Summer Coal Demand Straining U.S. Railways

US coal producers face the paradox of experiencing an increased demand for their product at times when they lack the means to deliver it to their customers, reveals the latest study published Wednesday by UK-based consultancy Wood Mackenzie.

In its reports Can railroads meet summer US coal demand? the firm says on top of the issue of having stockpiles almost depleted during the past harsh winter in North America, coal companies are now dealing with a rail network unable to increase the rate of deliveries much beyond 2013 levels. This, add the experts, means there is a high probability coal-producing units relying on western coal will not be able to ramp up output despite higher demand.

Data from the US Energy Information Administration seem to confirm the analysts' dire predictions. Coal inventories in February were down 32% compared to the previous year, while spot prices were up.

But rail congestion prevented producers from capitalizing on those conditions. The capacity crunch was the result of a perfect storm, in a literal sense and a figurative one. Winter weather delayed shipments from US producers, generating a backlog of orders. And demand for rail cars rose, prompted by a shorter grain harvest and rising domestic oil production.

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"Even if the railroad capacity problem is fixed, mine capacity may not be able to grow fast enough to meet demand," said in a statement Matt Preston, principal analyst, North America thermal coal markets for Wood Mackenzie.

The experts expect tighter gas markets to place upward pressure on gas prices, further increasing the appetite for coal this summer, even as western coal supplies remain limited.

Low stock piles, constrained rail deliveries, and lower production levels are having the strongest influence on coal demand from units relying on coal from the Powder River Basin (PRB), says the consultancy.

The problems were particularly acute for mines along the Burlington Northern Santa Fe's northern route out of the Powder River Basin. Additional shipments to and from the Bakken in North Dakota, where oil production is booming, contributed to traffic increase.

By Cecilia Jamasmie