Warren Buffett's big railroad buy is also a huge bet on coal
Nov 4th 2009 10:00AM
Updated Dec 4th 2009 4:18PM
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 firstname.lastname@example.org.