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Why Norfolk Southern’s Coal Revenues Slumped in 4Q16

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Jan. 27 2017, Updated 7:38 a.m. ET

Norfolk Southern’s coal revenues

Norfolk Southern’s (NSC) coal revenues may not see a turnaround anytime soon. In 4Q16, NSC’s coal revenues fell 7% to $403 million from $433 million in 4Q15.

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Coal volumes in 4Q16

Overall coal (ARLP) volumes for NSC’s 4Q16 plummeted 4% YoY (year-over-year). Volumes of utility coal fell 10%, but this fall was offset by a 40% rise in export coal volumes. Domestic metallurgical and industrial coal volumes dipped 8% in the same quarter.

The primary drivers for these lower volumes were the strong US dollar, which impacted coal exports (CNX), and the industry’s conversion from coal-to-natural gas power plants.

However, the company witnessed a sequential rise 4Q16 coal revenue on account increases in export coal tonnage. Still, revenue per unit from coal fell 3%, indicating pricing pressures in 4Q16. Mild winter weather and lower natural gas prices contributed to higher stockpiles. Coal oversupply across the globe and weakness in seaborne coal prices in the export market negatively impacted volumes and revenue.

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Management outlook

NSC expects to handle 17 million–19 million tons of utility coal per quarter in 2017. The company assumes weather related normalizations in the utility coal segment. Similarly, it anticipates handling 3.5 million–4.5 million tons of export coal in 2017 on a quarterly basis. The tightening of the international coal supply along with better seaborne pricing will most likely uplift the export coal tonnage over next four quarters.

Investors should note that spot pricing in 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 for the momentum in 4Q16 on the thermal coal export front to continue going forward.

ETF investment

Investors interested in the transportation (UNP) space can consider the iShares US Industrials ETF (IYJ), which has just over 5.5% exposure to US Class I railroads.

In the next part, we’ll assess the performance of Norfolk Southern’s general merchandise freight revenues in 4Q16.

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