U.S. Rail Coal Shipments To Rise Amid Favorable Business Environment

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President Trump recently announced the federal government’s intention to withdraw from the Paris Climate Agreement, and while the process to formally withdraw from the global climate treaty will take years, the announcement is an indication of the administration’s intention to create a more favorable business environment for the coal industry. Moreover, rising natural gas prices should translate into steady growth in coal production in the coming years.

Under the Paris Climate Agreement, the U.S. committed to lower its greenhouse gas emissions by 26-28% below 2005 levels by the year 2025. Had the U.S. followed through on its commitment, it would have led to the rapid substitution of coal by natural gas, a fuel with lower emissions, in electricity generation from 2020 onwards, when the Paris Climate Agreement enters into force. However, with the federal government indicating that it does not plan to follow through on the agreement as a part of its promise to lower restrictive environmental regulations on U.S. industries, the regulatory environment for coal production going forward appears to be favorable. In addition, natural gas prices, which averaged close to $2.50 per MMBTU in 2016, are likely to rise to $3.17 per MMBTU and $3.43 per MMBTU in 2017 and 2018, respectively. Rising exports of natural gas and LNG, as well as higher demand for natural gas for electricity generation amid strengthening economic conditions, are expected to translate into rising natural gas prices, at least in the near term. However, in the longer term, the declining production costs of electricity generation from renewable sources could threaten the sustainability of electricity generation from fossil fuels.

Given the federal government’s favorable policy stance towards the coal industry, we have raised our forecasts for U.S. rail shipments of the commodity. Our new forecast represents 16% higher shipments by the end of our forecast period, as compared to our previous forecast. In addition, we have also raised our margin forecast for CSX by 200 basis points by the end of our forecast period.

While we do expect coal shipments to grow steadily over the forecast period, longer term threats to rail shipments of coal could stem from competition from renewables as well as potential unfavorable changes in environmental regulation. Taking these threats into consideration, we have factored in a relatively modest 2% compounded annual growth rate into our forecast for U.S. rail shipments from 2018 onward. Nonetheless, the coal industry can look forward to a period of substantially more favorable business conditions, compared to the past few years.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such 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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