- Coal is one of the key commodity groups for Union Pacific,
accounting for around 20% of its total freight revenues
- Union Pacific's revenue ton-miles of energy commodities
freight fell from 239 billion in 2011 to 207 billion in 2012
owing to increased substitution of coal with cheaper natural
gas for electricity generation
- The share of coal in U.S. electricity generation has
decreased from 45% in 2010 to 37% in 2012
- We expect Union Pacific's revenue ton-miles of energy
commodities freight to drop to 187 billion in 2013
- We think increased stockpiles of coal at utilities,
the closure of several coal plants and declining coal
production are the key reasons to cause a drop in Union
Pacific's coal freight in 2013
- For coal to regain market share in U.S. electricity
generation, we think natural gas prices should exceed
Union Pacific Corporation (
) is one of the leading railroad companies in the United States.
Coal represents a key commodity group for Union Pacific as it
accounts for around 20% of its total freight revenues. Its revenue
ton-miles of energy commodities freight (which primarily consists
of coal), decreased from 239 billion in 2011 to 207 billion in
2012. Increased substitution of coal with cheaper natural gas for
electricity generation is the main factor responsible for
the decline. Higher stockpiles of coal at utilities and
lower electricity generation further contributed to this
According to the Association of American Railroads, the
overall coal railcar loadings in the U.S. were down by 11% in 2012.
While, the share of coal in U.S. electricity generation has
decreased from 45% in 2010 to 37% in 2012, the contribution of
natural gas increased from 24% to 30% in the same period, according
to the US Energy Information Administration.
We think Union Pacific's revenue ton-miles of energy
commodities freight will further drop to 187 billion in 2013, owing
to declining coal production, the closure of coal plants and higher
coal inventory levels at utilities. An increase in natural gas
prices coupled and a decline in coal prices will bode well for the
coal demand. However, we think natural gas prices should exceed
$3.50-4 for coal to regain some market share in U.S. electricity
generation. While U.S. exports of coal are rising, we think they
will only partially offset the decline in domestic coal
In this article, we evaluate the key trends in the coal market
that are expected to impact Union Pacific coal freight in 2013.
See our complete analysis of Union Pacific
Factors That Could Lead To Higher Coal Freight Traffic In
Increase In Natural Gas Prices
While the average natural gas spot price ($ per million BTU) was
recorded at $4.40 and $4 in 2010 and 2011 respectively, this figure
dropped to $2.80 in 2012, supporting the substitution of coal with
natural gas for electricity generation. However, this figure
started treading higher towards the end of 2012, and reached close
to $3.30 in February 2013.
According to Union Pacific, if natural gas prices go upwards of
$3.50-4, then coal will become a more competitive fuel to natural
gas for electricity generation.
Decrease in coal prices
Prices of Central Appalachian coal have been declining
recently, and they were recorded at around $2.5 per mmBtu in March
2012, bringing the price difference between Central Appalachian
coal and gas prices to around $1 per mmBtu.
While these factors bode well for electricity generation with
coal, coal-powered plants still remain comparatively more expensive
as compared to gas-powered plants according to some reports on
account of two reasons - gas-based plants are around 25% more
efficient as compared to coal-based plants, and the rail
transportation of coal from the mine to the power plant costs
around $1 per mmBtu, but this figure stands at a few cents for gas
transportation by pipeline.
Higher demand for U.S. coal exports
While the domestic demand for coal continues to fall, U.S.
exports of coal are rising. In the first nine months of 2012, the
U.S. exported around 98 million tons of coal, which was 23% higher
than last year. Exports to Europe, China and India rose by 29%,
108% and 52% respectively during the period.We expect increasing
U.S. coal exports to partially offset the decline in domestic coal
usage in 2013.
Factors That Could Lead To
Lower Freight Traffic In 2013
Increased inventory levels
According to the U.S. Energy Information Administration, coal
stockpiles at electric power plants throughout
January-November 2012, were above the levels recorded in 2011
as well as the five-year average. Stockpiles in November 2012 were
recorded at 11% higher as compared to the previous year. The
substitution of coal with natural gas and lower electricity
generation contributed to the rise in stockpiles. This indicates
that if the utilities prefer to use coal for electricity
generation in 2013, they still have significant coal reserves and
can defer coal purchases.
Lower coal production
Reflecting the lower demand for coal, its production in the U.S.
dropped by 6% annually in the first nine months of 2012. We believe
coal production could continue to suffer in 2013, owing to lower
domestic demand and higher stockpiles.
Closure of coal plants due to stringent emission
Stringent federal emission standards have led utilities to close
their older coal plants as they are finding it uneconomical to
invest in emission control equipment in the wake of cheaper natural
gas prices and lower power prices.
Our $141 price estimate for Union Pacific
is in line with the current market price.
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