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Export steam coal price weighs on eastern railroads; met prices also softening

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Export steam coal price weighs on eastern railroads; met prices also softening

Several railroads that transport coal to the export market have begun to feel the impact of lower seaborne thermal prices and recently pointed out a softening metallurgical coal sector.

Norfolk Southern Corp. executives said on a July 24 earnings call that the company expects 2019 coal volumes to decline year over year given lower international pricing in the seaborne market. Some coal producers may struggle or be unable to compete on the international market given lower prices on thermal coal being sold into Europe and Asia, experts have said. Alan Shaw, chief marketing officer for Norfolk Southern, said thermal coal volumes will likely take a hit in the second half of the year at those prices unless the tonnage is hedged. The Argus/McCloskey API2 European coal index tracks the benchmark price reference for coal imported into Europe.

"API2 prices are forecasted to remain at low levels in the second half, while seaborne coking coal prices are projected to decline, impacting both volume and [revenue per unit]," Shaw said. "Utility volumes will be impacted by natural gas prices and weather."

Metallurgical coal prices have been more supportive recently and several companies announced new coking coal developments as a result after the fourth quarter of 2018 and first quarter of 2019. But a drop in commodity pricing will pressure the seaborne coking coal market, Shaw said.

Seaport Global Securities LLC analysts Mark Levin and Nathan Martin wrote in an Aug. 1 note that Norfolk Southern and CSX Corp. could face headwinds due to the falling price of coking coal in the near future, most notably in the fourth quarter and into 2020. The Platts price for benchmark premium low-vol metallurgical coal dropped significantly from $203.50 per metric tonne on June 1 to $160.25 per metric tonne on Aug. 1, according to the report.

U.S. high-vol A prices dropped 17% over the period to $163 per metric tonne July 31, and U.S. low-vol prices fell 11% to $160 per metric tonne over the period as well. The Seaport analysts concluded that, assuming coking coal prices remain at their current level into 2020, then CSX may face a minimum earnings per share decline of 6 cents per share year over year while Norfolk Southern faces a drop of 12 cents per share next year compared to 2019.

CSX expects to export about 40 million short tons of coal this year, but executives noted that European thermal coal prices have been low for months.

"Export coal has been below our expectation, mostly driven by thermal and lower API2 benchmarks, which we think will likely continue into the second half," said Mark Wallace, executive vice president of sales and marketing for CSX.

Low natural gas prices are also affecting both the domestic and export coal markets, said president and CEO James Foote.

"Coal revenue declined 2% on 2% higher volumes as growth in domestic industrial markets was more than offset by export and utility declines," Foote said.

Weather weighs on western railroads

The western railroads discussed the impact of storms and flooding earlier this year, which damaged infrastructure, delayed shipments and forced companies to reroute trains in the Midwest.

Kansas City Southern reported a year-over-year increase in utility coal carloads despite second-quarter flooding. The railroad's second-quarter utility coal carloads increased 13% to about 30,400, and revenue increased by 15% to $27.5 million.

BNSF Railway Co., one of the railroads most affected by the flooding, reported a 3.1% year-over-year drop in second-quarter coal revenue to $883 million as well as a 5% decrease in overall unit volume in the first half of the year following severe winter weather and wet conditions.

Kenny Rocker, Union Pacific Corp.'s executive vice president of marketing and sales, said on a July 18 earnings call that flooding in May and June hurt shipments while a softer international market also led to a decrease in coal exports.

The company was not surprised by the recent wave of bankruptcies either, he said, which especially affect the Powder River Basin.

"It doesn't change our approach to ensuring that we compete and win the business at the appropriate return for us," Rocker said. "We're going to stay committed to that. I will say that as you hear about some of these bankruptcies or closures, it doesn't take away from the fact that another producer or shipper up in that area might be able to move that volume."

S&P Global Platts and S&P Global Market Intelligence are both owned by S&P Global Inc.