Union Pacific (UNP) reported better than expected earnings on Thursday thanks to surging coal demand.
The railroad's revenue just from shipping coal and renewables jumped 49% year-over-year while overall revenue rose 17% to $5.86 billion, higher than the $5.75 billion Wall Street analysts expected.
Newly won contracts were one contributing factor, and Union Pacific also increased its fuel surcharge for coal trains. But according to Union Pacific CEO and President Lance Fritz, surging natural gas prices were one of the main reasons why the railroad company saw increased demand.
“Given that coal is a direct replacement for natural gas as a fuel for electricity in the United States, we are definitely seeing customers want to use more coal right now,” Fritz said on Yahoo Finance Live (video above).
After Russia's invasion of Ukraine sent a shockwave through global energy markets, crude oil and natural gas prices have remained elevated. On Monday, natural gas futures hit their highest level since 2008. Relatively flat production, exports to Europe and Asia, and colder than anticipated weather have kept prices high for the fuel.
While the natural gas boom in the United States has contributed to a decline in coal use, that trend has reversed somewhat recently given the broader macroeconomic and geopolitical backdrop. U.S. coal exports also saw an uptick in recent years after China banned the coal imports from Australia, leading the country to seek metallurgical coal supplies (the kind used in steelmaking) elsewhere.
This comes as governments have been making pledges to phase out the fuel, which is a potent contributor to greenhouse gas emissions and climate change.
Fritz noted that the spike in coal demand is likely temporary, though where natural gas prices go from here is still unclear.
“We still think, over the very long run, coal is in a secular decline,” Fritz said. “But we think that natural gas prices could stay at very high levels through the end of the year. At least, that's what forward curves are telling us.”
“So if that's the case, we think the run on coal right now will continue certainly through this quarter and into the last couple of quarters,” he continued, adding: “Hard to say what happens to natural gas prices in the United States beyond what maybe the end of the year is showing.”
Though Union Pacific benefitted from the business of shipping coal in its most recent quarter, the company also faced the other end of higher fuel prices.
"Fuel was the largest single cost increase for us," Fritz said, adding that "it probably cost us about 80 basis points in our operating ratio."