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Monday, October 26, 2015 - 10:54

US Rail Freight Drops Again in Q3, No Relief Q4, Execs Say

--Railroads See Broad-Based Decline in Volume Carried, Led by Coal
--No Relief Seen Q4 or 2016 as Natural Gas Steals Coal's Market Share

PHILADELPHIA (MNI) - U.S. freight railroads reported declining volumes of many categories of freight carried in the third quarter, continuing a year-long pattern, and anticipate more contraction in coming months, executives said.

The major rail networks hauled less petroleum, grain, metals, and especially coal in the three months from June to September than they did a year earlier as the demand for coal dropped in response to switching to natural gas by power generators, the strong dollar cut into export demand, and commodity prices remained low.

Those headwinds will continue to buffet the industry in 2016 when oil prices are expected to remain low and the U.S. power industry continues to substitute natural gas for coal in response to low prices and regulatory pressure to cut carbon emissions, executives said during third-quarter earnings calls with financial analysts.

Union Pacific, which operates in 23 western and midwestern states, reported freight volume dropped in five out of six categories, led by coal which fell 15% from a year earlier, and shipments of industrial products which were down 12%. The only rising category was automotive, which rose 5%, the company reported in its third-quarter earnings statement on Oct. 22.

"Low natural gas prices continue to put downward pressure on coal demand as coal's share of electricity generation declined from 38% in the third quarter of last year to 35% this year," said Eric Butler, the railroad's executive vice president of marketing and sales, during the earnings call.

Higher-than-normal coal inventories also contributed to the sluggish demand, he said.

Cameron Scott, the railroad's executive vice president of operations, said there is little prospect of any change to that situation in 2016.

"At this point, if you look at natural gas futures, there's no discernible improvement," Scott said. "Natural gas will remain very competitive with coal. I don't think it would project any improvement in coal's market share."

In the eastern United States, CSX reported declining carloads in seven of its 12 freight categories, including forest products, chemicals, metals and coal destined for both domestic and export markets. The railroad reported a 9% drop in revenue during the third quarter, and predicted a decline in earnings per share during the fourth quarter.

CSX Chief Executive Michael Ward in an earnings call attributed the decline to the continued loss of coal freight as well as lower commodity prices and the strength of the U.S. dollar, eroding demand from export markets.

The railroad's Chief Financial Officer Frank Lonegro forecast further tough conditions in the fourth quarter, and said measures of performance will be exacerbated by an unfavorable comparison with a strong performance in the last period of 2014.

"We expect volumes to decline in the fourth quarter," he said. "Although we are projecting stable to favorable conditions for several key markets, this will be more than offset by unfavorable conditions for the remainder of the portfolio."

Declining freight categories include chemicals, which will be hurt by lower oil prices, and metals, where shipments will drop as the dollar's strength and high imports cut into domestic steel production, Lonegro said. He predicted "significant coal headwinds" for the railroad in 2016.

Kansas City Southern Railway, which operates in the central and southern United States and Mexico, reported a 7% decline in third-quarter revenue from a year ago, driven by drops in all but two categories of freight.

Among commodity groups, the biggest decline, 24%, was seen for shipments of frack sand, as oil producers sharply curtailed the development of new wells amid low global oil prices, the firm said.

"There is no question that KCS has been confronted with some challenges in 2015," said the railroad's chief executive, David Starling, in a statement.

Industry-wide data reflects the performance of individual railroads.

The Association of American Railroads said carloadings by its members dropped 4.9% in September, contributing to a 5.4% drop for the third quarter, which saw the second-lowest weekly average for the third quarter since 1988, when the trade association's records began.

Its monthly Rail Time Indicators report in early October, a digest of industry data for subscribers and members that is not usually released to the public, showed declines in 14 out of 20 carload categories.

The main reason continued to be declining carloads of coal in response to lower demand from power generators who are converting more plants to run on competitively priced natural gas.

Coal carloads dropped 8.2% from a year earlier to the lowest September level since before the AAR's records began.

The association noted that the amount of electricity generated from natural gas exceeded that from coal for the first time ever in April before rebounding slightly to equal it in September.

Meanwhile, the number of cars carrying petroleum and its products fell 15.6%, metallic ores were down 28.6%, and primary metal products dropped 18.9% the AAR said.

And in a sign of possibly slowing economic activity, the number of carloads excluding coal and grain dropped 4.8% in September compared with a year earlier. Year-to-date, carloads excluding coal and grain dropped 2.2%, the report said.

"Excluding coal and grain can be useful because carloads for those commodities, more so than for most other commodities the AAR tracks, tend to rise or fall for reasons that have little to do with the state of the economy," the trade association said.

The U.S. Commerce Department is scheduled to release advance data on gross domestic product for the third quarter at 8:30 a.m. ET Thursday.


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