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Coal Sets Sail

Global markets affect domestic prices, exports and infrastructure.

Fortnightly Magazine - August 2008

investments can be achieved in the short-term, investment decisions may be simple. However, many major capital investments require utilization over a significant time period to provide expected returns, a situation that brings more risk into play as the future of the coal industry is very uncertain and capital-intensive industries such as the railroad industry can’t afford to misallocate resources.

Recent infrastructure improvements to rail lines serving the Powder River Basin (PRB) are a perfect example. Despite market perceptions that rail capacity needed expansion, western rail operators ignored suggestions until western derailments and resulting supply shortages and high prices slammed coal buyers in late 2005. Only then did the railroads take a long-term look at the industry and decide that with CAPP production in an overall decline and sulfur and expansion constraints sure to be a factor in the future for other basins, the PRB was going to be partly responsible for increasing supply to the east. Particularly in times of unforeseen shortages in coal supply, their investments would provide solid returns. Railroads have since invested large amounts of money to improve transportation in and out of the PRB.

Already PRB transportation reliability has improved since these changes have been incorporated, despite a number of unexpected transportation issues in the West. Deliveries on the year are up, and suppliers, consumers and transportation carriers are much more comfortable. And now that more Eastern coal is moving overseas, the West has an opportunity to meet some of that lost domestic supply.

The global energy market now decisively includes coal and all those involved are dependent on outside factors to keep supply and demand in balance and prices under control. Current market dynamics are evidence that when unexpected situations arise, extreme volatility can result. The current market and its ability to sustain itself is dependent on a large number and variety of factors ranging from coal production to transportation rates to the willingness of some entities to make investments in unaccustomed areas such as transportation and export infrastructure.