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Why the Dismal Picture for Union Pacific’s Carload Traffic?

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Union Pacific’s carloads

Union Pacific (UNP) is a major freight rail operator in the Western United States. The company competes with the Berkshire Hathaway-owned (BRK-B) BNSF Railway. UNP’s total carload results in the week ended March 5, 2016, were disappointing. The company’s total carloads went down by 92,225 units, or 7%, the same week, from 99,252 units during the comparable week in 2015. But the fall was still in line with the 8% fall reported in the total weekly US railcar units. Offsetting this fall, railcars barring coal but including coke rose by ~3% that same week.

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Why coal carloads matter?

Union Pacific’s combined coal and coke carloads went down by a whopping 19,211 units, or by 32%, coming in at 28,218 units for the week ended March 7. You should note that UNP recorded a negative change of 22% in coal revenues for 2015. Notably, coal’s share of the company’s revenues was almost 16% in 2015.

Investors should note that UNP’s revenues depend upon production in the Southern Powder River Basin, or PRB. According to the US government, PRB production has declined over the past few years, mainly due to the recession and to competition from natural gas. PRB coal output is expected to fall significantly in 2016, for the first time since 1998, so major coal producers (PICK) in the US like Alliance Resource Partner (ARLP), Peabody Energy (BTU), and CONSOL Energy (CNX) are facing serious headwinds in 2016.

Headers and backbenchers

The commodities that saw advancing railcar units in the week ended March 5, 2016, include the following:

  • food and kindred products
  • primary forest products
  • stone, clay, and glass products
  • motor vehicles and equipment

The major laggards were farm products, petroleum products, grain mill products, and non-metallic minerals. On a YTD (year-to-date) basis, 13 out of 20 commodity groups were finished that week in the red for UNP.

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