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Carload traffic data for April provided by the Association of American Railroads continues to show significant declines in coal demand, which has historically driven 20 percent or more of total U.S. rail volumes, according to Fitch Ratings.

Coal carloads fell 16.6 percent in April and 11.3 percent in 2012’s first four months. The biggest factor driving weak domestic coal demand continues to be the declining price of natural gas and an ongoing shift away from coal as a feedstock for electrical utilities, Fitch Ratings officials said in a prepared statement. In addition, warm winter weather contributed to weak coal consumption as electricity demand slumped in early 2012.
 
“As natural gas prices fell below $2 per million [btu] earlier in the year, the economics of gas substitution for Powder River Basin coal became very attractive,” Fitch Ratings officials said. “It remains unclear whether or not a secular shift away from coal is under way, given the potential for gas prices to rebound if supply growth slows.”

The shift away from coal toward natural gas as the preferred power plant energy source also has been evident in sharp rail volume increases for commodities linked to rapidly growing production of crude oil and gas in newly developed North American shale plays, they said. For example, frac sand demand is booming.
 
“The data points to a mixed picture for industrial demand this year as traditional powerhouse commodities like coal see their share of rail traffic fall relative to other categories,” Fitch Ratings officials said. “Careful management of capacity, cost control and solid pricing power have allowed major railroads to weather the 2012 carload weakness effectively. Still, in light of the unevenness of the U.S. recovery, the outlook for rail volume growth over the remainder of the year appears relatively weak.”

An article that will be published in Progressive Railroading’s May issue (“A toll on coal”) will provide additional insight into the weak domestic coal market, as well as the strong export coal sector. The issue will be available online by week’s end and in print by early next week.