Despite an overall optimistic view for the next year within the US railroad industry, coal remains a headwind, even as it is expected to recover somewhat from rough third quarter results.Receive daily email alerts, subscriber notes & personalize your experience.
“Coal carloads will likely continue a steep decline in the remaining months of 2020, but should benefit from an increase in US coal production in 2021 that we expect to be 5%-10% higher compared to 2020,” Moody’s Investor Services said in a report Oct. 29. “The partial recovery in US coal production is driven by an expected increase in demand for electric power generation along with higher natural gas prices.”
However, given a 25% drop in coal carloads over the last 12 months, Moody’s said, railroads need to seek other growth opportunities to avoid a decline in total freight volumes.
Following the third quarter, Canadian Pacific executives said they expect strong fourth quarter results on the company’s Q3 earnings call Oct 20. Union Pacific executives likewise said in the Q3 earnings call Oct. 22 that they expect better results in the coming quarters as negative factors turn into positive ones.
“Our expectation [is that] fourth quarter volumes will be our first quarter with positive year-over-year growth in two year,” Kenyatta Rocker, executive VP of marketing and sales, said in UP’s call Oct. 22.
Growth in volumes is expected to turn positive over the next year following a nearly 10% decline due to the coronavirus pandemic, Moody’s said, leaving it to project revenue growth of 4.25%-6% in 2021.
Despite overall growth for railroads, Moody’s expects coal volumes to decline or potentially be flat over the next year.
“In light of the continuing decline in coal demand, it is critical that the railroad industry offers a competitive alternative to over-the-road transportation, both in terms of pricing and service levels,” Moody’s said.
Even with concern over the coal segment, Moody’s changed its 12-month to 18-month outlook for North American rails to stable, up from a negative rating, on Oct. 29 following railroad earning’s releases where the general consensus showed optimism for the fourth quarter and 2021.
Overall, North American rail volumes have largely been rising since the start of the fourth quarter, up 2% over eight weeks. However, coal remains one of the worst performing segments, down 20% year on year, a Benchmark Company report published Nov. 19 said.
Crude is the worst performing segment, down 28% from the year-ago period, and frac sand follows coal with a 18% decline.
“Looking forward, we think rails could benefit from a combination of infrastructure stimulus, modal conversions, and near-shoring trends,” Benchmark said. “The biggest risk, in our view, is entirely macro, i.e., a COVID-related pullback. That’s the short-term, though. Over the long term, few industries are as broadly exposed to a recovery as rails.”
Headwinds in coal
Jennifer Hamann, UP’s executive VP and CFO, said at a company conference presentation Nov. 17, coal “continue to be a headwind.” Hamann added that coal volumes were down 19% quarter to date. Year on year, volumes were down 23.2%, data from the Association of American Railroads said.
James Foote, CSX’s CEO and president, said in a Nov. 17 company conference presentation, “We recognize the US coal industry’s place in the global markets, and our challenge is to leverage what we’ve done on our service and cost side to prove that we’re a reliable source for export coal and, again, align ourselves with expanding or changing markets.”
According to AAR data, CSX coal volumes are down 27.8% year on year.
“At the end of the day,” Foote continued, “we’re kind of at the mercy of global demand, global steel demand, global demand for electricity, price of gas in Russia and all those kinds of things that we don’t have a lot of control over.”
Foote also questioned coal’s competitiveness against natural gas and in the electricity market.
“Our challenge in both markets here is to make sure that we are forward thinking,” Foote said in the presentation.
On CSX’s earnings call Oct. 21, coal was noted as a headwind, helping drive revenues down 11% year on year. Coal revenues declined 36% in Q3 from the year-ago period, while volumes dropped 27%.
Norfolk Southern’s Alan Shaw, executive VP and chief marketing officer, noted coal’s continued challenges in the export market due to low seaborne pricing.
“Export volumes are likely to improve sequentially, although seaborne prices will remain below prior year levels,” Shaw said in the Q3 earning’s call Oct. 28.
On the domestic side, the utility coal market is expected to face continued pressure related to high stockpiles and natural gas prices. NS volumes have declined 38.9% over 46 weeks from the year-ago period.
“Power prices in the PJM right now are below $20/MWh,” Shaw said. “Coal is going to have a really hard dispatching into that environment. And while natural gas has rebounded nicely to $3/MMBtu, the spot market is still below $2/MMBtu, closer to about $1.70, which is what coal uses to dispatch is that spot market.”