Warren Buffett's big railroad buy is also a huge bet on coal
Filed under: Energy, People, Berkshire Hathaway, Green
If the Sage of Omaha is truly an oracle of future returns and a leading indicator for where the market is going, it's hard not to think that U.S. carbon emissions will continue to grow apace and that the budding green revolution will be more bang than bucks.Why? On Tuesday, Buffett paid a hefty 25 percent premium to acquire the remaining 77 percent interest in railroad giant Burlington Northern Santa Fe (BNI) that his company, Berkshire Hathaway (BRK.A), did not already own. The fate of Burlington Northern is closely tied to shipments of coal.
In third-quarter 2009, coal shipments accounted for roughly 25 percent of Burlington Northern's total revenue, according to Marketwatch. It shipped 604,000 carloads of coal in the quarter, more than any other single category. And Burlington Northern hauled 297 million tons of coal last year, enough to supply roughly 10 percent of the country's electrical needs. Its coal shipments were down roughly 6 percent in the last quarter, year-over-year. The drop was largely blamed on the economic slowdown and reductions in industrial uses and power generation. The recession has also been closely linked to lower carbon emissions recently.
That means Buffett's bet could be viewed in one of two ways. Either he's doubling down on coal and saying to hell with global warming concerns. Or he believes that coal will continue to prosper even under the yoke of new government regulations on carbon emissions that will mandate expensive clean-up steps for smokestack emissions of utilities and other big coal-burning industries. Oh, and by the way. Berkshire also owns MidAmerican, one of the country's biggest coal-burning utilities. Clearly, the great sage isn't betting on any wholesale punitive steps to ratchet down carbon emissions.
Coal Will Stay King for a While
To pull this apart a bit, take a good look at how reliant the U.S. is on coal power generation. According to projections released by the U.S. Energy Information Agency in March 2009, coal provides the largest chunk of U.S. electricity of any fuel source and will continue to do so for the next two or three decades. In fact, the EIA forecasts only a moderate decrease in coal's share -- from 49 percent to 47 percent -- of total power generation for the country by 2030. Keep in mind, since March 2009, the rate of alternative-energy investment announcements has actually slowed.
Turning around a power-supply network is like turning a supertanker: It takes a long time for even drastic moves in the wheelhouse to change the vessel's course. So, in the short term, Buffett appears to be making a prudent bet that, green frenzy aside, coal will power the developing recovery and that any industrial snap-back will directly benefit the coal ecosystem (which includes Burlington Northern). Of course, theoretically, the recovery should lift all segments of the railroad's business, but Buffett, a careful investor, can hardly ignore the outlook for his acquisition's largest segment.
Also keep in mind that other countries might gladly snap up excess U.S. coal production -- namely, China and India. The "I" and "C" of the BRIC bloc (Brazil and Russia being the "B" and "R") are expected to double or triple their coal consumption in the next three decades as their economies continue to grow. Power generation is forecast to rise at a high-single digit or low-double digit clip in order to keep pace. Importing coal is expensive because it entails shipping costs, but if oil prices remain in the $80 range, then U.S. coal won't be a tough sell since the supply and the price look relatively stable.
The downside for global warming is that if you think it's hard to get utilities to install expensive carbon-capture technologies in the U.S., try getting it done in China and India, where central governments have far less control over businesses in the provinces, and environmental regulations are harder to enforce.
For treehuggers, coal may look dirty. To Warren Buffett, coal looks like money.
Alex Salkever is Senior Writer at AOL DailyFinance covering technology and greentech. Follow him on twitter @alexsalkever, read his articles, or email him at alex@dailyfinance.com.
D-Day for Harry Reid: Can he wrangle 60 votes for Senate health reform bill?
Fed stalls on Chinese bank deal, costs taxpayers $1.7 billion
Dell in a handbasket: Should founder Michael Dell resign?
Reader Comments (Page 1 of 2)
11-05-2009 @ 9:50AM
htc said...
Buffett needs to put his considerable influence behind an effort to clean up coal emissions. I cannot believe that a country that developed nuclear weapons (albeit with a majority of European scientists) cannot figure out a way to take the environment-killing waste products out of coal smoke. We need a Manhattan Project type of crash program to accomplish this. Mr. Buffett, your help is needed on this and it can only profit you with your purchase of BNSF.
