What To Expect From Union Pacific’s Coal Freight Business In The Near Term?

by Trefis Team
Union Pacific Corporation
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Union Pacific Corporation’s (NYSE: UNP) coal freight business accounts for 13% of the company’s value, according to our estimates. The business is dependent on macro trends in the coal industry, primarily coal as well as natural gas price movements. In the recent past, the company has seen a decline in coal shipments, as it lost some of the business. However, other railroad companies are seeing strong growth in export coal shipments, 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 Union Pacific ~ 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



Union Pacific’s coal freight revenues grew in high single digits to $2.6 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 an expected decline in domestic coal shipments will likely be offset by strong export volume growth. However, any significant growth is unlikely, given that the company is facing pricing headwinds of late. In fact, coal shipments were down 3% in the previous quarter. Also, the company has lost some of the coal business, which is impacting the overall segment performance. The decline in domestic coal shipments for the industry 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 652 million short tons (mst) coal consumption next year 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 the Henry Hub natural gas price moving over 55% to $4.69 currently. This can be attributed to concerns over supply shortages in the near term. Coal prices have also inched higher by 10% during the same period. Higher prices will bode well for the U.S. coal exports. Thermal coal in particular is seeing strong growth with exports up 44% y-o-y for the nine month period ending September 2018. Also, the overall U.S. coal exports stood at 87 mst for the nine month period ending September 2018, as compared to 69 mst, during the prior year period. Despite strong trends in export, 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. While Netherlands, Japan, and India currently remain the top buyers of the U.S. coal, continued war over tariffs could slow the export growth for Union Pacific in the near term. Looking at the margins, we forecast Union Pacific’s EBITDA margins to remain stable around 50%. 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 could impact the near term revenues for the company, they will likely trend higher for the full year.



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