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US railroads post 9.2% drop in 2019 coal carloads YOY amid weak market

Following a year plagued by significant declines in international coal pricing, retiring utility coal capacity and severe Midwestern flooding, American railroads hauled about 9.2% fewer carloads of the commodity from 2018 to 2019.

Coal shipments accounted for about 4 million carloads through Dec. 28, 2019, compared with 2018 when those railroads transported about 4.4 million carloads of coal through Dec. 29, 2018, according to the Association of American Railroads. BNSF Railway Co., which shipped the most coal in the U.S. last year, saw the smallest year-over-year percentage decline with a 5.8% reduction in coal carloads to about 1.8 million. Union Pacific Corp., a railroad that largely serves western coal producers, saw a 15.6% decline, the highest among the top-four publicly traded U.S. railroads by coal volume.

Moody's Investors Service lowered its outlook for the North American railroad sector from "stable" to "negative" in late October given the expected shipment decline in many of its sectors, including coal. The firm projected that utility thermal coal demand will fall 7% annually over the next decade given market conditions at the time. In September, Moody's estimated that rail companies will see a $5 billion revenue loss over the next 10 years as coal shipments decrease.

Many of the major railroads also reported year-over-year declines in their third-quarter coal revenues.

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The so-called "bomb cyclone" pummeled the Midwest in mid-March with heavy flooding that affected coal shipments from the Powder River Basin and the Illinois Basin. Western rail companies, including Union Pacific and BNSF, were especially affected by damaged infrastructure that delayed shipments.

Jennifer Sackson, assistant vice president of coal marketing for BNSF, said the railroad had outages across its network for about four months and expected its coal volume for the year to decline as a result. But she also noted opportunities for the company to recover in 2020.

At a Surface Transportation Board meeting in May, Linda Brandl, Union Pacific's vice president of energy, said that the "unprecedented" flooding resulted in 13-day network outages in some areas, causing the company to reroute up to 50 trains a day.

Union Pacific's now-CFO told a Credit Suisse analyst on a December call that the coal market is in secular decline.

"In terms of what it's going to continue to do long-term in 2020, I think we're certainly not anticipating any reversal relative to growth," Jennifer Hamann said. "But hopefully, the trajectory of the slope of the line in terms of the decline should ease up a little bit next year but still be downward-facing."

Additionally, weakened seaborne thermal and metallurgical coal markets may hurt some U.S. railroads. Seaport Global Securities LLC analysts wrote in a Dec. 9 note that they expect the dramatic fall in metallurgical coal prices to weigh on eastern railroads, namely Norfolk Southern Corp. and CSX Corp., in the fourth quarter. Prices simply are not high enough for U.S. producers to compete, they said at the time.

"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."