Rising coal demand to boost railroads

As the overall economy improves and the industrial sector continues to grow, coal production will also notch up.

By Trefis Dec 16, 2011 6:47PM
Image: Elevated view of freight cars with coal © Joseph Sohm-Visions of America/Photodisc/Getty ImagesThe global volatility in coal demand and supply has caused major coal producers, including Alpha Natural Resources (ANR) and Walter Energy, to reduce sales guidance for the second half this year.

Still, we believe that coal demand in the longer term will remain strong, particularly as infrastructure investments in Asia improve production levels. This should benefit railroad companies such as CSX (CSX), Norfolk Southern (NSC) and Union Pacific (UNP).

We expect the total carloads of coal shipped via railroads in the U.S. to increase to 8.6 million by the end of our forecast period, with improving domestic coal production levels and robust demand for coal exports.

Our complete analysis for CSX Corporation's stock is here


CSX US Rail Carloads of Coal


Coal production to rise as US economy improves


Freight demand has historically been correlated to the U.S. gross domestic product. In June, the World Bank predicted the U.S. GDP will continue to grow at a moderate rate of 2.6% in 2011, 2.9% in 2012, and 2.7% in 2013. As the overall economy improves and the industrial sector continues to grow, coal production will also improve, pushing the demand for coal freight higher. Following a 12.9% decline in 2009 due to recession, coal shipments via U.S. railroads have recovered in 2010 at a growth rate of 3.8%.


The U.S. Energy Information Administration forecasts the electricity generation and domestic coal production levels to stay flat in 2011, followed by a mild growth of 2% and 2.5% in 2012 and 2013, respectively.


Strong demand from Asian economies


The export coal demand is expected to grow, although at a slower rate, given the tight truckload capacity, growth in international coal prices and improving global demand, particularly from Asian economies.


According to the Economist Intelligence Unit, global demand for coal will grow at an average of 4.3% in 2012-13, down from an estimated 5.1% in 2011. China, which accounted for 46% of global coal consumption in 2010, will average at 6.3% in 2012 and 2013 in terms of coal demand. Another important driver is India, where coal consumption has risen rapidly, averaging 8.5% between 2006 and 2010, according to EIA data.


While we estimate U.S. rail carloads of coal will increase from 7.7 million in 2012 to 8.8 million by the end of our forecast period, Trefis members* expect an increase from 8 million to 10 million during the same period. The member estimates imply an upside of 5% to the Trefis price estimate for CSX Corporation's stock.


We currently have a Trefis price estimate of $33.80 for CSX Corporation's stock, about 61% above the current market price.


* Trefis members constitute more than tens of thousands of users of the Trefis platform, inclusive of investors, financial analysts, and business professionals who use the Trefis platform to create their own models and price estimates.

Tags: csxNSCUNP
0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123
123 rated 1
262
262 rated 2
480
480 rated 3
651
651 rated 4
649
649 rated 5
629
629 rated 6
616
616 rated 7
496
496 rated 8
346
346 rated 9
111
111 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
EXCEXELON CORPORATION9
TAT&T Inc9
VZVERIZON COMMUNICATIONS8
CTLCENTURYLINK Inc8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.