Berkshire Hathaway 2017 Annual Meeting Audience Question # 17

BNSF’s coal shipment revenues will go down over time

Warren Buffett:


Gregg Warren:

Warren, my question also relates to Burlington Northern.

Despite the current administration’s belief that they can bring the coal industry back, market forces continue to lead to the industry’s demise.

While 90 percent of U.S. coal consumption is driven by electricity generation, natural gas has been both cheaper and cleaner burning, and renewable electricity generation has remade parts of the market as wind and solar have gained scale and become cheaper alternatives.

This has created problems for Burlington Northern, with coal shipments accounting for just 18 percent of volume and revenue for the railroad last year, down from an average of 24 percent for both measures the previous 10 years.

While some of this was due to large buildup of coal supplies the past couple of winters, which finally seem to be working their way out, what are your expectations for the contribution coal can make to BNSF longer term?

And I know that the railroad currently handles some export shipments going through Canada’s Pacific Coast ports, but will there be enough growth there to offset domestic demand? Or will BNSF need to rely more heavily on segments like intermodal to offset lost coal volumes?

Warren Buffett:

Yeah, the answer is coal’s… coal is going to go down over time. I don’t think there’s much question about that.

The specifics of any given year relate very importantly to the price of natural gas. I mean, right now there are… there…

Demand is somewhat up… fair amount up… from last year because natural gas is at 3.15 or 3.20, and the utilities can produce electricity, in many cases, quite a bit cheaper with coal than with natural gas. Whereas, with a $2, it would all be… it would be natural gas.

But over time, coal is… in my mind… is essentially certain to decline as a percentage of the revenue of the railroad.

The speed at which it does, you know, it… you don’t build… create generation plants overnight. And so it…

You can’t predict the rate. And if natural gas is cheap enough, it’s going to be a… you’ll see a big conversion back to natural gas.

So coal is a… coal is going to go down, as a percentage of revenues, significantly.

You know, certainly over 10 years it’ll be quite significant, and who knows exactly, year by year.

We are looking for other sources of growth than coal. If you’re tied to coal, you got problems.


Charlie Munger:

Well… you go out over the extremely long term, I think that all hydrocarbons will be used, including all the coal.

So I think that, in the end, these hydrocarbons are a huge resource for humanity, and I don’t think we’ve got any good substitute.

And I’ve never minded saving them for the next generation. I don’t like using them up very fast.

So, I’m often on a road on my own on this one.

And people think that all this hydrocarbons are going to be stranded and the whole world’s going to change. I think we’re going to use every drop of the hydrocarbon sooner or later. We’ll use them as chemical feed stocks. It’s…

I regard all these things as very hard to predict. And I’m not at all sure that… I would eventually expect natural gas to be pretty short in supply.

Warren Buffett:

A change in storage would make a big difference.

We will produce, within a few years, as much electricity in Iowa… or virtually as much… electricity in Iowa from wind as our customers use. But the wind only blows about 35 percent of the time or something like that. And sometimes it blows too hard.

But the storage, you know, having it 24 hours a day, seven days a week, is a real problem, even if we’ve got the capability of producing, like I say, a self-sufficient amount, essentially, in Iowa before very long.

Coal… our shipments of coal are up fairly substantially this year on the BNSF. But they were very low last year, and as you said, stockpiles grew and have come down somewhat. They’re still on the high side.

But in my mind… Charlie’s got a longer-term outlook on this… in my mind, we’re going to be shipping a whole lot less coal 10 or 20 years from now than we are now.

On the other hand, I think there’s some decent prospects in other long hauls.

I mean, it’s a pretty cheap way to move bulk commodities long distance. Rail is. And I think it’s a good business, but the coal aspect of it’s going to diminish.

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