Reply
11-04-2009 @ 10:51AM
Davey Rockeyfeller said...
Buffet is no dummy. America is a in a bad fix because of poor planning and short sighted idiots in DC-(crooks) and a lot of spoiled little Harvard and Yale brats who don't know what real work is or a real economy. These morons have played us and stolen as much money as they possible could and got us into this stupid war for nothing. We need to import 65% of our oil, manufacturing has been outsourced and we lose billions daily as a country and now just print up paper dollars by the trillions to bail out a bunch of crooks on Wall St. and pay off the graft sucking morons in DC. Coal is our ace in the hole with a 650 year supply and you can turn coal into oil. With new technologies and getting Sasol etc. to help we can be energy independent in 5-10 years tops. That railroad will carry maybe half or more of the coal and he owns it. Germany turned coal into oil to to power it's Nazi war machine and got the technology from Rockefeller's Standard Oil. With high speed rail and upgrading our tracks we can have a first class transportation system and save a bundle. Over time with geothermal, wind, solar, tidal, and bio-fuels we can keep the lights on and bring back manufacturing and beat the Communist Chinese and Japan like we beat the world in less than 4 years back in WW11. All we need is leadership and common sense and to ignore the idiots like Al Gore and his global warming lie and all the corrupt paper pushers in DC, shoot the crooked executives and banksters that sold us out and Boom again! Other alternative is to launch WW3 and just drop nukes(already paid for) on Asia etc. but the polticians would never go for that and the generals are just corporate managers. COAL, COAL to OIL, trains, tracks, manufacturing, real tradable goods and end the wasteful wars which just handed the Communist Chinese the Iraqi oil and would send the Caspian gas to India. Arrest David Rockefeller and his parasite family of scum and shut down their front groups like CFR, Trilateral, Council of the America's, Bilderburg, Rand Corp. Rockefeller Foundation, and the CIA, and ban "lobbying" and flush DC-elect a real leader who has worked in the real world and knows business is common sense, practical, and makes money which America hasn't done in years. End the FED/IRS scam ands return control of the money backed by gold, silver, oil, real things to the people and a Congress without lobbyists! Wake up and stop listening to the pansy assed paper pushing "experts" and BS artists in DC and PBS and the Universities that don't have real world experience or an ounce of common sense. Business is real simple and real, a war and war is a business so wake uo we've been sold out from within.
Reply
11-04-2009 @ 1:51PM
ejg said...
I agree with most of your points, except mfg has not been outsourced as much as most are led to believe. U.S. still mfrs nearly 45% of the world's mfrd goods by value. What has been outsourced is much of the low skill mfg labor. Some labor has been replaced by automation and other productivity improvements, but most just sent overseas. Mfg has been this country's safety net for those who do not excel in our educational system. Now our lower middle-class is quickly becoming part of our lower class.
What could be next if we don't fight back is for the upper middle-class, the educated people, e.g., accountants, doctors, nurses, financial system employees, etc., being beaten into the lower-class as well by productivity improvements, e.g., accounting software, and government mandate, e.g., socialized medicine or payroll czars.
For the last 20 years, we have been on a path toward two socioecononomic classes -- the working class and the ruling elite. Guess where 99+% of us are being herded -- and many of them eagerly?
11-04-2009 @ 2:41PM
Lindsay said...
Well Said.
11-04-2009 @ 5:55PM
me said...
i hope someone else knows this
11-04-2009 @ 8:48PM
Patricia said...
Everything you say is true it will take a revolution to accomplish this like the civil war. I was not born to privilege all the millions I see going into rich politicians makes me sick. All we can do is complain while they eat cake.
What a mess we have the answers they are not listening
11-04-2009 @ 12:55PM
sam said...
your damm skippy flush them all out
Reply
11-04-2009 @ 1:53PM
Philip Gehring said...
When I heard the news of the RR takeover (like a monopoly Board Game) I figured it must be a play on some long haul commodity. So thanks yes it is coal. Since enviros are here to stay ( Natuaral Gas would be the pick for them and most bussinesses) he must know something big like an oil supply cut off down the road is probable (on the agenda). He is not a gambler and he has backed this administration alot so he has his inside info.
Bet on oil supply disruption. Natural gas and Coal!
Reply
11-04-2009 @ 1:38PM
TomW said...
