PCX Patriot Coal Corp.

The coal projection has once gain stirred up trouble for the railroads. After being hit by lower coal shipment by producers Alpha Natural Resources (ANR) and Walter Energy (WLT) in the second half of the fiscal 2011, rail stocks plunged on the news of another player in U.S. coal biz, Patriot Coal (PCX) closing a few of its operation due to the softening of coal demand.

The ensuing negative market reaction resulted in declines in share prices on Friday. Major players like CSX Corporation (CSX) and Norfolk Southern (NSC) fell 3.3% and 2.2%, respectively, followed by  Union Pacific (UNP) which dropped 1.2%.

Over the past year, rail companies have shown significant growth in terms of their coal shipments that represents approximately one-third of their total freight businesses. The declines in Australian markets last year, after the floods tempered mining activities, resulted in substantial momentum in the U.S. coal market. Additionally, increasing coal demand from Asian countries like China and India for steel manufacturing also uplifted the position of the U.S. as global coal supplier. As a result, railroads were optimistic on the long-term demand for coal given the emerging position of U.S. as the coal export hub.

However, the current global volatility that affected mining activities, the sudden drop in demand from the Asian markets sighting problems over quality along with harsh weather conditions in the Pacific region have resulted in a major setback for coal shipments across the globe. Additionally, the recovery of the Australian mine from last year’s flood also poses a threat to the U.S. coal exports. On the domestic front, lower natural gas prices and seasonality impacts have also dampened coal demand and the trend is expected to continue in the near term.

We are yet to see changes in predictions by railroads like CSX and Norfolk in the upcoming quarterly and full year 2011 results. Both companies still stick to their investment plans and export projections. In fact, for the full year, CSX has raised its capital plan from $2 billion to $2.2 billion and Norfolk has set a higher export goal based on an approximately 5% increase in global steel production.

What lies ahead for the railroad companies in the backdrop of a fluctuating economy and raised expectations, is to be watched out for. Further, several legal battles on railroad safety will also pose near-term concerns for an industry that has started to rebound on growing demand for rail freight services.

We are currently maintaining a long-term Neutral recommendation on Norfolk, CSX Corp. and Union Pacific with a Zacks short-term (1-3 months) #3 (Hold) rating on Norfolk and CSX. Union Pacific retains a short-term Zacks #2 (Buy) rating.

 
ALPHA NATRL RES (ANR): Free Stock Analysis Report
 
CSX CORP (CSX): Free Stock Analysis Report
 
NORFOLK SOUTHRN (NSC): Free Stock Analysis Report
 
PATRIOT COAL CP (PCX): Free Stock Analysis Report
 
UNION PAC CORP (UNP): Free Stock Analysis Report
 
WALTER ENERGY (WLT): Free Stock Analysis Report
 
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