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Global Oversupply Pulls Down CSX’s Coal Revenues in 3Q16

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Oct. 14 2016, Updated 1:04 p.m. ET

CSX’s coal revenues in 3Q16

CSXs’ coal revenues fell to $467.0 million in 3Q16. Revenues fell 20% from $583.0 million in 3Q15. Coal formed 17% of CSX’s total revenues in 3Q16 compared with ~20% in the corresponding period last year. The company’s coal revenue per unit saw a positive change of 1% in 3Q16, reflecting favorable results from coal asset rationalization.

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Coal volumes

CSX reported a 21% drop in coal volumes in 3Q16. The volumes of domestic utility coal fell due to continued depressed natural gas prices, and mild winter weather kept inventory levels high. The volumes of domestic coke and iron ore fell due to an oversupplied coke market driven by softer domestic integrated steel production.

Export coal volumes plummeted mainly due to the strong US dollar coupled with global oversupply. The strong dollar negatively impacted the US’s competitiveness in the global markets for thermal coal and metallurgical coal. However, with improvement in metallurgical and thermal benchmarks, the rate of volume decline was significantly low compared with earlier quarters.

Management’s guidance

CSX benefitted from a near-term rise in metallurgical coal demand due to lower Chinese supply. Thus, 4Q16 volumes are expected to be similar to levels in the corresponding quarter last year. The company expects its fiscal 2016 export coal volume tonnage at 25.0 million tons.

CSX believes that with natural gas prices down, the excess supply could prompt coal-fired power plants to shift their energy source away from coal. However, for 4Q16, the company expects stable domestic coal volumes compared with 3Q16.

How weakness in coal is affecting CSX’s peers

The present weakness in the coal business has led many Class I railroads such as Norfolk Southern (NSC), Union Pacific (UNP), Genesee and Wyoming (GWR), and Canadian Pacific (CP) to rationalize their coal assets in view of the shift in volumes.

All the major US railroads are part of the WisdomTree Earnings 500 Fund’s (EPS) holdings. In the next part, we’ll analyze CSX’s intermodal segment’s performance in 3Q16.

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