How Will The Recent Move In Natural Gas & Coal Prices Impact CSX Corporation’s Coal Freight Business?

by Trefis Team
CSX Corporation
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CSX Corporation’s (NYSE: CSX) coal freight business accounts for roughly 20% of the company’s value, according to our estimates. The business is dependent on macro trends in the coal industry, primarily the coal as well as natural gas pricing. In the recent quarters, the company has seen a decline in domestic coal shipments, while export coal has seen strong gains, led by a rise in global benchmark coal prices. We expect this trend to continue in the near term, and result in higher shipments in 2018 and 2019. However, looming trade tensions could impact the growth rate in the near term. We forecast coal freight revenues to grow in mid-single digits in the near term, driven by both volume and pricing gains. We have created an interactive dashboard analysis ~ How Is The Coal Freight Business Trending For CSX Corporation ~ highlighting the company’s coal freight segment. You can adjust revenue and margin drivers for 2018 and 2019. Below we discuss our expectations and forecasts for the coal freight business.

Expect Coal Freight Revenues To Grow In Mid-Single Digits Led By Both Volume And Pricing Gains

CSX’s coal freight revenues grew in low teens to $2.1 billion in 2017. We forecast them to grow in mid single digits in 2018 and 2019. In terms of volume, we forecast low single digit growth in the near term, as strong export volume growth will mostly be offset by an expected decline in domestic coal shipments. In fact, domestic coal tonnage was down 9% while export tonnage was up 27% in the nine months period ending September 2018. This resulted in 4% growth in overall coal tonnage for CSX Corporation during the same period. The decline in utility coal tonnage can largely be attributed to the trends in natural gas prices. The benchmark henry Hub natural gas price was around $3.02 by the end of Q3 2018, similar to what it was in the prior year. With gas prices being more attractive, the dependency on coal as an energy source continues to come down. In fact, as per the latest EIA estimates of 690 million short tons (mst) coal consumption in 2018 will mark the year with the lowest coal consumption over the last 40 years.

However, since September 2018, natural gas prices have seen a sharp move upward with Henry Hub natural gas price moving over 40% to $4.28. This can be attributed to concerns over supply shortages in the near term. Coal prices have also inched higher with NYMEX coal futures moving up 10% during the same period. With coal prices remaining higher, the U.S. coal exports could continue to see strong growth, thereby aiding the export volume for railroad companies. Thermal coal in particular is seeing strong growth with exports up 44% y-o-y for the nine month period ending September 2018.

However, there are certain concerns looming over the U.S. coal exports given the trade tensions. China has already imposed a 25% tariff on imports of U.S. coal in August, as part of its retaliation against tariffs on its exports implemented by the U.S.  Note that September coal exports fell to a six-month low of 8.6 mmt. This could slow the export growth for CSX Corporation in Q4. It will be interesting to see how the U.S. coal exports trend in the near term with prices being supportive on one hand, and looming concerns over trade tensions on the other.

Looking at the margins, we forecast CSX’s EBITDA margins to see around 300 basis point growth in 2018, primarily led by better pricing. Average revenue per carload will likely see low single digit growth in the near term, aided by higher fuel surcharges. While a strong decline in crude oil prices over the last two months will impact the Q4 revenues for CSX corporation, they will likely trend higher for the full year. Overall, we believe that Q4 in particular could be challenging for CSX Corporation’s coal freight business, as trade tensions will likely impact the export volume, and the domestic consumption being at a 40 year low will continue to drive the domestic coal tonnage lower.


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