How CSX Could Benefit From A Revival Of The Coal Industry Proposed by The Incoming President

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The coal industry could be one of the beneficiaries of the outcome of the recent U.S. presidential election. The incoming administration has promised to take steps for the revival of coal mining in the U.S. by rolling back certain environmental regulations that have at least partly been responsible for the decline of the coal industry. [1] Besides environmental regulation, an environment of cheap natural gas prices has contributed to a steady decline in the demand for coal by utilities, with the share of natural gas in U.S. electricity generation exceeding that of coal this year. [2] Among the range of options being considered by the incoming administration to lower the regulatory restrictions on the coal industry is the rollback of President Obama’s Clean Power Plan. The Clean Power Plan, which targets a 32% reduction in power plant carbon dioxide emissions from 2005 levels by 2030, has created added incentive for thermal power plants to adopt natural gas as their preferred fuel for electricity generation. [3] Thus, if the new administration were to revoke the Clean Power Plan, it would create conditions suitable for a recovery in the demand for coal, which would benefit not only coal miners but also companies involved in the transportation of coal such as CSX.

How A Revival In The Coal Industry Could Benefit CSX

We currently forecast an approximate 10% decline in U.S. rail coal shipments from 2016 levels by the end of our forecast period. If the incoming administration were to create a more conducive environment for the coal industry, U.S. rail coal shipments would probably trend along a different trajectory. However, any increase in the demand for coal utilities would remain limited unless gas prices increase substantially. As per EIA forecasts, natural gas prices will increase to $3.12 per MMBtu in 2017 from an estimated $2.50 per MMBtu in 2016. [4] If gas prices maintain this upward momentum, in conjunction with a more favorable regulatory environment, the demand for coal from utilities could increase substantially. We have created a scenario modelling such a development in which U.S. rail shipments of coal rise 5% from 2016 levels by the end of the forecast period, as opposed to the 10% decline currently factored into our model for CSX.

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See our forecast for U.S. rail shipments of coal in this scenario

We have also modified our revenue per carload forecast for CSX’s coal freight as well as the company-wide EBITDA margin forecast to account for the improved demand conditions.

See our complete analysis for this scenario here

If we factor in these assumptions into our model for CSX, it translates into a 9% increase to our price estimate for the company. Thus, a revival of the coal industry engineered by the incoming administration could significantly boost the prospects of the company.

Have more questions about CSX? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for CSX

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Notes:
  1. Oil, Coal Seen as Winners With Donald Trump Victory, Wall Street Journal []
  2. Natural gas expected to surpass coal in mix of fuel used for U.S. power generation in 2016, EIA Website []
  3. FACT SHEET: Clean Power Plan By The Numbers, EPA Website []
  4. Short Range Energy Outlook, EIA []