Most trains are diesel and could all be electric as they are in the Northeast. Of course with OBama's plan we will only be able to ride the on sunny and windy days because he owes the investors in solar/wind energy. We should be pursuing hydroelectric dams on the major rivers in the US that are already dammed and locked for navigation. Hydro is totally clean and runs /24/7 and as been around for decades (the TVA was about hydroelectric). But that means that Obama's cronies cannot make billions (Gore is now a billionaire) scamming us on solar/wind electricity. Its a myth, it cannot run a modern country. Hydro is the answer and its not even being discussed. Why? Follow the money.
Reply
11-04-2009 @ 2:11PM
glenn said...
i wish i was related to this guy,,, my grandson loves trains
Reply
11-04-2009 @ 2:49PM
Fletch said...
Buffet is a globalist. Their mission, one world government. We will never give up our Constitution willing. They know this. The use of U.S. and NATO military is the only way they can achieve their goals. FEMA/Halliburton have quietly built almost 700 internment camps in the U.S., in all states, next to railroad tracks. Martial Law will be declared by our president, those of use who resist will be killed, and those of you who follow orders will be shipped by train to the camps. These are all facts. But please, do your own research. Read the truth for yourself.
Reply
11-04-2009 @ 9:02PM
Patricia said...
I agree with everything but when. I see the camps some have furnaces as in Indiana just like Nazi germany they cut off the health by spending all the money then they started the long march to the death camps.
If anyone goes to FEMA concentration camps you will see for yourself. My questions if they keep 1/2 a billion which is stated in the Bloodline of the Illuminiti do all the white politicians think they will not avoid the onslaught. Obama does not care about anyone he has a mirror to carry around to fall in love again and again
What can the people do??????????
11-04-2009 @ 3:04PM
Coop said...
The author puts an awful lot of weight on the fact that BNSE makes 25% of its revenue from hauling coal. If they make 25% hauling coal, they must haul quite a bit of other stuff to make up the other 75%. The whole coal angle to this story is way overblown. Trains are much more efficient than trucks and trucks are getting harder to operate at a profit. Given the state of Amtrak, the passenger rail possibilities are wide open. Morgan likely sees many opportunities to make money with his new train set than just moving coal around.
Reply
11-04-2009 @ 3:07PM
Coop said...
I meant Buffet, of course - not Morgan.
11-04-2009 @ 3:35PM
LBJ033 said...
BUFFETT HAS THE RIGHT IDEA - LETS KEEP THAT COAL MOVING AND BURNING--LOVE COAL--
Reply
11-04-2009 @ 7:20PM
Bud said...
And let's keep those trains loaded and running!! My retirement check comes from the Railroad Retirement Board.
Reply
11-06-2009 @ 8:42AM
saw the light said...
Jimmy knows what he is doing but the reasons have everything to do with the NWO/FEMA and nothing to do with coal.
Reply
11-04-2009 @ 7:46PM
zflynn said...
Let's see, Buffett is one of Obama's top financial advisers. The same Obama who, on the campaign trail, threatened he would jail dirty coal producers and users. Warren didn't become the richest man in the world by being a foolish idiot, so obviously he has some knowledge of a "future" "miraculous" turnaround in Obama's policy stance (like a kazillion other past, present and future miraculous turnarounds). Hey, another good bet to lay some money down: part of one of Obama's upcoming "stimulus" plans will involve huge cash payouts to the railroads. You think? Geez, Buffett sure is a genius who can envision the future. (Or is he just one of the biggest cogs in that corrupt corporate/political machine? Naaah!)
Reply
11-04-2009 @ 8:21PM
James said...
Let's see, the revenues on coal are about one-third of those of the other 75% of the goods (1.27 cents per ton mile vs 3.34 cents per ton mile). .....so you are saying he wants to bet on coal expansion?
A stronger case could be made that he sees the railroad getting out of the low-margin commodity businesses long term..
Coal is more steady, but low-revenue and can be (but not always) high-handling.
So, please do a bit of research on your topic...a bit more than just planting an answer in search of a question.
Reply
11-04-2009 @ 9:19PM
mlr said...
Hey, Alex. It's not about coal but the RR. The article is very short sighted. Railroading has been very profitable in this country since Reagan deregulated it in 1980. This is what Buffett sees and wants a part of the biz. The biggest customer for the RRs is the trucking industry now. (I've 35 yrs. in the RR industry).
Reply