WITH its loading pier stretching far out into the waters of the Hampton Roads, the Norfolk Southern (NS) coal export terminal at Lamberts Point, Virginia, epitomises the importance of coal to the Class 1 railway. Capable of handling up to 48 million tonnes of coal per year, the site can accommodate 6200 loaded wagons and unload up to 1200 wagons a day straight onto waiting ships. Global demand for export coal keeps the facility's two rotary tipplers turning 24 hours a day, seven days a week, whatever the weather.
But while export coal demand keeps Lamberts Point busy, big changes are afoot in the US coal market. North America's boom in domestic gas production, brought about by horizontal hydraulic fracturing (fracking) of shale rock formations, triggered a huge drop in the price of wholesale price of natural gas, which fell by 56.8% between 2007 and 2012. Correspondingly, the volume of coal consumed by US power stations dropped from 948 million tonnes in 2007 to 779 million tonnes in 2013 as major generators scrambled to take advantage of cheap gas. American Electric Power (AEP), one of the country's largest generators with more than 38,000MW of capacity, currently generates 60% of its power from coal, but plans to cut this to about 45% by the end of the decade.
This shift has major implications for the North American railfreight industry. According to the Association of American Railroads (AAR) coal accounted for 41% of rail tonnage and 21.6% of gross revenues in 2012. More than 70% of the coal consumed by coal-fired power stations is delivered by rail.
As one of the largest coal carriers in North America, NS is feeling the impact of the switch to alternative fuel sources in power generation. Coal accounted for 23% of NS' turnover in 2013, but the railway's coal revenues fell 17% in 2012 and 12% in 2013 and it expects weak demand to continue this year. Utility coal volumes declined from 111 million tonnes in 2011 to 88 million tonnes last year.
Yet despite the loss of this traffic, NS generated record revenues of $US 11.2bn last year - its third consecutive year with turnover exceeding $US 11bn, and chairman and CEO Mr Wick Moorman told IRJ that after a strong first quarter NS is on course for further growth this year. "Right now the railway is running better, volumes are up compared with the same time last year, and we told the analysts that we expect 2014 to be a good year for us," he says.
In the face of a contracting domestic thermal coal business, NS has rapidly expanded in other areas and indeed is benefiting from the expansion of domestic oil production, with a massive rise in the movement of crude oil and other materials associated with fracking. NS' chemical business is in the ascendency, with revenues in this sector rising 14% last year to $US 1.68bn thanks to a 16% increase in volumes. This is largely attributed to increasing crude shipments from the Bakken and Canadian oil fields, most of which travels through the Chicago area to refineries in the northeastern United States. NS expects to carry well over 80,000 wagonloads of crude on this corridor this year, up from just a few hundred five years ago.
"This is a great new market for rail and certainly a great market for NS," says Moorman. "The number of wagonloads we've handled that are related to fracking in some way are roughly equivalent to the number of wagonloads of coal that we've lost. The profitability is different, the length of haul is different, but it's good traffic and we're happy that we have it."
Moorman explains that the fracking boom has been about far more than the movement of crude oil, and rail is benefiting in a number of other ways. "Even before we saw crude we saw a lot of frac sand starting to move, a lot of pipe shipments and some chemical shipments," he says. "We're now starting to see other products such as natural gas, liquids and other hydrocarbon products, and there are still opportunities for growth in other areas. We're also starting to move products such as heavy crude and asphalt from the Chicago gateway to the east and south."
As well as rewards, the rapid increase in chemical movements on the rail network has brought significant challenges for the North American railfreight industry. Last July a Montreal Maine & Atlantic Railway train carrying crude oil derailed and exploded in the town of Lac Mégantic, Quebec, killing 47 people. The tragedy has prompted a re-examination of tank wagon standards and the operation of chemical trains, although the United States Department of Transportation (USDOT) is still working with the industry to finalise a regulatory response.
"I think we'll see new tank car standards and the industry has voluntarily agreed to new operating restrictions and additional inspections," Moorman says. "We don't know yet exactly what will be proposed in terms of regulation, but this will all evolve very quickly. By and large the regulators have been thoughtful and have listened to what's going on, and they've considered how it can be fixed without fundamentally damaging our ability to transport these products. This isn't just important for the railway business it's also vital to the whole notion of energy independence for the country and using these hydrocarbon assets as efficiently as we can. It's a national issue, not just an issue for the railway industry."
While Moorman expects the domestic market for thermal coal to decline, he is more optimistic about the prospects for other segments of the coal market. "We have a big metallurgical coal franchise and about 30% of the coal we handle is used for steel making," he says. "Part of it is domestic, and that business is stable. They're still going to make steel and they're still going to need coal, so we think that business will continue to be viable in the long term."
Export coal volumes have remained steady over the last few years at around 25.4 million tonnes, and while a slight decline is anticipated this year Moorman is confident about the longer-term future of this sector.
"The global benchmark price of metallurgical coal is very low, which takes a lot of US producers out of the game," he explains. "At some point that will reverse, we've seen it go down before and we'll see it come back up. Fortunately for us we have the largest coal export facility in North America, which puts us in good shape. The other question, not just for NS but also for the US coal industry is how much thermal coal ultimately is exported from this country. We have enormous coal reserves in the United States and coal is still the single fastest-growing fuel source for electrical generation worldwide, so this will have an impact on how things play out for the US coal industry."
