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Why Norfolk Southern’s Coal Revenues Fell in 3Q16

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Norfolk Southern’s Coal segment revenues

In this article, we’ll examine why revenues from Norfolk Southern’s (NSC) Coal segment may not see a turnaround soon. In 3Q16, NSC’s coal revenues fell 17.6% to $397.0 million from $482.0 million in 3Q15. For more information on the coal business, please read Market Realist’s Norfolk Southern overview.

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Coal volumes in 3Q16

Overall coal (ARLP) volumes for 3Q16 fell 15% compared with 3Q15. The volumes of utility coal fell 16%, whereas export coal volumes fell 26% in 3Q16. The volumes of domestic metallurgical and industrial coal fell 3% in the same quarter. The primary drivers for the lower volumes were the strong US dollar impacting coal exports (CNX) and conversion from coal to natural gas power plants.

The revenue per unit from coal was down 3%, indicating pricing pressures in 3Q16. Above-normal stockpiles, warm summer weather and higher natural gas prices contributed to higher utility burn. Although year-over-year utility coal volumes were lower, it was up 28% sequentially. This was mainly due to higher natural gas prices and hot summer weather.

Management outlook

Norfolk Southern (NSC) expects to handle 15.0 million–18.0 million tons of utility coal in 4Q16, assuming normal weather conditions. Similarly, it expects to handle 3.0 million–4.0 million tons of export coal in 4Q16 with the quarter-over-quarter rise in thermal coal volumes through Baltimore.

Investors should note that the spot pricing in the seaborne markets has been consolidating for a while. However, production cuts and bankruptcies of coal companies (BTU) have negatively impacted the US coal export supply. NSC also hopes to see momentum on the thermal coal export front in 4Q16.

NSC’s efforts to curb coal downfall

In 2Q16, Norfolk Southern (NSC) idled one of its steepest and hard-to-operate coal lines. The company did so by rerouting its coal trains into its main line with excess capacity. The company is also looking for a short-line operator to handle lower volume segments.

Investors interested in the transportation (UNP) space can consider the iShares US Industrials ETF (IYJ). This ETF holds just over 5.5% in Class I railroads.

In the next article, we’ll assess the performance of Norfolk Southern’s General Merchandise Freight segment revenues in 3Q16 and the management’s outlook on these revenues.

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