A Quick Snapshot of Norfolk Southern’s Chemical Freight Segment

by Trefis Team
Norfolk Southern
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Norfolk Southern (NYSE:NSC) generates its revenues primarily from various commodities freight, including intermodal, coal, chemicals, and automotive, among others. The Chemical Freight segment accounts for over 15% of the company’s value, according to our estimates. The segment over the last couple of years has been facing pressure on the volume front, given a decline in the chemical shipments. However, the pricing has seen some growth during the same period, which has aided the segment revenues. Looking forward, we forecast the segment revenues to grow in mid-single-digits in the near term, led by higher production, and a continued growth in pricing. We have created an interactive dashboard analysis highlighting the company’s Chemical Freight segment. You can adjust revenue drivers and margins for 2018 and 2019 to see how it impacts the company’s overall revenues, earnings, and price estimate. Below we discuss our expectations and forecasts for the company.

Expect Steady Growth In Chemical Freight Volume & Pricing

The Chemical Freight segment accounts for roughly 16% of the company’s overall revenues and EBITDA. In terms of carloads, it accounts for around 13% of the company’s overall carloads, excluding the Intermodal segment. We expect Norfolk’s Chemical Freight revenues to grow 4% to $1.74 billion in 2018, and $2.20 billion by the end of our forecast period. Chemical freight revenues are dependent on two factors – Number of Chemical Carloads, and Revenue Per Carload. We expect steady growth for both of the factors in the near term. We expect the volume growth to be driven by higher production. While the overall chemical production in the U.S. was less than 2% in 2016, it has picked up the pace since then, and is expected to grow at around 3.5% in 2018 and 2019. In terms of exports, the growth was over 2% in 2017. However, there is a risk on the export front, given the recent fear of a trade war with China. It should be noted that over 12% of U.S. chemical exports go to China. As such, any growth in chemical shipments will likely be capped in the near term. We thus forecast only a low-single-digit growth in the chemical shipment volume for Norfolk Southern. In Q1 2018, the company reported a 2% growth in chemical shipments, led by an increase in LNG shipments.

Looking at pricing, we forecast a low-single-digit growth in the near term, led by fuel surcharge. The oil prices are trading at higher levels when compared to 2017. In fact, EIA forecasts Brent crude oil prices to average around $71 in 2018, reflecting a 30% growth from the 2017 average. Fuel surcharges are a component of Revenue Per Carload, and are linked to prices of WTI or U.S. On Highway Diesel. With oil prices expected to trend higher in 2018, higher fuel surcharge revenues will boost the Revenue Per Carload. Below are our core reference data for dashboards on Norfolk Southern’s volume metrics.

Coal Carloads

Intermodal Units

Agriculture & Consumer Products Carloads

Chemicals Carloads

Metals And Construction Commodities Carloads

Paper, Clay, And Forest Products Carloads

Automotive Carloads


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