CSX expects US domestic coal volumes to drop more than 10% this year compared to 2014 and then sink another 9.2% in 2016, officials said Wednesday during a third-quarter earnings call.
For Q3, the railroad posted a 17% drop in overall coal shipments compared with the year-ago quarter, with volumes falling to 29.9 million st from 36.1 million st.
Domestic thermal coal was down 16% in the quarter to 16.8 million st and dropped 11% year to date to 52.6 million st, compared with the same period last year.
"Domestic coal will continue to be unfavorably impacted by sustained low natural gas prices," CFO Frank Lonegro said Wednesday.
"As we look ahead to next year, significant coal headwinds are expected to continue in 2016," he added.
CSX expects domestic coal volumes in the fourth quarter to drop to about 21 million st, with thermal coal accounting for 15 million st of the total.
Fredrik Eliasson, chief sales and marketing officer, said that level, about 20% below Q4 2014 volumes, is a "really good place to think about next year" as a run rate sequentially for all four quarters of 2016.
If that forecast holds, 2016's resulting total domestic coal volume of about 84 million st would mark a 9.2% drop from this year's predicted total of 92.5 million st and a 19.2% decline from 2014's volume of 103.9 million st.
Eliasson said the railroad will lose 3 million st in domestic coal volumes next year because of the scheduled closure of coal-fired power plants, and it also expects utility stockpiles will remain high entering in 2016, causing a drop in coal demand.
EXPORT COAL TO FALL TO 24 MILLION ST IN 2016
The railroad still expects export coal volumes to total 30 million st this year, a 23.1% drop from 2014's volume of 39 million st.
Export metallurgical coal volumes fell 22% in Q3 from the year-ago quarter to 4.3 million st, while thermal volumes sank 28% to 2.3 million st.
A predicted run rate of 12 million st for the second half of this year should hold true for all of 2016, Eliasson said, with export volumes forecast at a total of 24 million st next year.
Eliasson added the railroad is working on increasing export volumes, especially for thermal coal, in "a much more difficult environment even today than it was just six months ago." He said CSX would have a "much better sense" of export totals for 2016 after the fourth quarter this year.
COAL REVENUES TO FALL BY $450 MILLION
The railroad expects coal revenues to decline by about $450 million this year after totaling $583 million st in the third quarter, down 19% from Q3 2014.
Year to date, coal revenues total $2.234 billion, down from $2.260 billion in 2014.
Ellison said lower coal volumes had a particularly negative effect on revenue when it came to the 20% of utilities that have fixed-variable contracts with the railroad.
He said the railroad was working on improving its domestic profits, but said bettering pricing in the export market would be difficult.
"As we move forward, I think you're going to continue to see the export market being very challenged, and there's little opportunity, if any, to really improve pricing there," Ellison said, "But on the rest of the market, we're going to continue to see what the value proposition is, and we're going to look plant by plant to see what we can do."
CHANGES COMING TO APPALACHIAN COAL NETWORK
With declining coal volumes, CSX is looking at streamlining its coal network to make it more efficient and cost effective, officials said.
Cindy Sanborn, the railroad's newly appointed chief operating officer, said an announcement could come soon about some of those changes.
"We are analyzing, looking at what we need to harvest from our existing coal network where we've seen the most significant declines in Appalachia," she said.
Sanborn said that when it comes to what changes could be made, "everything is on the table."
"As we're seeing some of the loadouts either closing or consolidating, we have an effort afoot here to try and figure out where the best efficiencies are," she said. "Some of it will be mainline operations. Some of it will be facilities."
While volumes of Appalachian coal have been falling for CSX, CEO Michael Ward pointed out there has been an increase in its Illinois Basin coal business and the railroad expects it will continue to grow.
CSX this year opened the $100 million Casky Yard in southwestern Kentucky to facilitate an amplified flow of Illinois Basin thermal coal to utilities in the Southeast.
Ward said the changes CSX is making to its coal network involve "not just looking at some assets that are less intense, but also making sure we're positioned for the future growth."
