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Agriculture and Metals Freight Hurt CSX’s Merchandise Business

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CSX’s merchandise business

Most of CSX’s (CSX) merchandise revenues come from the I-90 and Southeastern corridors. The company transports agricultural products, industrials, and housing and construction supplies. In 1Q16, the merchandise business’s share was 66.2% against 59.8% in the corresponding period of 2015.

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CSX’s merchandise revenues

CSX’s merchandise revenues went down by 4.1% to $1,734.0 million in 1Q16 against $1,809.0 million in the same period last year. The agricultural and metals revenues fell by 10% each in the reported quarter. In this segment, the only respite came from automotive and waste & equipment. The revenues of these subsegments went up by 9% and 6%, respectively.

Why volumes fell

Metals volumes went down due to lower steel production and fewer imports due to the strong US dollar. The slump in energy markets also negatively impacted pipe shipments. Agriculture volumes were affected by the drop in ethanol volumes and feed products resulting from inventory pile-up and weakness in commodity prices.

Phosphates and fertilizers’ volumes primarily fell due to reduced phosphate rock shipments and a lull in fertilizer demand. A sustained decline in crude oil shipments negatively affected the volumes of chemicals. The forest products volumes were affected resulting from capacity cuts due to industry consolidation and reduced export demand due to the strength in the US dollar.

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Management’s outlook

CSX expects growth in automotive freight due to growth in light vehicle production. On the minerals front, the company expects a boost resulting from a new fly ash remediation project. The highway construction activity is expected to fuel the freight hauling prospects of aggregates. However, the company anticipates a decline in chemical shipments as a result of the shaky energy market movements, low crude oil prices, and a lower active rig count due to reduced drilling activity.

General merchandise occupies a major share of the freight revenues of major US Class I railroads. However, this freight source’s growth has been a matter of concern for all major US railroads such as Norfolk Southern (NSC), Union Pacific (UNP), Kansas City Southern (KSU), and Canadian National Railway (CNI) in the recent past. With the sluggish growth in the US economy, Class I railroads are assessing alternative ways to improve business.

All the US-born Class I railroads make up 4.7% of the portfolio holdings of the First Trust Industrials/Producer Durables AlphaDEX Fund (FXR).

In the coming part of the series, we will go through the operating margin of CSX in the first quarter of 2016.

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