Why Norfolk Southern’s Stock Is Declining

Norfolk Southern’s (NYSE:NSC) stock has now declined 20% since the beginning of 2015, as investors have grown increasingly concerned about the railroad’s performance this year. The unfavorable coal pricing environment and competition from natural gas has been one of the major reasons behind the decline, and other railroad stocks have been impacted as well. In this article we take a look how things have panned out to date and what might be in store for the remainder of the year in relation to coal shipments for Norfolk Southern.

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Weak Coal Carloads

U.S. railroads have been suffering from weak metallurgical and thermal coal prices in the global market. Coal prices have slumped due to high exports from Australian coal suppliers and low demand from China. Additionally, the strong U.S. dollar has also presented headwinds. U.S. coal suppliers have either had to lower their prices in order to remain competitive or have stopped exporting. Norfolk Southern’s coal carloads, which accounted for 20.5% of its revenues in 2014, have also been suffering due to these trends. Its coal volumes declined 7.4% in the first quarter and 21.8% in the second quarter to date through June 20. ^[1]  Looking at the current trends, we believe that the weakness is likely to persist in the short term.

Metallurgical coal was trading at around $111.50 per ton by the end of May, as a result of Australian coal producers having agreed to sell metallurgical coal at around $109.50 per metric ton, a six year low, to Japanese steel mills. ^{[2] [3]} However, prices are likely to go down further as a result of new contracts for the third quarter, which have been priced at $93 per ton. ^[4] Thermal coal is also trading at lows of $50 per ton, compared to its peak of $338.75 per ton in 2011. According to Citi, the low price environment will likely persist. ^[2] This should keep the pressure on U.S. metallurgical and thermal coal producers and temper exports, which will likely lead to a decline in Norfolk Southern’s export coal volumes in the future, as well as its coal revenue per carload.

On the domestic front, the demand for coal at electric utilities seems to be declining, which is also having an impact on Norfolk Southern’s domestic coal shipments. For the month of April, coal consumption at electric utilities declined 11.0% year-on-year, leading to a 30% rise in coal stock piles. ^{[5] [6]} The spot price for natural gas at Henry Hub has remained lower than $3 per million btu in the past few months, a level at which utilities start to shift from coal to natural gas. This is also evident from the rise in natural gas consumption at electric utilities, which grew 24.8% year-on-year in April. ^[7] If the present conditions persist, Norfolk Southern’s domestic coal volumes could continue to tank in 2015.

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1. Norfolk Southern Carloading Report, www.nscorp.com [↩]
2. Coal headwinds tipped to drive down prices, May 28, 2015, The Sydney Morning Herald [↩] [↩]
3. Met Coal Tumbles to New Six-Year Low Amid Slumping Demand, March 17, 2015, Bloomberg [↩]
4. Met Coal Hits Lowest Price in a Decade, June 17, 2015, Wall Street Journal [↩]
5. Table 2.1.A. Coal: Consumption for Electricity Generation, June 25, 2015, EIA’s Electric Power Monthly Report [↩]
6. Stocks of Coal, Petroleum Liquids, and Petroleum Coke: Electric Power Sector, June 25, 2015, EIA’s Electric Power Monthly Report [↩]
7. Table 2.4.A. Natural Gas: Consumption for Electricity Generation, June 25, 2015, EIA’s Electric Power Monthly Report [↩]