The New Future for American Coal: Export It

Consol Energy Shipped 10 Million Tons Through Baltimore Facility; The ‘Million Dollar Mile’ Train

Consol’s Baltimore terminal, where coal is unloaded from rail cars and put on cargo ships, is the only one wholly owned by a coal company. Greg Kahn/GRAIN for The Wall Street Journal

BALTIMORE—For Consol Energy Inc., CNX -0.42% a key to profiting from its coal is the sprawling terminal more than 200 miles from its mines on the Chesapeake Bay.

At 8:20 on a recent morning, a ship loaded with 134,000 tons of the combustible black rocks embarked from the terminal and headed to South Korea, where they will be fed into blast furnaces belonging to Posco005490.SE +0.35% the world’s fifth largest steelmaker.

At noon the same day, a second ship with 30,000 tons of coal headed for a mill in Brazil owned by ArcelorMittalMT -0.13% the world’s top steelmaker, while crews on the ground unloaded rail cars filled with coal destined for Japan’s Nippon Steel & Sumitomo Metal Corp. 5401.TO -2.17%

As environmental restrictions and abundant natural gas reduce coal consumption at home, exports have become more important for U.S. mining companies. U.S. coal shipments outside the country in 2014 are expected to surpass 100 million tons for the third year, a record string. A high level of exports helps keep the domestic supply in line with demand and helps prevent U.S. prices from tanking.

“Exports are growing more essential by the moment, particularly for central Appalachian operations,” says Ted Pile, a spokesman for Alpha Natural Resources Inc. ANR -1.33%

Last month, Bristol, Va.-based Alpha opened a London office in response to demand from Europe, which is weaning itself from nuclear power and installing more pollution-control mechanisms on power plants. In 2013, the top foreign buyer of American coal was the U.K.

Still, relying on exports is risky. While averting a glut at home, U.S. exports feed into a world market that is oversupplied, depressing global prices.

The prices for benchmark thermal coal, which is used by utilities, have declined over the past three years to around $80 a ton from more than $130. The U.S. coal industry also has a difficult time competing with Indonesia, Australia and Russia, which are closer to key Asian markets.

Shipping coal from a U.S. mine to a customer in Asia adds $50 to the per-ton price, including truck, rail and freighter costs. Australian producers can get coal from their mines to China and other Asian markets for half that.

As a result, U.S. producers are focusing their efforts on markets that are closer, such as Europe and Brazil, and some Asian steel markets, where demand is strong, rather than China. Indeed, while U.S. coal exports to China fell 15.4% in 2013, they increased 12.8% to the Netherlands and 8.3% to Germany,

Last year, Consol, which began mining coal more than a century ago, sold off five mines, the source of about half its coal production, but it kept the most profitable mines, including one that just completed an $800 million expansion.

The plan is to export much of the extra coal—most of it high-quality metallurgical coal for steelmakers—through the Baltimore terminal, which is the only one wholly owned by a coal company. Other coal companies pay fees to Consol to use the terminal for exports. Last year, 30% of the 10 million tons exported from the terminal belonged to Rosebud Mining Inc., and this year Murray Energy Corp., which bought five mines from Consol, will also start using the terminal. The companies, which didn’t return calls seeking comment, will have to pay between $4 and $8 a ton, according to analysts.

The Terminal “is Consol’s magic bullet,” says Bob Hodge, a coal analyst at IHS Energy. Consol’s 15 million tons a year of capacity, he adds, means the company can boost exports sharply if needed, removing excess coal from the market and keeping prices in the U.S. firm.

Thirty percent of the 28.5 million tons Consol produced last year was exported, three times the amount a decade ago. Last year’s levels, while high, were below 2012’s. Total exports from the terminal fell 20% in 2013 from year-earlier levels.

But analysts expect the export market to be profitable in the long term, saying coal will remain the dominant fuel source globally in spite of environmental concerns.

“There are two billion people in Asia who need more power, so eventually more U.S. coal will get onto global markets,” says Matt Preston, an analyst with Wood Mackenzie.

The Baltimore facility, where coal is unloaded from rail cars and put on cargo ships, was built on a cargo-pier site in 1984. It takes two to three days for the black rock, packed in trains 130 cars long, each carrying 100 tons, to travel from mines in Southwestern Pennsylvania to the port. The trains often travel under Baltimore, passing close to Babe Ruth’s birthplace near Oriole Park at Camden Yards, and emerging at the terminal across the harbor from Fort McHenry.

Consol employees call a long coal train a “million dollar mile,” a reference to the cargo’s total value at current prices.

In the winter, the coal must be thawed by heaters to keep it from sticking to the bottoms of the rail cars, which are flipped upside down by a $9 million “dumper.” After the coal is unloaded into a 30-acre central oval area, bulldozers drive over the football-field-sized pile to tamp it down, reducing dust and preventing it from sliding into other piles. The oval can hold a million tons of coal, which can be valued at more than $60 million and is enough to make 500,000 tons of steel a year.

The only other coal terminals on the East Coast, one in Baltimore and three in Virginia, are owned, often jointly, by rail lines like CSX Corp. CSX -0.66% and Norfolk SouthernCorp. NSC +0.66% , coal companies like Alpha, Arch Coal Inc. ACI 0.00% andPeabody Energy Corp. BTU -0.82% or logistics companies, which also own a handful of other terminals on the Gulf of Mexico. Three West Coast coal terminals, proposed for Oregon and Washington, have been delayed because of environmental concerns about global greenhouse-gas emissions.

ArcelorMittal’s mill in Tubaruo, Brazil, which makes more than seven million tons of steel a year, regularly buys coal from Consol even though the Luxembourg-based firm owns coal mines in the U.S., Russia and Kazakhstan and has 318 million tons of coal reserves.

Bill Steers, a spokesman for the steelmaker, says its U.S. mines provide coal for mills in Indiana and other U.S. locations but don’t normally ship to Brazil. One reason: The coal from Consol is a good deal because the miner owns the terminal and can provide better shipping rates. “We make purchasing decisions based on price and quality, regardless of where it comes from,” Mr. Steers says.

Consol says it won’t ship coal unless it has a buyer. “A few years ago, we let a couple ships go without a market and that didn’t work out so well for us,” says James McCaffrey, Consol’s vice president for energy marketing.

Moving coal out of the U.S. market cuts domestic supply and helps Consol get better prices in the U.S., says Mr. McCaffrey. “We don’t want to manipulate prices,” he adds. “We do that to get the best returns for our shareholders and to be strategic in our marketing.”

Environmentalists say they worry about a coal-export terminal that’s so close to a major harbor and generates coal dust. “From mine to rail to port, coal is a dirty fossil fuel,” says Diana Dascalu-Joffe of Chesapeake Climate Action.

Consol says it controls the dust with water and bulldozers. It also says it pumps water out of pools and puddles that form between coal piles and discharges it into the harbor after it’s certified clean.

Write to John W. Miller at john.miller@wsj.com

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About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

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