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Seaport: Weak coal export markets to plague eastern railroads' Q4'19 earnings


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Seaport: Weak coal export markets to plague eastern railroads' Q4'19 earnings

Analysts wrote in a recent note that they expect the effects of the "dramatic fall" in metallurgical coal prices to be especially prevalent in the fourth quarter, taking a more significant toll on eastern railroads' earnings this quarter compared with the third quarter.

Many of CSX Corp. and Norfolk Southern Corp.'s coking coal contracts are priced quarterly and have a one-quarter lag, Seaport Global Securities LLC analysts Mark Levin and Nathan Martin said in a Dec. 9 report. Metallurgical coal prices seem to have stabilized in the last few weeks amid more spot activity from China and India.

Those two railroads may also take a hit from the "absolute dearth of activity" in the seaborne steam coal space, the analysts wrote. They projected that CSX's fourth-quarter coal revenue will sequentially decline by about $24 million and Norfolk Southern's will fall by $33 million, though they acknowledged that the decrease may be even worse. API2 prompt-month prices for thermal coal sold into Europe are around $58/t, meaning "the math simply doesn't work for U.S. exports."

"The coal markets — both domestic and export — are simply that bad right now, and there isn't an obvious answer to us why they will get much better in the first half of 2020," the analysts wrote. "Looking ahead, both CSX and [Norfolk Southern] could be dealing with $200MM+ operating income headwinds from coal next year."

Citing U.S. Census Bureau data released last week, the analysts noted that October has been the worst month for U.S. exports so far in 2019, with only 6.4 million tons sold abroad. Total exports fell 17% from September and 40% year over year, with 3.8 million tons of metallurgical coal and 2.6 million tons of thermal coal shipped internationally.

Metallurgical shipments to Asia were down 49% year over year in October and 13% year-to-date, according to the report. Coking coal exports to Europe and South America were down 13% and 11%, respectively, year-to-date. The analysts projected that coking coal exports will total 55 million tonnes this year and 48 million tonnes in 2020, a 13% decline.

Thermal coal exports sank 29% through October, with an especially high 70% decline in thermal exports to Europe year over year and a 42% slide year-to-date, according to Seaport. While 31% of U.S. thermal coal exports went to Europe in 2018, only 24% were shipped there year-to-date. Additionally, steam coal exports to Asia dropped 26% year-to-date. The Seaport analysts projected that thermal coal exports will total 38 million tonnes this year and 28 million tonnes in 2020.

The report also noted Glencore PLC CEO Ivan Glasenberg's remarks during a recent investor presentation that highlighted the company's bullish outlook on global thermal coal demand. While the CEO noted that coal accounts for about 26% of current global energy supply and may drop to 23% by 2030, demand from urbanizing nations will increase and lead to more coal consumption overall. The company expects supply deficits in the thermal coal space down the line amid challenges in securing mining permits and accessing capital.

"Interestingly, most investors to whom we speak seem to have resigned themselves to the death of thermal coal given the proliferation of global LNG and renewables, abandoning the theory that impoverished nations will need the cheapest form of baseload electricity they can find (i.e., coal). Against that backdrop, investors continue to assign very little value to seaborne coal assets, including Glencore's," the analysts wrote.