Despite the impacts of inclement weather and staggering fuel prices, U.S. Railroads saw strong momentum in the first half of 2011 primarily driven by higher coal volumes. Coal shipments, which accounted for approximately 40% of the total railway shipment, led to positive market sentiments.
However, a suggested decline in coal shipments for the second half of the year by Alpha Natural Resources (ANR) and Walter Energy (WLT) is having a ripple effect on the rail industry.
The negative market reaction resulted in steep declines in share prices. Major players like CSX Corporation (CSX) and Norfolk Southern (NSC) plunged 8.1% and 8.3%, respectively, followed by Union Pacific (UNP) and Kansas City (KSU) which sank a respective 6% and 4.5%.
The recent news comes as a big blow to rail companies as they banked mostly on these coal producers for shipments to domestic as well as international markets. Coal miners were optimistic on the long-term demand for coal given the emerging position of U.S. as coal export hub.
Global supply constraints for export coal due to disruptions in Australia and the growing demand for coal in Asian countries for steel manufacturing lifted the market position of the U.S.
However, the current global volatility that affected mining activities, the sudden drop in demand from the Asian markets sighting problems over quality along with harsh weather conditions in the Pacific region have resulted in a major setback for these coal companies. Lower natural gas prices and higher utility stockpile levels have also raised their concerns.
For second half of the year, Alpha has reduced its estimated shipments to 102.5–109.5 million tons from 104–112 million tons guided previously. Even Walter expects metallurgical coal sales volume of around 5.2 million, down from the previous expectation of 5.9 million.
We are yet to see changes in predictions by railroads like CSX and Norfolk. Both companies still stick to their investment plans and export projections. In fact, for the full year, CSX had raised its capital plan from $2 billion to $2.2 billion and Norfolk had set a higher export goal based on approximately 5% increase in global steel production.
What lies ahead for the railroad companies in the backdrop of a fluctuating economy and raised expectations, is to be watched out for. Several legal battles will also add to the woes for an industry that has started to rebound.
We are currently maintaining a long-term Outperform recommendation on Norfolk with a Neutral recommendation on CSX Corp., Union Pacific and Kansas City.
ALPHA NATRL RES (ANR): Free Stock Analysis Report
CSX CORP (CSX): Free Stock Analysis Report
KANSAS CITY SOU (KSU): Free Stock Analysis Report
NORFOLK SOUTHRN (NSC): Free Stock Analysis Report
UNION PAC CORP (UNP): Free Stock Analysis Report
WALTER ENERGY (WLT): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment