Coal stocks have been hammered this year, some miners falling over 40%. There is still an opportunity for investors to make money in coal, however, through the transportation companies that move coal from Canada to Asia.
Asian manufacturers are importing Canada's metallurgical coal to build cars, trucks and appliances. About 70% of steel is made with coal, which also provides roughly 30% of the world's primary energy. Worldwide consumption of coal has grown every year for the past 10 years, according to data from the U.S. Energy Information Administration. .
Coal shipped by rail in Canada increased 5.1% year to date through Sept. 28. Canadian rail trends in August and September were spiking upward, with coal shipments soaring 31% year over year to 10,466 rail cars during the week ended Sept. 14; up 33% in the week ended Sept. 21; and up 20.6% in the week ended Sept. 28, according to reports by the Association for American Railroads -- the AAR, for short.
Coal traffic gains benefit Canadian Pacific Railway (NYSE:CP) and Canadian National Railway (NYSE:CNI) , which haul coal to ports in western Canada, where it is loaded on ships bound for Asia. Most of the coal is being shipped through terminals owned by Westshore Terminals Investment (TSX:WTE).
Westshore's terminal at Roberts Bank, Delta, British Columbia, just north of the U.S. border, is the largest coal export facility on the West Coast of North America; it ships more coal than the other Canadian terminals combined. Westshore upgraded the terminal in 2012 to handle 33 million tons annually, but had a stroke of bad luck when a vessel destroyed a trestle. That damage was repaired by mid-first quarter, and second-quarter shipments of coal were up 17%. I expect the repairs at Roberts Bank to significantly boost Westshore's third-quarter results.
Canada's annual coal production had remained around 60 million tons for about a decade. But it increased to 67 million tons in 2012, including 38 million tons of thermal coal, produced mainly in the prairies, and 29 million tons of metallurgical (steel-making) coal, produced in Western Alberta and British Columbia.
Shippers of coal in Canada argue that it's a shorter distance to Hong Kong or Tokyo from the government's terminal at Prince Rupert, B.C., than from ports in Seattle or Los Angeles. Ridley Terminals in Prince Rupert has handled some coal from the Powder River Basin in Montana and Wyoming, angering Canadian coal producers, who are argue the government's terminal should benefit Canadian mines only. That terminal may be for sale.
BNSF Railway, owned by Berkshire Hathaway (NYSE:BRK.B), hauls coal from the Powder River Basin to ports in the Upper Northwest. BNSF wants to expand shipments through terminals in Washington state, but has run into opposition by environmentalists.
Coal revenues for Canadian National were flat in the second quarter, and down 1% in the first quarter, while coal revenues for Canadian Pacific were up 3% year-to-date through the second quarter. I expect their third-quarter coal revenues to be higher based on improving AAR data.
Coal-by-rail traffic in the United States was down 4.1% year to date, according to the AAR. CSX (NASDAQ:CSX) lost thermal coal exports to Europe and blamed higher competition and a "global oversupply." About 27% of CSX's 2012 revenue came from coal shipments. One positive, the company said, was that shipments of domestic coal increased in the second quarter due to higher coal-fired power generation. Miners like Arch Coal (NYSE: ACI) are having a tough time making money in coal because of low prices and the expense of transporting coal to customers.
Key driver: China
The key driver for mining materials, such as coal, is China, which is currently consuming 40% of all mineral products. China's hunger for coal and minerals is driven by demand for Chinese manufactured goods, and by the movement of rural populations to cities in China. Chinese growth rates have slowed in recent quarters, putting pressure on mining companies to scale back production, but China is still growing.
While U.S. railroads have suffered declines in coal shipments, Canadian railroads experienced a rebound in coal shipments in the third quarter. However, this may be a temporary trend. Investors should watch third-quarter results for Canadian National, Canadian Pacific and Westshore Terminals to see whether they offer guidance on future coal shipments. CN, CP and Westshore are well-positioned to profit from coal exports if they continue to improve.