High diesel prices stemming from the US-Iran war are increasing costs for US coal production and transportation, potentially boosting prices and curbing available supply into 2027, according to producers and buyers.
Diesel is a major operating expense for surface mines, and it is also factored into rail, barge and truck fuel surcharges. Rising costs first started worrying some coal market participants when prices rose sharply in March at the outset of the US-Iran war, and that concern has only grown with the war in its eighth month with no end in sight.
US retail diesel price hit an all-time high in the week ended 21 September, averaging $6.529/USG, according to US Energy Information Administration (EIA) data. While retail prices fell to $6.199/USG in the week ended 5 October, that was still $2.30/USG higher than the weekly average before the start of the US-Iran war and 53pc above values in the first weeks of October in 2021-25.
Producer margins under pressure
High diesel prices are having the biggest effect on Powder River basin (PRB) and Central Appalachian coal mines. Surface mines are particularly exposed because diesel fuels large-haul trucks, loaders and other mobile equipment. Producers that did not fully hedge their fuel consumption have had little protection from the sharp increase, one coal producer said.
Midwest miners who had to buy fuel not under contract would have paid an average $6.286/USG in the week ended on 5 October, while those in the Rocky Mountains would have paid $6.276/USG, EIA data show. A year earlier, average prices were were $3.67/USG in the Midwest and $3.671/USG in the Rocky Mountains.
"Higher production costs will drive up the floor price that producers are likely to demand," another market participant said.
But many producers cannot fully offset operating cost increases in the short term, at least partly because a majority of coal currently being produced is being supplied under contracts that predate the spike in diesel prices.Operators also have limited ability to reduce diesel consumption without cutting equipment use or production.
The effect may be most consequential among producers operating near break-even levels. The two largest PRB producers, Peabody Energy and Core Natural Resources, reported negative PRB cash margins in the second quarter. Peabody's PRB segment recorded a $7.1mn loss in adjusted earnings before interest, tax, depreciation and amortization, while Core Natural reported a $5.8mn adjusted loss from its PRB operations.
In Central Appalachia, mining costs had already trended higher for the several years because of thinning mining seams and higher labor costs. Added cost pressures from diesel prices since March have further amplified profit-margin pressures, according to producers in the basin.
Going into 2026, producers indicated that costs to produce Central Appalachian coal at a surface mine, load the product onto trucks and transport it to railroads totalled $80-$90/short ton (st). Sources say those costs have increased since the start of the war by least $6-8/st, with much of the additional expense linked directly to surging diesel prices.
Elevated fuel costs may prompt some US miners to scale back output as soon as next year, a few producers told Argus. To protect their margins, US coal producers may also seek higher prices or push for adding fuel-related adjustments to contracts. Fuel adjustments are already common in Central Appalachian term agreements to account for at least some of the costs related to shifts in diesel prices, but the number of utilities willing to enter these longer-term commitments have faltered in recent years, and many rely more on purchasing coal from the basin on a spot basis.
Still, buyers facing escalating rail surcharges may resist paying more for the coal itself.
Sustained increases could affect the relative economics of coal-fired power generation, particularly at plants receiving coal over long rail distances or competing against natural gas generation.
Transportation costs climb with lag
Fuel surcharge pricing mechanisms differ by transportation company and contract. Many railroads use a monthly average diesel price from one or two months earlier, meaning that the September spike will continue flowing into freight costs even after weekly prices retreat.
This could influence some coal producers' interest in exporting coal, since producers pay the cost of shipping coal to export terminals. But the greater effect on the US coal industry might be on domestic buyers.
Some US power plant operators, which pay for transportation to their facilities, have not yet adjusted coal consumption and purchasing plans because of high diesel costs, but they monitor diesel prices closely.
The monthly average on-highway diesel fuel price for August, which some railroads apply to fuel surcharges on contracted October coal shipments, increased to $5.462/USG from $3.744/USG a year earlier, according to EIA. This raised Union Pacific's surcharge for southern PRB coal trains shipped this month to around 70¢/mile from the 41¢/mile charge applied to shipments in October last year, equivalent to about $2.58/st increase on PRB coal shipped to the St. Louis region, according to Argus calculations.
With diesel prices rising further in September, the average fuel surcharge for PRB coal shipments in November will climb to 84¢/mile.
Among eastern US rail carriers, CSX's surcharge for October deliveries nearly doubled to 87¢/mile from 44¢/mile a year earlier, and the surcharge will rise further to $1.07/mile for November deliveries.
