North American Railroads as of March 26: Slipping off the Tracks
Kansas City Southern’s railcar units
Kansas City Southern’s overall railcar units fell by around 23% in the week ending March 26, 2016. In the same week, KSU moved ~19,000 railcar units compared with 24,000 units in the corresponding period of 2015. Kansas City Southern is the smallest of all Class I railroad carriers in the United States. What’s concerning is that, excluding coal and coke railcar units, the company reported a fall of 17.6% in railcar units in the week ending March 26, 2016.
The company’s railcar units excluding coal came in at ~17,000 in the week ending March 26, 2016, as compared to 20,000 units in the corresponding period in 2015. Note that KSU’s hauling of railcar units is linked with the movement of overall Mexican railcar units. However, the fall in KSU’s total railcar units was in line with the huge 25.1% fall of railcar units reported by Mexican railroads for the week ending March 26, 2016.
Are coal carloads important to KSU?
Kansas City Southern’s coal and coke railcar units fell by a whopping 47% in the week ending March 26, 2016. In the same week, KSU hauled 2,200 units of coal and coke, against 4,100 units in 2015. Note that utility coal, other coal, and petroleum coke accounted for 7.4% of KSU’s total revenues in 2015. Plus, the utility coal and petroleum coke carloads represented ~11% of total 2015 carloads. This may not seem significant percentage-wise, but it is important given the company’s relatively small scale of operations.
The company moves coal originating from the Powder River Basin in Wyoming and coal mined in the Midwest. The coal producers operating in that region, such as Alpha Natural Resources (ANR) and Peabody Energy (BTU), have anticipated weak coal shipments in 2016. Black Hills Corporation (BKH) also operates in that region but doesn’t produce coal commercially.
To gain exposure to the transportation sector, investors can opt for the iShares Global Industrials ETF (EXI). Major US railroads and airlines make up 3.8% and 7.4%, respectively, of EXI’s holdings. Union Pacific (UNP) makes up nearly 2% of EXI.
Rising and falling commodities
For the week ending March 26, 2016, commodity groups such as grain, food and kindred products, and iron and steel scrap saw an increase in railcar units.
The major commodities that saw a drop in railcar units included the following:
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crushed stone, sand, and gravel
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lumber and wood products
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metals and products
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motor vehicles and equipment
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pulp, paper, and allied products
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petroleum products
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chemicals and allied products