NEW YORK (Reuters) - U.S. railroad CSX Corp CSX.N, which serves the U.S. East Coast, said it expected continued soft demand for coal among utilities, a key market for the company, but shipments should begin to flatten next year as electricity providers work down their coal inventories.
“Utility coal volume will continue to be challenged by low gas prices and high utility stockpiles,” Clarence Gooden, chief sales and marketing officer, said on the company’s earnings conference call.
“Although we expect these headwinds to moderate somewhat through the balance of the year, they will continue well into 2013,” Gooden said.
Last year’s mild winter cut demand for electricity, plus low natural gas prices and environmental regulations against coal all depressed demand, Chief Executive Michael Ward said in an interview.
“If we see gas prices pick up a little and we get either cold weather or a hot summer, that would be favorable toward our coal movements,” Ward said.
Utilities will work down their coal inventories over the course of next year so demand will stabilize, albeit below peak levels, he predicted.
CSX, which does not give earnings or sales forecasts, relies on coal shipments for more than a quarter of its revenues. The Jacksonville, Florida-based company on Tuesday reported higher-than-expected quarterly earnings but its sales were slightly below Wall Street estimates.
Shares of CSX were down 2.2 percent at $21.15 in afternoon New York trading, while the wider Dow Jones transportation average .DJT was up slightly. CSX is a component of that index.
CSX has higher exposure to coal than its peers, reflecting the railroad’s geography, which includes the U.S. Appalachian coal basin, said Morningstar analyst Keith Schoonmaker. The company’s margins held up well despite weaker volumes, because CSX has done a good job matching capacity with demand, controlling how much it spends on crews and fuel, he said.
Railroads including CSX are likely to continue to win market share from trucks, even in a stagnant economy.
“Railroads have capacity, whereas trucking doesn’t have capacity with (its) perennial driver shortage,” Schoonmaker said.
Besides coal, overall rail volumes are decelerating because of an uncertain economic outlook, especially around the ‘fiscal cliff’ of possible spending cuts in the new year, CEO Ward said.
“Companies are a little more hesitant to expand capacity or hire people because they’re not sure what’s going to happen here,” Ward said. “My hope is Congress doesn’t ... wait until the last minute because if they (do) we’ll get the negative effects of (the fiscal cliff) regardless of what they do.”
Reporting By Nick Zieminski in New York; Editing by Sofina Mirza-Reid and Bob Burgdorfer