CSX’s Coal Freight To See 20% Decline In 2020?

CSX Corporation’s (NYSE:CSX) Coal Freight segment, which consists of the transportation of thermal and metallurgical coal either on CSX’s rail lines or in concert with connecting carriers, has seen revenues shrink steadily from $3.6 billion in 2011 to $2.1 billion in 2019, and we expect these revenues to shrink further in 2020 to below $1.7 billion, reflecting a 19% y-o-y decline, as we detail in our interactive dashboard, CSX Revenues: How Does CSX Make Money?.

There are several factors behind the revenue decline:

• There has been an overall shift to natural gas to meet the energy demand, as it is a cleaner form of energy.
• The demand for coal is linked to the pricing of natural gas. A decline in natural gas prices results in lower demand for coal. Natural gas prices have declined from around $5 levels in 2011 to $2 levels by the end of 2019, though they have been volatile in the range of $1.50 to $5.00 per MMBtu (million British Thermal Unit).
• Things are likely to only get worse over the coming months, as the coronavirus outbreak has disrupted the global economic growth, and the demand for coal is expected to fall sharply. In fact, The U.S. Energy Information Association (EIA) predicts a 22% decline in the U.S. production from 690.1 mst (million short tons) in 2019 to 536.7 mst in 2020.
• Looking at coal exports, it is also expected to decline sharply by 32% from 92.9 mst in 2019 to 62.7 mst in 2020, as top importers, such as India, are currently in a lockdown.
• This will directly impact CSX’s coal shipments, and the segment revenues.

But then why is CSX still in the coal freight business? Why doesn’t it focus more on its Merchandise Freight business, which consists of the transportation of chemicals & petroleum products, metals & equipment, minerals, fertilizers, forest products, agricultural & food products, and automotive, where the segment revenue grew from $5.6 billion in 2011 to $7.6 billion in 2019?

Despite falling revenues for coal freight, it is an important segment for railroad companies, including CSX. Coal as an energy source accounts for roughly a quarter of the U.S. electricity generation. It is also required by steel, cement, and other industries, and railroads are the most efficient and cost-effective means of coal transportation. And from CSX’s point of view, the decline in coal freight over the recent years has primarily been due to lower shipments, while the company managed to grow its pricing. The shipments (total carloads) have declined 21%, and average revenue per carload grew 13% over the last 5 years. The current model, hence, helps boost the company’s overall profit margins.

Even though the revenue share of the Coal Freight segment has shrunk from 19.5% in 2015 to below 17.3% in 2019, and will continue to shrink over coming years, we believe that it remains an important part of the company’s business model, as we detail in our interactive dashboard on CSX Revenues.

Company Overview

CSX Corporation is engaged primarily in freight transportation in the Southeast, East, and Midwest regions of the U.S. CSX’s rail network is over 21,000 route miles, and it serves many large population centers in 23 states. Its customers include, chemical producers, industrial manufacturers, agricultural companies, coal, oil & gas, and mining companies, steel processors, and automotive companies, who pay CSX to carry their goods. CSX’s competitors include trucking companies, along with other railroad companies, such as Norfolk Southern, BNSF Railway, and Union Pacific.

Overview of Company Revenues

CSX reported $11.9 billion in Total Revenues for full-year 2019. This includes 4 operating segments, of which the key 3 segments are:

• Merchandise Freight: It consists of the transportation of chemicals & petroleum products, metals & equipment, minerals, fertilizers, forest products, agricultural & food products, and automotive.
• Coal Freight: Coal Freight consists of the transportation of thermal and metallurgical coal either on CSX’s rail lines or in concert with connecting carriers.
• Intermodal Freight: Intermodal Freight refers to the shipment of containers that can be moved from one form of transport to another, such as from train to ship.

Our interactive dashboard highlights all the components of CSX’s Revenues and compares the company’s top line with peers, Norfolk Southern and Union Pacific.

Merchandise Freight

• The segment revenue increased from $7.1 billion in 2017 to $7.6 billion in 2019 and we expect it to shrink 6% to $7.1 billion in 2020.
• The expected decline in 2020 can be attributed to the global pandemic, and its repercussions on the economy. The global economy is feared to go into recession, and this will weigh on overall industrial output, and in turn, on CSX’s Merchandise shipments.

Coal Freight

• Coal Freight has remained around the $2.1 billion mark between 2017 and 2019, and we expect it to decline 19% to $1.7 billion in 2020.
• The expected decline in 2020 can be attributed to declining natural gas prices, which has resulted in lower demand for coal as an energy source.

Intermodal Freight

• Intermodal Freight has remained around the $1.8 billion mark between 2017 and 2019, and we expect it to decline 8% to $1.6 billion in 2020.
• The expected decline in 2020 can be attributed to increased trucking capacity in the U.S., as well as an overall decline in demand due to the impact of the current pandemic on industrial output.

Given the current pandemic, and its impact on the economy, CSX’s stock can drop 30% from the current levels of $60.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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