Slow Coal Production hasn’t Slowed Down the Railways
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Coal production has been easing up and there are two very simple reasons for this. To a greater degree we had the unseasonable mild winter. This led to a slow down in the use of coal. The warmer weather also led to reduced natural gas prices. Utility companies were substituting natural gas for coal since the prices were so low.
With this was taking place, one would consider the chain effect to be reduced revenue for railroad companies and manufacturers of railroad equipment/locomotives. Typically coal is a third of all railway transportation. If coal is not being transported, revenue is lost and locomotive and equipment reinvestment does not take place.
But this is not the case this year.
Despite the lower coal shipments, the rebounding economy is showing signs the Rail Industry is surging: This is especially true in intermodal and container volume increases. Strong auto sales means parts are now being shipped more. Petroleum and chemical tanker growth is also taking place. When President Obama rejected the Keystone Pipeline, the volume of oils and chemicals shipped by rail offset the depletion of coal shipments. Union Pacific (NYSE: UNP) has increased its revenue base as a result.
Kansas CitySouthern (NYSE: KSU) is also benefiting from the increase in truck transportation by rail. CEO David Starling of KSU had this to say about revenue in 2012: "We believe that in 2012, (Kansas City Southern) will continue on a growth trend similar to that of the past year.” In the last quarter of the year, its income rose 85% from the year before. This should not be a surprise when one considers that at the same time coal is slowing down, prices of fuel are increasing. Considering this, the fact that a railway can move a ton of freight 484 miles on a single gallon of diesel makes it a viable alternative to transporting everything by truck alone.
This has lead to revenue being spent on equipment upkeep and purchasing. Caterpillar (NYSE: CAT) has a factory as big as a dozen football fields where workers are testing new robots that will help weld together 200-ton train locomotives. It is being called the most efficient locomotive-manufacturing plant in the world. General Electric (NYSE: GE), the big boy on the block has increased its orders of locomotives and Caterpillar is trying to grab a larger piece of the pie as rising profits allow railroads to upgrade their fleets.
Canada's Stella-Jones, which makes treated wood products for the railroad industry increased profits by 26% because of a surge in demand for its railroad ties.
Even though coal sales and delivery has slowed, a growing economy is helping the railways increase revenue delivery and that success has been passed down to the larger companies like General Electric and Caterpillar who support the railway industry through locomotive building and railway repair.
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