May 7, 2012 / 6:51 PM / 8 years ago

TEXT-Fitch says U.S. rail volumes still lagging on coal weakness

(The following statement was released by the rating agency)

May 7 - U.S. rail carload traffic continues to contract on a year-over-year basis, driven in large part by the ongoing decline in coal demand from utility customers. Fitch Ratings views weak year-to-date rail volume trends as a reflection of fundamental shifts in demand patterns for key industrial commodities as domestic production of unconventional oil and gas resources continues to grow. Rail carload traffic data for April provided by the Association of American Railroads (AAR) continues to show significant declines in demand for coal, which has historically driven 20% or more of total U.S. rail freight volumes. For the month of April, coal carloads fell by 16.6% versus April 2011, the largest year-over-year decline for coal shipments on record. Year-to-date coal carloads are down 11.3%. The biggest factor driving weak domestic demand for coal continues to be the declining price of natural gas produced in the U.S. and the ongoing shift away from coal as a feedstock for electrical utilities. In addition, warm winter weather has contributed to weak coal consumption as electricity demand has slumped in 2012. As natural gas prices fell below $2 per million British thermal units (Btu) earlier in the year, the economics of gas substitution for Powder River Basin coal became very attractive. It remains unclear whether or not a secular shift away from coal is underway, given the potential for gas prices to rebound if supply growth slows. While overall rail carloads shipped declined by 5.5% last month, continuing a weak first-quarter trend, virtually all of the weakness was explained by declines in shipments of two commodity groups — coal and grain. Grain carloads fell by 17.2% year over year in April. We see underlying demand patterns for other key industrial products as more resilient early in the year, belying the overall rail volume contraction. In particular, shipments of autos and auto parts remain quite strong, with April freight volumes up by 21.1%. This mirrors the broader strength in U.S. consumer demand for new vehicles that has been evident since the start of the year. Moreover, intermodal shipments have shown more strength in 2012, growing by 2.8% for the year through April 28. Intermodal traffic, including both containers and trailers carried on trains, often serves as a better proxy for consumer demand than shipments of bulk commodities. The shift away from coal toward natural gas as the preferred source of energy for power plants has also been evident in the sharp increases in rail volumes for commodities linked to rapidly growing production of shale oil and gas in newly developed North American shale plays. Rail volumes for petroleum products grew by 43.1% in April, while shipments of crushed stone, gravel, and sand grew by 9.3%. Increased carload volumes for the latter category reflect the booming demand for fracking sand used in unconventional energy exploration and production. The data points to a mixed picture for industrial demand this year as traditional powerhouse commodities like coal see their share of rail traffic fall relative to other categories. Careful management of capacity, cost control, and solid pricing power have allowed major railroads to weather the 2012 carload weakness effectively. Still, in light of the unevenness of the U.S. recovery, the outlook for rail volume growth over the remainder of the year appears relatively weak. (Caryn Trokie, New York Ratings Unit)

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