In our interview with analyst Jason Seidl of Dahlman Rose & Co., we spoke a little about the current state of the companies in the railroad space. According to him things are getting worse, not better, and all because of coal:
Mr. Seidl: If you look year to date, carloadings are down almost 18.5%. If you look quarter to date, they’re down almost 23%. It is a significant falloff, but, again, I’m pointing at the fact that it actually hasn’t gotten better, in fact it’s gotten a little worse. I think the reason for that is that coal is rolling over. Coal has gone from being down just over 5% in the first quarter to down nearly 18% thus far in the second quarter.
There are two main reasons for coal being under so much pressure right now, a drastic decline in exports and sluggish domestic demand. You have the lack of an export market, which is driven by coal prices and demand. Indeed, we are currently out of the money compared to South African coal. On the demand front, it is fairly obvious what has happened to the steel industry in Europe and this has been weighing heavily on demand for metallurgical exports to Europe. While China has started to import some coal, it is only on the margin.Looking at the domestic utility market, we find that demand is not much better. If you look at the burn levels for a lot of the utilities in the first quarter, we were down over 3%. While 3% may not sound like much, it is actually quite severe for a utility market.
For the complete interview with Mr. Seidl, including a full overview of the Railroad space and stock picks, click here.
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