Tuesday, March 20, 2012

Railroads and Declining Coal Usage (CSX; BRK.B; UNP; NSC)

 Berkshire's Burlington Northern is the country's largest coal hauler. KOL is the Market Vectors Coal ETF, down 2.63% this morning.
From the Wall Street Journal's Heard on the Street column:
Even in this age of the "new iPad," there is still a lot of money to be made just hauling around rocks—specifically, coal.

Railroads are still beholden to coal, which is tailor-made for the business. It is heavy and shipped in large volumes between the same set of fixed points—mine, power plant, foundry, port—over and over. Alternative means of transportation are limited. That makes for pricing power, big revenues and high margins. Although it isn't reported clearly, railroads derive an estimated 40% to 50% of their operating profit from hauling around coal, says David Vernon of Bernstein Research.

Problem is, the U.S. is using less coal. On a 12-month rolling basis, coal consumption in November was 10% below its July 2008 peak. And the trend is down, especially as mild winter weather has curtailed already weak demand for electricity. Power generation accounts for more than 90% of coal use.

Even more important is the impact of the revolution in U.S. natural gas. With gas being so cheap, generators are switching off coal-units to burn gas instead when possible. Research firm ISI Group estimates demand from utilities could drop by up to 50 million tons this year, equivalent to 5% of overall consumption.

So even though U.S. rail traffic overall is down only 1.4% so far this year, according to the Association of American Railroads, coal carloads are down 7.6%. The stock prices of CSX Corp., CSX -1.35% Norfolk Southern Corp. NSC -1.09% and Union Pacific Corp. UNP -1.09% have all trailed the transportation sector and, even more so, the S&P 500 so far this year....MORE
Mar. 15 
"It's Dark Days for Coal and Power Sectors" (KOL; BTU; ACI)
March 11 
Natural Gas and its Threat to the U.S. Coal Industry (BTU; ACI; ANR; PCX)
Jan 27 
The Economist:"the end of America’s coal era" and "Asian Coal Demand Buoys Peabody; Arch, Kinder Morgan Team On Exports" (BTU; ACI)