Union Pacific Corporation (NYSE:UNP), one of the leading railroad companies in the U.S., generates 17% of its revenues through chemical shipments. Industrial chemicals and plastics represent close to 45 % of Union Pacific’s chemical shipment volume. Petroleum products, soda ash, fertilizers, sodium products, phosphorous rock and sulfur account for the remaining 55%.
We believe that Union Pacific’s chemical shipments business is poised to grow because of the growing demand of plastics and industrial chemicals. Demand for plastics will be driven by the growing automotive and housing industry in the U.S. Low natural gas prices and increased industrial activity shall boost demand for industrial chemicals.
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Growth In Plastics Shipment
Plastics shipped by Union Pacific are used for automotive manufacturing, housing construction, and durable and disposable consumer goods. Growth in these end markets shall bode well for Union Pacific’s plastics shipments.
The use of plastics in automobiles shall grow due to the revised Corporate Average Fuel Economy (CAFE) standards issued by the U.S. Environmental Protection Agency and the National Highway Traffic Safety Administration. In August 2012, the CAFE standard was increased with an aim to increase fuel efficiency of automobiles set to be launched late 2016 onwards. One way to improve fuel efficiency is by reducing the weight of the vehicle, since less energy is required to move a lighter vehicle. Plastic being lighter than metals, can be used to cost effectively reduce weight of vehicles without compromising on durability. Additionally, plastics have also proven to increase safety of cars through structural reinforcements and enhancements such as bumpers, and door panels, and innovations such as advanced seat belts and air bags. Due to its advantages, the use of plastic in vehicles has increased 15% from 2002 to 2012, and is expected to increase further in the future.  Combined with an increase in U.S. and global auto sales,  demand for plastic will increase, driving growth in plastic shipments for railroads such as Union Pacific.
Growth in housing starts will also boost shipments of plastics. Plastics are increasingly used in plumbing, floorings, doors, windows, bathrooms, railings and for insulation given its light weight, low costs and long life compared to metals and wood. Housing starts grew 18% in 2013 to 923,400 and building permits were up by 17.5%.  The strong growth trend is expected to continue into 2014, driving shipments of housing and construction material including plastics. Housing starts are estimated to reach 1.15 million in 2014.  We believe that Union Pacific’s chemical shipments may benefit from these trends that will drive the demand for plastics.
Expansion Of Production Capacity By Chemical Manufacturers Bodes Well For Union Pacific
A large number of chemical companies are opening new operations and increasing production capacity in the U.S. This is because of two reasons. Firstly, due to a strong recovery in the U.S. economy and increased industrial activity, demand for industrial chemicals in the U.S. has increased. Secondly, price of natural gas, which is used as raw material and also as power source for chemical plants, has declined due to the shale boom.  As companies shift base to the U.S. and increase production capacity, production of chemicals in the U.S. is expected to grow 25% over the next five years.  These trends should benefit railroads since increased chemical demand and supply will lead to increase in chemical shipments.
Companies such as Chevron Phillips Chemicals, Formosa Plastics, Dow Chemical and Exxon Mobil are set to expand their existing capacity in sites near the gulf coast. This bodes well for Union Pacific since these sites are located close to its terminals in Houston, New Orleans and Brownsville. Chemical manufacturers will probably opt for Union Pacific to ship their products given the proximity of its terminals. In addition, shipping chemicals by railroads costs 25% less compared to trucks.  This should help increase Union Pacific’s chemical shipment volumes and revenue.
- Chemistry and Light Vehicles, July 2013, www.plastics-car.com [↩]
- Global auto sales head for 100 million by 2018, December 1 2013, www.freep.com [↩]
- Housing-Starts Forecast for 2014: Past Is not Prologue, January 17 2014, blogs.wsj.com [↩]
- Strong Single-Family Growth will Fuel Housing in 2014, February 4 2014, www.nahb.org [↩]
- Chemical Companies Rush to the U.S. Thanks to Cheap Natural Gas, July 25 2013, www.businessweek.com [↩]
- U.S. Chemical Industry Poised for Dynamic Expansion; Set to Outpace Overall U.S. Economy, December 17 2013, www.americanchemistry.com [↩]
- Railroads and Chemicals, September 2013, www.aar.org [↩]