CSX Corporation’s (NASDAQ: CSX) Coal Freight segment, which consists of the transportation of thermal and metallurgical coal either on CSX’s rail lines or in concert with connecting carriers, has seen revenues shrink steadily from $3.6 billion in 2011 to $2.1 billion in 2019, and we expect these revenues to shrink further in 2020 to below $1.7 billion, reflecting a 19% y-o-y decline, as we detail in our interactive dashboard, CSX Revenues: How Does CSX Make Money?
There are several factors behind the revenue decline: There has been an overall shift to natural gas to meet the energy demand, as it is a cleaner form of energy.
The demand for coal is linked to the pricing of natural gas. A decline in natural gas prices results in lower demand for coal. Natural gas prices have declined from around $5 levels in 2011 to $2 levels by the end of 2019, though they have been volatile in the range of $1.50 to $5.00 per MMBtu (million British Thermal Unit).
Things are likely to only get worse over the coming months, as the coronavirus outbreak has disrupted the global economic growth, and the demand for coal is expected to fall sharply. In fact, The U.S. Energy Information Association predicts a 22% decline in the U.S. production from 690.1 mst (million short tons) in 2019 to 536.7 mst in 2020.
Looking at coal exports, it is also expected to decline sharply by 32% from 92.9 mst in 2019 to 62.7 mst in 2020, as top importers, such as India, are currently in a lockdown.
This will directly impact CSX’s coal shipments, and the segment revenues.
But then why is CSX still in the coal freight business? Why doesn’t it focus more on its Merchandise Freight business, which consists of the transportation of chemicals & petroleum products, metals & equipment, minerals, fertilizers, forest products, agricultural & food products, and automotive, where the segment revenue grew from $5.6 billion in 2011 to $7.6 billion in 2019?
Despite falling revenues for coal freight, it is an important segment for railroad companies, including CSX. Coal as an energy source accounts for roughly a quarter of the U.S. electricity generation. It is also required by steel, cement, and other industries, and railroads are the most efficient and cost-effective means of coal transportation. And from CSX’s point of view, the decline in coal freight over the recent years has primarily been due to lower shipments, while the company managed to grow its pricing. The shipments (total carloads) have declined 21%, and average revenue per carload grew 13% over the last 5 years. The current model, hence, helps boost the company’s overall profit margins.
Even though the revenue share of the Coal Freight segment has shrunk from 19.5% in 2015 to below 17.3% in 2019, and will continue to shrink over coming years, we believe that it remains an important part of the company’s business model, as we detail in our interactive dashboard on CSX Revenues.
Despite falling revenues for coal freight, it is an important segment for railroad companies, including CSX. Coal as an energy source accounts for roughly a quarter of the U.S. electricity generation. It is also required by steel, cement, and other industries, and railroads are the most efficient and cost-effective means of coal transportation. And from CSX’s point of view, the decline in coal freight over the recent years has primarily been due to lower shipments, while the company managed to grow its pricing. The shipments (total carloads) have declined 21%, and average revenue per carload grew 13% over the last 5 years. The current model, hence, helps boost the company’s overall profit margins.
Even though the revenue share of the Coal Freight segment has shrunk from 19.5% in 2015 to below 17.3% in 2019, and will continue to shrink over coming years, we believe that it remains an important part of the company’s business model, as we detail in our interactive dashboard on CSX Revenues.
