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CSX Optimistic About Domestic Coal Business, Power Plant Closures May Affect Demand

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CSX Corporation, a leading freight railroad in the eastern U.S., is optimistic about its domestic coal business for 2014. This follows a long period of declining volumes. Domestic coal business for the entire freight railroad industry has been declining for two reasons. Firstly, because of the competition from natural gas and secondly because of the inventory overhang. The trends for these factors seem to be reversing because of which CSX feels optimistic about its domestic coal business. However, many coal-fired power plants are scheduled to be shut down in the next few years due to non compliance with the Mercury & Air Toxics Standards. This raises the question of whether or not there will be enough demand to bolster CSX's domestic coal revenues.

See our complete analysis of CSX here

Rising Natural Gas Prices And Declining Inventories Will Help Stabilize Domestic Coal Shipments

Coal shipments declined in the past due to competition from natural gas. Besides being cheaper than coal, natural gas is also cleaner and environment friendly. This led to an increase in demand for natural gas at power plants. This shift in demand caused coal inventories to pile up, leading to further decline in coal shipments.

Lately, natural gas prices have been rising due to increasing demand and the harsh winter weather this season. This has partially eroded the price advantage that natural gas had over coal. When natural gas prices rose above $3.50 in August 2013, coal shipments from the Powder River Basin and the Illinois Basin became profitable. CSX sources around 50% of its coal business from these two basins. Additionally, driven by the harsh winter weather, natural gas prices temporarily rose above $5 between January and March, leading to North and Central Appalachian coal becoming profitable. CSX sources the remainder of its coal business from these basins. The U.S. Energy Information Administration forecasts natural gas prices to remain around $4.58 in 2014. This implies that around half of CSX's domestic coal business will remain profitable for this year.

In the twelve months ended February 2014, coal inventory at the northern and southern power plants served by CSX declined 33% and 34% respectively, towards more stable levels since the inventory overhang in 2012. Also, days of burn, which indicates how many more days the coal inventory at power plants will last, is quite close to its historical average for both northern and southern power plants. If the days of burn falls below average historical levels, power plants will have to replenish inventory or else they may not be able to fulfill demand for electricity. As the power plants move to replenish their coal inventory, demand for coal will increase, and this will bolster CSX's domestic coal shipments.

Coal-Fired Power Plant Closures May Have A Negative Impact On Coal Demand

Following the announcement of the U.S. Environmental Protections Agency's MATS in December 2011, many coal-fired power plants were scheduled to be retired due to their non-compliance with the standards. CSX's coal shipments had a vast negative impact due to the closure of power plants. Its utility coal volumes declined from 77 million tonnes in 2011 to 61 million tonnes in 2012, a decrease of 21%. It further declined by 3.2% in 2013. CSX expects a decline of another 7 million tonnes by 2018 due to the closure of 12 power plants. However, it believes that the renewed demand at the remaining operational plants may be able to offset the loss of coal tonnage shipped due to plant closures.

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