What’s Driving U.S. Rail Shipments This Year?

by Trefis Team
-8.12%
Downside
116
Market
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Trefis
UNP
Union Pacific Corporation
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U.S. rail shipments have risen 2.3% year-over-year so far this year, in stark contrast to the 5% decline seen over the course of the year 2016. [1] Though there has been a broad-based rise in shipments across categories this year, the Coal and Metallic Ores & Metals categories have witnessed the sharpest gains, registering 15.9% and 4.7% growth so far this year, respectively. [1] These shipment categories are likely to witness continuous growth over the rest of the year, as well.

Coal Shipments

U.S. rail coal shipments largely depend on the demand from utilities. Soft natural gas prices hampered the demand for coal from utilities in 2016, translating into a 20% year-over-year decline in U.S. rail shipments of coal. [2] However, benchmark natural gas prices are expected to average $3.03 per MMBTU in 2017, around 20% higher year-over-year. [3] Higher natural gas prices are expected to translate into a considerable increase in rail shipments of coal this year, as illustrated by our forecasts for the same.

While we expect coal shipments to rise this year, the trajectory of shipments next year onward would depend upon how quickly gas prices rise. If gas prices sustain their growth momentum over the coming years, coal shipments could rise at a faster rate as well.

Metallic Ores & Metals Shipments

The Metallic Ores & Metals category reported a decline of around 5% year-over-year in 2016, as growth in domestic steel shipments was disrupted by competition from unfairly traded steel imports. [2] Based on petitions from domestic steelmakers, U.S. trade authorities imposed antidumping duties on steel imports from a number of countries indulging in unfair trade practices, including major steel producers such as China and South Korea over the course of 2016. [4] This has translated into the lessening of competition from steel imports, boosting domestic steel production, and translating into higher rail shipments of the commodity. This is reflected in our forecasts for Union Pacific’s Industrial Products Freight shipments category, which includes metal shipments.

Going forward, the successful implementation of the Federal Government’s plans for a $1 trillion overhaul of domestic infrastructure should translate into higher demand for steel. [5] This would likely boost rail shipments of metals, too.

Thus, coal and metals shipments are likely to remain elevated throughout the year. The year 2017 is likely to be characterized by rising shipments and revenues for railroad operators, in contrast to the previous year which witnessed declines in both shipments and top lines. [2]

Have more questions about Union Pacific? See the links below.

Notes:

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

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Notes:

  1. U.S. Railroad Freight Statistics Week Ended March 4 2017, AAR [] []
  2. U.S. Railroad Freight Statistics Week Ended December 31 2016, AAR [] [] []
  3. Short Term Energy Outlook, EIA []
  4. US hits China and others with more steep steel duties, CNBC []
  5. Trump Begins to Map Out $1 Trillion Infrastructure Plan, Wall Street Journal []
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