Insights: Coal Industry

Written by The FTR Experts | 6/23/22 7:12 PM

Coal will continue to be a significant commodity for railroads in the immediate future, but it will never return to the dominant position that it held in the twentieth century.

There are three major coal-producing regions in the United States:

Eastern coal is produced in the Appalachians, in a band running from Pennsylvania down into central Alabama.
Interior coal comes chiefly from western Indiana, eastern Illinois, western Kentucky, and Missouri.
Western coal comes from a band running from the Powder River Basin of Wyoming and the Uinta Basin of Colorado and Utah northwards into Canada.

Since 2006, the Powder River Basin (PRB) has produced more than 40% of all coal mined in the U.S. In 2021, nearly 44% of coal produced came from the PRB. Western coal is low in sulfur and relatively cheap to extract compared with other types. For several years the volume of Western coal production has been increasing as a percentage of total production, even though Appalachian coal has about 40% greater BTU content than PRB coal. Since 2002, Western mines have produced more than half of all U.S. coal in most years because of its low sulfur content. This shift – from Eastern coal to Western – is motivated by the need to reduce sulfur emissions at power plants and by the significant price differential. In 2021, Western coal accounted for about 57% of production.

Trends

From 1994 through 2012, the U.S. produced over a billion tons of coal per year. However, since output peaked in 2008, coal production has been declining. There were catastrophic declines in 2009, 2015, and 2020, but the trend has been downward for over a decade.

Coal production in 2021 was 578 million short tons, an 8% increase over the catastrophic decline in 2020. The 2020 result was heavily impacted by COVID-19 restrictions and was the lowest total since 1978.

Since 2007, coal used for electricity generation has declined by more than 50% while natural gas used for electricity generation has increased by more than
60%.

The transportation of coal is an important factor in total freight transportation, particularly for railroads. In 2021, more than 6% of all U.S. freight ton-miles were made up of coal moved by rail. 62% of the total coal tonnage and 89% of the total coal ton-miles were transported by rail, and 24% of all rail ton-miles consisted of coal shipments.

Industry Indicators
In 1952, 24% of coal consumption went to produce electrical power, 26% for industrial heat and power, 22% for coking plants, 20% for residential and commercial heating, and 8% for transportation. In 2021, about 92% of domestic coal consumption was used to generate electricity. About 3% went to coking plants for the steel industry. The remainder was mostly used for industrial heat and power. Commercial and residential uses represent a minuscule percentage of total consumption.

Electricity generation grew at a fairly steady 2% per year from 2001 through 2007 but declined by almost 6% during the recession of 2008-2009. Generation recovered through the latter half of 2009 and 2010, although output never reached the peak attained in late 2007. After more than 60 years of steady growth, electricity generation has been essentially constant since 2008.

Stockpiles at electrical utilities typically represent about 80% of total stockpiles, including those producers and distributors. After running on the lean side through most of the 1990s and the early years of this century, stockpiles grew steadily from 2005 through 2009. This growth was driven in part by an inventory shortage at many generators that used Western coal in the wake of twin derailments on the main rail lines that bring coal out of the PRB in 2005. In the wake of those disruptions, generators increased inventories to ensure they could keep generating units online at all times. Since then, stockpiles have gone through three cycles of depletion and replenishment. After peaking in the spring of 2020, stocks have been declining for two years. Stockpiles are at the lowest levels since the late seventies.

Typically, Appalachian coal prices are 4 to 5 times the price of PRB coal. When prices for Appalachian coal peaked in 2008, it was demanding as much as 14 times the price of PRB coal. Currently, Appalachian coal prices are about 7 times PRB prices.

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