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Rail congestion expected to plague Powder River Basin coal into late 2014

Rail congestion expected to plague Powder River Basin coal into late 2014

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Powder River Basin coal

Rail cars are loaded with an average of 121 tons of coal each on their way out of Cloud Peak Energy’s Antelope Mine north of Douglas, Wyo. The executive director of the Wyoming Infrastructure Authority said Wednesday the state is in talks to help finance an out-of-state coal export dock.

Powder River Basin coal companies face a paradox: Demand for their product is on the rise. Now, if they could only get it to their customers.

Wyoming coal shipments were snarled by congested rail lines in the first quarter of 2014, dragging down mining firms' profit margins and leaving three of the four major companies working in the Powder River Basin in the red through the first three months of the year.

The trend is expected to continue into the latter half of 2014, even as utilities clamor to replace the coal stockpiles burned off during one of the coldest winters in recent memory.

Coal inventories in February were down 32 percent compared to the previous year and spot prices are up, according to the U.S. Energy Information Administration.

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

"You’ve seen the problem cascade to the point where weather is not a problem for the rails, but they continue to play catch on shipments missed in the first part of the year," said Ted O'Brien, president of Doyle Trading Consultants, an industry research firm.

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

The constraints cost Arch Coal 4 million to 5 million tons in coal shipments during the fourth quarter of 2013 and first quarter of 2014, John Eaves, the CEO of the St. Louis-based company, told analysts in a conference call reporting the company's earnings.

The company's Black Thunder mine was particularly impacted, as the mine's customers are served by BNSF, Arch officials said. They said they expected to make up the shipments throughout the year.

Cloud Peak Energy shipped 1.2 million tons during the first quarter, compared to 1.4 million last year, due in part to congested rail service, company officials said.

They noted that mines in the northern part of the basin, like the Spring Mine in Montana, faced more problems while the Antelope Mine in the southern half of the basin actually saw shipments on the quarter increase. Cloud Peak CEO Colin Marshall told analysts during his company's earning call he was optimistic service will improve in the southern part of the basin this year, while the northern route will take longer to address.

Peabody Energy reported the North Antelope Rochelle mine, in the southern part of the basin and served by UP, the mine was not impacted by the constraints.

Matthew Jones, a BNSF spokesman, noted that the railroad accounted for 50 percent, or about 400,000 new carloads, of the country's rail growth in 2013.

"We are taking aggressive short-term action in over-resourcing the railroad, bringing in extra crews, locomotives and equipment to increase fluidity to the system and work down the past due orders," Jones wrote in an email to the Star-Tribune.

BNSF will invest $900 million in capital upgrades this year along its northern corridor, which stretches from the Pacific Northwest to Chicago and serves Wyoming. The railroad has been hiring aggressively for months and is graduating new conductors every month, Jones sad.

Still, training conductors takes time and it will likely be a while before rail service constraints are alleviated, said O'Brien, the industry analyst. Some utilities that burn Powder River Basin coal are running their plants at lower levels to ensure they have enough coal to meet peak demand during the summer.

"It probably won’t be until the end of the year before systems are running at what we think is a normalized level," O'Brien said.

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