January 19, 2017

Railroads May Benefit if Trump Keeps Promise to Energize Coal Industry

Holland & Knight Alert
Jameson B. Rice

Most U.S. railroad industry stock rose in the immediate aftermath of Donald Trump's election as president. Optimism surrounding railroad stock may be driven in part by the prospect of a resurgence of the coal industry, since one of President-Elect Trump's notable campaign promises included putting coal miners back to work. Demand for coal has declined in recent years, which is due in part to the relatively low cost of natural gas as compared to coal as well as regulatory burdens with respect to coal.

The American railroad industry would benefit from an increased demand for coal. Historically, transporting coal has been a primary revenue source for the largest American railroads, and the industry's primary trade association has said that no commodity is more important to America's railroads. Declining coal demand has caused railroads to focus their efforts on other kinds of traffic, including intermodal traffic. But moving intermodal traffic is generally less profitable than carrying coal.

Even if Trump does make good on his campaign promise, changes seem unlikely to come quickly. He announced during the campaign that his plan to recharge the coal industry included cutting regulations, offering infrastructure-related tax breaks and ending a moratorium on mining on federal land. Congressional and agency action, even if comparatively swift due to single-party control of Congress and the White House, will likely take time to be agreed upon and implemented, and it will take time for industry to take advantage of any opportunities that are created. Furthermore, relieving regulatory burdens on coal does not address another factor affecting the demand for coal: the cost of natural gas.

Finally, in addition to power plants likely requiring time to ramp up in order to increase their use of coal as fuel, some major American railroads have already been implementing plans to realign their rail networks to de-emphasize coal. This includes allowing clearance for double-stacked containers on each railcar on nearly all of their rail networks, as well as routes that emphasize service to population centers rather than the locations of coal mines and power plants. Improved coal prospects would need to be both substantial enough and sustained enough to alter the long-range planning of the power and railroad industries with respect to large capital expenditures on structural elements that may be necessary with respect to domestic coal consumption.

A more immediate impact might be felt from fostering a more favorable environment for export coal. Even if coal never regains the prominence it once had in railroad financial statements, any uptick, whether for domestic or foreign use, would be a boon to railroads in the short term and might smooth the transition to a rail network that leverages the efficiency of rail transportation of many different types of commodities.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

Related Insights