Norfolk Southern’s Coal Woes Likely To Continue

Norfolk Southern (NYSE:NSC) continues to face headwinds with its coal shipments. At a time when competitor CSX is reporting double digit growth in coal carloads, Norfolk Southern has been reporting double digit declines. Competitor Union Pacific’s coal carloads have also grown in the high single digits. These declines are likely to weigh on Norfolk Southern’s revenues considering that its short-term outlook for coal shipments seems to be soft.

See our complete analysis of Norfolk Southern here

Contract Loss Offsets Renewed Domestic Demand

Driven by the high price of natural gas and low coal inventory at utilities, demand for coal in the U.S. began to pick up early in the year. Railroads such as CSX and Union Pacific have been able to capitalize on the rejuvenation in coal demand and benefited from the increase in coal shipments. However, Norfolk Southern was not able to do the same, at least partially because of a contract loss it suffered earlier in the year. The contract loss led to a 2.2% decline in Norfolk Southern’s coal shipment volume and revenue in the third quarter.

According to Norfolk Southern’s carloading report for the week ending November 22, its fourth quarter to date coal carloads have declined 11.2%, ^[1] whereas CSX and Union Pacific have reported 10.5% and 9% growth, respectively, over the same period. ^{[2] [3]} Though Norfolk Southern’s contract loss can explain at least part of the decline, there may be other factors at play as well that are driving the severe decline.

Weak Export Markets And Mild Weather Will Continue To Add Pressure

Norfolk Southern’s coal shipments will also face headwinds from the weak coal market. Declining coal demand in China and high coal output from Australia have put pressure on the price for thermal and metallurgical coal. Recent reports put global prices for thermal and metallurgical coal at their 5 year lows. ^{[4] [5]} U.S. coal suppliers are unable to compete at such low prices, which leads to lower export coal carloads for Norfolk Southern. With China imposing tariffs on coal imports, prices are likely to remain low for some time. This should continue to put pressure on U.S. coal, which will further impact Norfolk Southern’s export coal volumes.

Mild weather forecasts for this winter in the U.S. have caused natural gas futures to decline. On November 24, the January 2015 natural gas futures on the New York Mercantile Exchange declined 5.45% on predictions of mild winter weather. ^[6] Declining natural gas prices could threaten the demand for coal, especially at a time when investors are betting on a decline in demand for heating.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Norfolk Southern’s Carloading Report, www.nscorp.com [↩]
2. CSX’s 2014 Week 47 Carloading Report, www.csx.com [↩]
3. Union Pacific’s 2014 Week 47 Carloading Report, www.up.com [↩]
4. THERMAL COAL-Prices remain weak as Australian exports surge, October 7, 2014, www.reuters.com [↩]
5. Metallurgical Coal at 6-Year Low as Chinese Demand Slows, September 25, 2014, www.businessweek.com [↩]
6. Natural Gas NYMEX, www.ino.com [↩]