The 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

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.