(The following story by Bill Freehling appeared at GuruFocus.com on May 5, 2010.)
When Berkshire Hathaway snapped up Burlington Northern Santa Fe Corp. earlier this year, Warren Buffett raved about the bright future of U.S. railroads—particularly those in the west.
An article in today’s Wall Street Journal likely explains part of the reason for his enthusiasm.
The article, headlined “Coal Prices Heat Up in China,” reveals that China is now a huge net importer of coal after years of being a net exporter. The country’s coal imports in March jumped 165 percent from the same period the year before.
Despite all the green talk about windmills, solar power and trash-to-electricity projects, coal remains the fuel that powers the vast majority of the world’s energy needs. More than 70 percent of China’s electricity comes from coal-fired plants, the Journal reports.
Last year China imported about 126 million metric tons of coal, and it’s on track to easily eclipse that this year as the economy picks up steam. New power plants are getting built every day, promising to further drive up the coal demand.
Though Australia has long been the biggest supplier, much of the coal into China is now coming from Wyoming’s Powder River Basin, through which Burlington Northern’s tracks run and go all the way to the west coast—where the coal can be loaded onto ships bound for Asia.
BNSF’s Web site says that more than 90 percent of the coal it hauls comes from the Powder River Basin, “which contains the world’s largest single deposit of low-sulfur coal.”
The new plants that China is building require cleaner-burning coal such as the kind that comes from the PRB. Many of the newer plants are on the east coast of China, where it’s often cheaper to buy coal that comes from the sea compared with coal that arrives via train from China’s remote hinterlands.
In short, though BNSF is never mentioned in the Journal article, it would seemingly be one of the prime beneficiaries of this trend. And this is probably a big reason why Buffett — who has often talked about China’s future growth possibilities — said he likes western railroad companies the best.