Why Union Pacific’s Chemicals Revenues Slumped in 2Q16



Union Pacific’s chemicals revenues

Previously, we looked at Union Pacific’s (UNP) agricultural products revenues. Now we’ll look at UNP’s chemicals revenues. In the second quarter of 2016, chemicals revenues declined 5% to $864.0 million, from $905.0 million in 2Q15.

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Chemicals volumes

Chemicals volumes declined by 3% in the second quarter of 2016 compared to the corresponding period last year. Plastic carloads declined 5% mainly due to reduced polyethylene shipments and weak exports from the strengthening US dollar.

Fertilizer volumes declined 6% in 2Q16. They were negatively impacted by lower shipments due to soft exports, which was due to a softness in the domestic agricultural market. However, it was partly offset by higher volumes of industrial chemicals.

Crude oil shipments declined 46% on a year-over-year basis in the reported quarter. This was mainly due to lower crude oil prices and unfavorable price spreads. However, there was some respite on chemical volumes other than crude oil. These rose 1% in 2Q16 on a year-over-year basis.

Management insights

Union Pacific expects steady chemical business through 2016. It also anticipates growth in the LPG (liquefied petroleum gas) market and industrial chemicals. However, the depressed agricultural scenario and weak wheat exports will most likely put downward pressure on the fertilizer market in 2016.

The company also expects lower crude-by-rail shipments for the remainder of 2016.

Peer group chemicals business

Union Pacific’s Class I peers are also facing strong headwinds related to crude oil shipments. These include Norfolk Southern (NSC) and CSX (CSX). In the Midwest, UNP competes with Kansas City Southern (KSU). All of these companies, along with Canadian National Railway (CNI) and Canadian Pacific Railway (CP), form US Class I railroads.

All the US Class I railroads except CP and CNI are included in the holdings of the VanEck Vectors Morningstar Wide Moat ETF (MOAT).


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