Low US thermal coal stocks fuel rail capacity concerns

US coking coal exporters are concerned that winter railroad capacity may be more strained than usual because of depleted thermal coal stocks at power plants.

US coal-fired power plants' requirements are likely to be prioritised in the event of another harsh winter. "We are extremely concerned," a US coking coal producer said, noting that public pressure to keep the lights on will far outweigh any argument in favour of prioritising coking coal cargoes. Some other US market participants echoed this sentiment, concerned at the lack of elasticity in such an overstretched infrastructure network.

US power plants are running low on thermal coal and will require a boost in deliveries in the fourth quarter, railroad operator CSX's chief financial officer, Frank Lonegro, said last week. "They are low in the south. The predominance of our coal, domestic coal, utility coal is for the south and the stockpiles are low heading into the winter here," Lonegro said. "This is probably one of the [first] quarters that I have seen in a long time that I think our domestic utility coal is actually going be up in the quarter."

US power plant coal stocks ended this summer heading towards a 12-year low, according to the US government agency the EIA, which projected that inventories would drop to 110.7mn short tons (100.4mn t) in August. The last time they dropped that low was in February 2006, when they stood at 106mn st. August's inventories will be confirmed in the EIA's next data release on 24 October.

Power plants' thermal coal stocks are running lower owing to a combination of factors. Competitive natural gas prices have played a part this year, with generators continuing to use cheaper natural gas to create electricity, limiting the need for railroads to deliver replacement coal, CSX said.

And utilities in recent years have moved away from buying so much thermal coal on long-term contracts, turning instead to the spot market if supplies need replenishing to avoid being left with a lot of excess material as happened amid the mild summers and winters of 2014-15.

Any utilities suddenly turning to the spot market for additional thermal coal this winter may incur additional costs, according to market participants. Some US thermal coal producers are sold out through to the end of 2018 largely owing to robust exports, and are warning domestic consumers that if they want to book a spot cargo they may need to pay a particularly high price to cover fees incurred from pulling that tonnage away from long-term contracts.

US power plants have so far not expressed concerns about running out of coal during the fourth quarter. But it remains to be seen how the winter season develops and if there is a repeat of 2017-18's severe cold snap.

CSX and Norfolk Southern — the railroads of particular relevance for coking coal exporters as well as thermal — so far do not appear to be under any greater strain than usual. CSX transported 17,230 carloads of coal in the week ending 13 October, up by 9pc from a year earlier. Norfolk Southern is lagging behind a year earlier, with carloads of coal in the week ending 6 October down by 2.6pc at 17,794.

Coal sellers and buyers have been critical of Norfolk Southern this year, saying it lacks sufficient crews and locomotives. Those shortages have delayed deliveries. A few utilities have put additional trains into service to make sure they will the coal needed ahead of winter.

Coking coal export infrastructure constraints appear to have eased lately, with several market participants describing shorter vessel queues at Hampton Roads compared with just before Hurricane Florence. The hurricane itself had little lasting impact on logistics, with operations quickly returning to their normal state once Hampton Roads port was reopened.

And US census bureau data confirm a continued increase in the volumes coming through the east coast despite concerns about export infrastructure. The US exported 5.67mn st of coking coal in August and 42.3mn st in January-August, up on the year by 11pc and 20pc, respectively.