Summary
In 2003, revenue from railroad intermodal traffic surpassed receipts for coal shipments in the US, mainly due to the phenomenal growth of imported containers. Although both are down this year and both imports and coal traffic may take a while, if ever, to recover to 2007 levels, domestic intermodal may eventually replace them both as the engine of growth for railroad revenue, at least that is what the railroads must be hoping.
Analysis
Revenue from intermodal traffic continued to outpace coal shipments until 2008, when coal revenue jumped to $14B and outpaced intermodal’s rise to $13B for the Big Four carriers in the US. In 2009, intermodal receipts are expected to fall to less than $9B while coal revenue will probably fall only to $11.3B. The railroads have not been able to raise freight rates for intermodal traffic due to highway competition, but they have managed to keep increasing rates on coal shipments even as traffic has fallen by over 8% this year. The future for coal however, looks less bright.
The price of natural gas for electric utilities has fallen by 40% since last year, and supplies and low transportation costs will keep it low for many years. Coal prices however, especially for coal from the Powder River Basis, have declined less than 20% at the mine and transportation costs (remember those rising rates from the railroads) have only fallen 6% even though most of the fuel surcharges (estimated to be over 20% of the basic rate) have ceased. Railroads will be pressured to lower rates in the future and the Global Warming Crowd will continue to work for a decrease in coal burning.
It would be nice if coal came roaring back and railroad revenues soared as they did the past few years, but just in case they don’t, the railroad investments in intermodal terminals and track improvements may provide a new source of revenue in the future, domestic intermodal. Trucks have all but a few percentage points of truck traffic under 1,000 miles, and even most of the domestic movements over 1,000 miles. However, the same Global Warming Crowd that is battling coal producers is also fighting truck exhausts and highway spending. It’s somewhat of a hedge bet for the railroads, but it could pay off and offset some of the losses that might be seen in the coal sector in future years.
Toby Kolstad consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
