WASHINGTON – Railroads such as Union Pacific and Burlington Northern Santa Fe may be rolling past the record slump in coal volume as costlier natural gas and summer weather rekindle demand from the nations power plants.
The seven largest railroads hauled 106,728 carloads of coal in the week ended April 20, up 22 percent from a record low at the end of 2012, Association of American Railroads data show. With coal accounting for 21 percent of all carloads, the gain helps mend a weak patch for an industry challenged by a decline in coal volumes that began in 2008.
Shipments of coal, the largest source of energy for electrical power generation around the world, slumped at all three of the biggest U.S. railroads last year as utilities began switching to natural gas. Rising natural gas costs, combined with a pickup in the economy and forecasts for a warmer summer, indicate the hit to rail revenue from coal is dissipating.
The worst has passed, said Nathaniel Gabriel, an industrials analyst at Argus Research in New York. I see Union Pacific as top of the pack in terms of leveraging higher coal volumes into earnings growth as we pull out of this rut.
Investors have been rewarded. Shares of Union Pacific in late April climbed to a record.
The Standard & Poors Supercomposite Railroads Index, which also includes CSX, Norfolk Southern, Genesee & Wyoming and Kansas City Southern, has advanced about 21 percent this year.
The broader S&P 500 Index is up 12 percent.
The headwinds are lightening up pretty considerably for Omaha, Neb.-based Union Pacific, the largest U.S. railroad by sales, and Berkshire Hathaways Burlington Northern because those two companies predominantly haul coal from the Powder River Basin of Wyoming and Montana, said David Vernon, a Sanford C. Bernstein & Co. analyst in New York.
Central Appalachian coal is among the most expensive to produce and requires higher natural gas prices to be competitive, according to Vernon.