CSX Chugs to $33 on Coal Demand
Despite the global volatility in coal demand and supply affecting the mining industry causing major coal producers like Alpha Natural Resources (NYSE:ANR) and Walter Energy to reduce their guidance for coal sales for second half of 2011, we believe that coal demand in the longer term will remain strong, particularly driven by infrastructure investments by Asian economies, which should improve coal production levels. This should benefit railroad freight companies such as CSX (NYSE:CSX), Norfolk Southern (NYSE:NSC) and Union Pacific (NYSE:UNP). We expect the total carloads of coal shipped via railroads in the U.S. will increase to 8.6 million by the end of our forecast period with improving domestic coal production levels and robust demand for coal exports.
Our complete analysis for CSX Corporation’s stock is here.
Coal Production to Rise As US Economy Improves
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Freight demand has historically been correlated to the U.S. GDP. In June 2011, the World Bank predicted the US GDP will continue to grow at a moderate rate of 2.6% in 2011, 2.9% in 2012, and 2.7% in 2013. As the overall economy improves and industrial sector continues to grow, coal production will also improve pushing the demand for coal freight higher. Following a 12.9% decline in 2009 due to recession, coal shipments via US railroads have recovered in 2010 at a growth rate of 3.8%.
The US Energy Information Administration (EIA) forecasts the electricity generation and domestic coal production levels to stay flat in 2011, followed by a mild growth of 2% and 2.5% in 2012 and 2013, respectively.
Strong Coal Demand from Asian Economies
The export coal demand is expected to grow, although at a slower rate, given the tight truckload capacity, growth in international coal prices and improving global demand, particularly from Asian economies.
According to Economist Intelligence Unit, global demand for coal will grow at an average of 4.3% in 2012-13, down from an estimated 5.1% in 2011. [1] China, which accounted for 46% of global coal consumption in 2010, will average at 6.3% in 2012-13 in terms of coal demand. Another important driver is India, where coal consumption has risen rapidly, averaging 8.5% between 2006 and 2010, according to EIA data.
While we estimate US rail carloads of coal will increase from 7.7 million in 2012 to 8.8 million by the end of our forecast period, Trefis members expect an increase from 8 million to 10 million during the same period. The member estimates imply an upside of 5% to the Trefis price estimate for CSX Corporation’s stock.
We currently have a Trefis price estimate of $33.80 for CSX Corporation’s stock, about 61% above the current market price.
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