is about $20 a ton, said David Host, executive vice president of T. Parker Host.
Comparing two similar quality coals, the Australian coal would cost $48 a ton delivered onto a ship, while the U.S. coal would be $53. Australia’s current $5 a ton price advantage effectively would be erased by the $20 difference in shipping, Host said.
“Freight rates are as high as they have been in 10 years, and that always brings the U.S. back into competition in Europe,” he said.
Add to that the U.S. dollar’s decline relative to the Australian dollar, and the price gap gets even wider.
“It makes our coal cheaper and foreign coals more costly,” said the Energy Information Administration?s Watson.
The Australian dollar was on par with the U.S. dollar in the early 1990s but fell as low as 50 cents on the dollar. It’s since rebounded to about 70 cents on the dollar as rising domestic deficits have driven down the U.S. dollar.
“Those things have combined to increase the interest of European buyers in U.S. coal,” Bower said. “There’s no question that there will be increased demand from Europe for U.S. coals.”
He declined to predict by how much. Delivery contracts for the next coal fiscal year, which starts April 1, are now being negotiated.
There also are questions about the supply of coal.
“One of the biggest problems is the supply of coal,” Host said. “We’re having trouble getting coal for export from every producer we’re involved with.”
Several key mines that serve the export market are having production problems.
Smaller, older mines that produced the low-volatility coal favored by European steel makers closed as exports withered. And the domestic market for steel and utility coal remains strong, which makes competing in the volatile international arena less attractive to coal producers.
“The market for U.S. coals has tightened, especially for low-volatile coking coals,” Donald W. Seale, Norfolk Southern?s senior vice president for merchandise marketing, told analysts at the New York meeting. “Looking at the fourth quarter, demand for and the price of steam coal in the domestic market continues to keep these coals out of the export market.”
Also, production problems in several key mines is cutting the supply.
Brinley wonders whether most producers are willing to play in the volatile export market again.
“The domestic market continues to be very strong,” said Wilson J. Browning Jr., president of W.J. Browning Co., a Norfolk shipping agency that has dropped out of the coal business. “It’s easier to sell coal on a 10-year contract to XYZ utility company than to play the yearly export contract game.”
After several years of minimal export demand, the infrastructure to support coal exports also has shrunk.
“Ten years ago, there were 40 exporters; today, there are eight,” Host said.
In the late 1990s, mining companies were so pressed for profits that many cut their export coal capacity, Browning said. Those cutbacks may be the biggest threat to a recovery.
Even Norfolk Southern trimmed resources available for coal exports, laying off workers at Lamberts Point and cutting the number of hopper cars on its system.
“Based on the economics, Europe ought to be buying everything here right now, but these things are hard to turn,” Browning said.The conditions have to hold for a while for it to make economic sense for coal producers to get back in the export business, he said.
He wonders how long the U.S. dollar will be down and said ocean freight rates could begin to rebound within a year as more bulk ships are built.
“Coal exports could be coming out of the trough, or it could be a short-term blip, or it could be that enough capacity was taken out that we can’t get out of the trough,” Browning said.
But Norfolk Southern’s Bower is confident in the supply.
“Is there low-vol coal available for export? The answer is yes,” Bower said.