Here’s Why Norfolk Southern’s Coal Freight Revenues Could Decline In The Near Term

by Trefis Team
Norfolk Southern
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Norfolk Southern’s (NYSE:NSC) coal freight business accounts for roughly 15% of the company’s value, according to Trefis  estimates. The segment generated revenues of $1.82 billion in 2018, accounting for 16% of the company’s total revenues, and a growth of 4.5% over the prior year. This can be attributed to an uptick in coal exports in 2018. In fact, the coal export volume for Norfolk Southern was up 6% last year. However, the volume growth in export was offset by declines in utility, domestic, and industrial coal. The revenue growth was primarily led by higher average revenue per coal carload. You can view our interactive dashboard analysis ~ How Did Norfolk Southern Fare In Q1, And What Can We Expect From Full Year 2019? ~ for more details on the expected performance of the company. In addition, you can see more of our data for industrial companies here.

For railroad companies, including Norfolk Southern, the coal freight business is dependent on macro trends in the coal and gas industry, primarily natural gas pricing, which has declined around 20% year-to-date, and thus offering a reasonably priced and cleaner alternative to coal as an energy source. On the contrary, coal prices could inch higher in the long run, given the introduction of tough environmental protection laws in several countries, which will make it difficult to develop new mines, thereby limiting the supply.

Also, the trends in exports have changed in the recent past. The trade tensions between the U.S. and China could hamper the growth in coal exports. Note that China is an important market for the U.S. coal. The exports to Asia doubled from 15.7 million tons in 2016 to 32.8 million tons in 2017. Looking at China, exports were 3.2 million tons in 2017, as compared to zero in 2015 and 2016. Looking forward, the overall U.S. coal exports are expected to decline 15% to 98 mst (million short tons) in 2019. Coal production is expected to decline 7% to 700 mst, while coal consumption is expected to decline 12% (y-o-y) to 604 mst in 2019, according to EIA. These factors will likely have an impact on railroad coal shipments.

Norfolk Southern could see low single-digit decline in coal volume for the full year 2019. However, this will partly be offset by growth in average revenue per carload, which has been trending higher. Average revenue per coal carload grew 6% last year. This can primarily be attributed to a higher fuel surcharge, given the trends in fuel prices over the last 3 years, and better pricing. However, crude entered bear market territory recently with ballooning U.S. inventories. It will be interesting to see how the crude averages for 2019 turn out, as it could have an impact on the company’s fuel surcharge revenues.





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