Monday, November 19, 2012

Rail freight prices for coal rise; firms able to pass increasing costs

The US Department of Energy today released historical data on costs of transporting coal via rail to electric power plants. Price increases vary considerably across locations, but at the national level these costs are up 50% in the past decade.
EIA: - The average cost of shipping coal by railroad to power plants increased almost 50% in the United States from 2001 to 2010. Railroad transport accounts for more than 70% of U.S. coal destined to the electric power sector, so changes in rail rates can have an important impact on the cost of coal delivered to power plants. Though they vary significantly, transportation costs accounted for 40% of the average overall cost of coal delivered at electric power plants in 2010.

Source: EIA

A more up-to-date general rail freight data sets (up to Q2-2012) from the Department of Transportation seem to point to even larger increases. Given the shift toward natural gas by US utilities (chart below), shouldn't rail freight prices stabilize (aside from fuel prices)?

Source: EIA

Apparently a great deal of the freight costs have been driven by rising costs of operating railroads. The Association of American Railroads keeps track of price level of inputs to railroad operations: labor, materials, and supplies, and other operating expenses. Excluding fuel costs (which the rail industry charges separately as a "surcharge") the operating costs seem to have risen about as much (on a percentage basis) as the shipping costs paid by the coal companies. Of course the Association of American Railroads has an incentive to pump up the index, but they claim to have some regulatory oversight.

All-inclusive rail operations cost index less fuel (Q4-2007 = 100, source: Association of American Railroads)

This is bad news for the coal industry, particularly if rail firms continue to pass their cost increases to the clients. Except in a few cases, rail demand seems to be sufficient to maintain pricing power. The EIA pointed out that in some cases the cost of shipping is higher than the actual price of coal. It is only a matter of time before natural gas takes a larger share of that business.
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