Another important focus for NS is intermodal, and over the last decade the railway has invested heavily in terminals and gauge enhancements for double-stack trains. The completion of the Heartland Corridor project in 2010 cut the distance for double-stack trains travelling between the Midwest and the East Coast by 320km, reducing transit times for intermodal services between Chicago and the port of Norfolk, Virginia, by up to a day.
The $US 2.5bn Crescent Corridor spans 11 states from New Jersey to Louisiana and is being implemented as a public-private partnership between NS and state and federal governments. The project aims to provide a fast alternative route to the interstate highways for intermodal freight from the northeast to the southeast United States, with new terminals in Alabama, Tennessee, North Carolina, and Pennsylvania. The first phase of the project is due to be completed in 2016, and by 2030 the Crescent Corridor is expected to eliminate 1.3 million lorry journeys per year.
Other intermodal projects include the $US 300m Meridian Speedway from Meridian, Louisiana, to Shreveport, Louisiana, which is being developed jointly by NS and Kansas City Southern, and the $US 140m Pan Am Southern Corridor from Mechanicville, New York, to Ayer, Massachusetts, which is being implemented in partnership with Pan Am Railways.
"There are enormous numbers of trucks still on the highway, particularly in the eastern part of the country where we operate, and a lot of it over distances that are very attractive for rail," Moorman says. "We have to continue to focus on the margins. Intermodal is a tough business because every single load competes against the highway. We've done an enormous amount to improve productivity, such as improving the operation of terminals, making sure that we have the right load on the right wagon on the right train, and ensuring we double-stack everything we possibly can. It continues to be a very attractive market for us, and the market is primarily the conversion of existing highway traffic to rail."
PTC deadline looms
Like the other Class 1s, NS is currently grappling with the rollout of Positive Train Control (PTC) on a significant proportion of its network. Following a head-on collision between a freight train and a commuter train at Chatsworth near Los Angeles in September 2008, the Senate Commerce Committee and House Transportation and Infrastructure Committee decreed that PTC must be installed on all main lines carrying passenger trains and lines carrying hazardous materials by the end of 2015, a ruling which became law in October 2008.
With a little over seven years to install PTC across an estimated 117,482 track-km, this has unsurprisingly been an enormous financial and logistical undertaking for the railways.
"PTC is a classic example of a very bad piece of well-intentioned legislation," Moorman says. "It was mandated with an artificial timeline, employing technology that really had not been fully developed. So [the freight railways] all had to figure out not only how to develop it but also to implement it on a nationwide basis, which has involved a lot of work. We discovered early on that interoperability would be an issue because our locomotives frequently run on other railways, so we had to make it work as a nationwide system and we have done that. We're continuing to develop, field test and battle-harden communications infrastructure, onboard systems, all the software and algorithms that ensure the system does what it's supposed to, the back office systems which tie it to the dispatching system - all those things you need for a product to be ready and reliable that just hadn't happened, and we're still not finished with it.
"In the meantime we have to start installing the technology on locomotives, start installing tens of thousands of lineside devices, and do all the testing. We have equipment installed that won't be turned on for another two or three years simply because if we didn't start we couldn't physically do it all by the federal deadline. We spent $US 200m on PTC last year, we'll spend $US 220m this year, we'll spend more than $US 200m next year, but we won't be finished by the end of next year and nor will anybody else. In fact we think it will take up to five more years to get it to a point where it works and it's fully implemented across NS."
Moorman also cites regulatory issues and says the resources available to the Federal Railroad Administration (FRA) did not reflect the huge scale of PTC implementation across the country. "We have had considerable delay foisted upon us by the government," he says. "The FRA was really not equipped or staffed to expeditiously carry out all regulatory oversight and approval processes. That's taken a long time to resolve. The cost-benefit ratio for PTC is also ludicrous. The government's own estimation is that for every $US 20 the industry spends it will get $US 1 in benefits."
While North America's freight railways get to grips with PTC implementation and tighter regulations, there are lingering fears of a drift towards reregulation of the industry's economic activities, which many argue would reverse the vast improvement seen in the wake of the 1980 Staggers Act, which enabled railways to set their rates according to market demand. Since then average rates have fallen by 45% and the railways have invested more than $US 500bn of their own funds in their networks.
"The American railway system has undergone a remarkable transformation in the last 30 years from a system where carriers were really at a financial disadvantage to a position today where railroads are profitable, making an adequate return, and investing a lot of what they make back into the railway," Moorman says. "Freight rail infrastructure in this country is now in the best shape it has been in for 70 or 80 years. We have invested an enormous amount in not only infrastructure but terminals and technology. Service is the best it's ever been in the industry."
Moorman explains that the argument for reregulation is being led by railway customers who are unhappy with the rates being levied. "That is the discussion underway today - does the industry need some fundamental economic change? I'm optimistic wisdom will prevail. You don't want to tamper with a system that works and a system that most public policy leaders believe is doing what it needs to, and in fact needs to invest and do more in the future because of the state of the rest of the nation's transport infrastructure."
With its traditional markets in flux, NS has diversified its business by responding to new opportunities in the bulk market and improving its offer in intermodal to compensate for the decline in domestic coal and provide a firm foundation for the future. It has also invested in new technologies to improve the efficiency of its operations. All of this has helped drive the company to record results in challenging economic times. "We have a great network and a great portfolio, we're the leading intermodal franchise in the east and I expect us to continue to grow that," Moorman concludes. "I expect our merchandise business will continue to grow, and in five years expect to be substantially better than we are today - that's always the goal."
