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Given the recent weakness and conflicting data in rail, it’s helpful to talk to some industry insiders for a better perspective on what’s going on in this important sector of the economy.  And who better to reach out to than CSX, one of the largest railroad companies in the world.   I was fortunate enough to tap into the knowledge of Oscar Munoz, the COO at CSX for a few brief questions about some of the macro trends in rail today:

Cullen Roche:  Rail traffic continues to be an excellent indication of the health of the economy.  What is CSX seeing today in terms of the recovery and growth in the USA?  

Oscar Munoz: We continue to see indications of stabilization and slow, steady growth in the U.S. economy. Given that, we expect to meet increased demand for freight transportation services across the highly diversified set of industries that we serve. As such, CSX expects its business will grow at a rate above the economy, with 90 percent of the company’s volume expected to remain stable or increasing in the second quarter of the year.

CR:  Coal demand has really skewed some rail reports in recent months.  Can you explain what’s behind the decline and how this is impacting CSX’s business?  

Oscar Munoz: Historically, demand for electricity has been driven by overall economic performance and industrial production coupled with the impact of weather patterns. This year, mild winter weather drove down demand for power generation in the eastern United States. Additionally, new technology and drilling techniques have driven natural gas prices to all-time lows, further impacting the traditional electricity demand equation and driving continued displacement of coal at some utilities. Although low natural gas prices are the dominant force in the current utility coal market, there is also uncertainty around a number of EPA regulations that will likely impact the sector.

Not surprisingly, given those factors, CSX is seeing headwinds in its domestic utility coal business. The company expects these headwinds to be the strongest in the second quarter and then moderate throughout the balance of the year. Although domestic demand for utility coal is soft, CSX expects full-year export coal levels to remain at high levels, similar to 2011, as global population and economic growth drives ever-increasing demand for export coal.

Given the changes in utility coal demand, we’ve taken steps to adjust resource levels in select areas, particularly in the coal-generating regions, and shifted resources to the other areas of the business that are growing. As mentioned earlier, 90 percent of CSX’s business is expected to remain stable or grow in the second quarter and the company remains committed to supporting that growth while delivering the high service levels customers have come to expect from CSX.

CR:  Is CSX seeing any direct impact from the slow-down in China or the continuing crisis in Europe?  If so, how is this impacting the domestic economy?  

Oscar Munoz:  While the rate of growth in China may temporarily moderate, China’s expanding and evolving population continues to spur healthy energy demand and infrastructure expansion. This trend is expected to drive on-going exports of domestic materials and, thus, a need for sustained transport of freight bound for China.

Despite Europe’s well-publicized issues, the continent continues to be an important destination for the products we ship. Although Europe’s fiscal and economic policies have created some volatility in the markets, it continues to be an important destination for export coal shipments. In fact, about two-thirds of our export coal goes to Europe and much of that is thermal coal already under contract.

CR:  What’s CSX’s outlook for commodities in general?  Is the commodity bull market still intact?  

Oscar Munoz:  We are seeing commodity shipments increase with the economy overall and expect that to continue. More specifically, the expanding industrial economy supports growth in CSX’s automotive and metals markets driving strength in shipments of not only finished automobiles, but also sheet steel and plastics.

In addition, energy exploration and the low price of natural gas are generating significant opportunity for CSX to ship products such as frac sand, piping, crude oil and petrochemicals. Looking ahead, we expect our agriculture business to be stable, with increases in both grain and phosphate shipments being offset by lower ethanol demand.

Lastly, although still off a low base, we are continuing to see modest improvement in the multi-family housing and construction sectors. This growth supports CSX’s forest products business and provides a stable environment for shipments of other products such as aggregates, cement, steel and lumber.

CR:  What’s your broad outlook for the rail industry and CSX’s integral role in this industry going forward?  

Oscar Munoz:  CSX sees a wealth of opportunities to continue providing strong service to our diverse customer base, and, based on that foundation, we expect sustained strong business performance. Freight rail, and our nation’s broader transportation network, will remain an integral component of the national economy—representing an efficient, secure means of transporting essential materials both domestically and abroad. Freight rail is also the most environmentally-friendly way to ship goods over land.

The health of CSX is rooted in the company’s well-positioned transportation network and our ability to respond nimbly to challenges. We’ve come out of the recession a leaner and more efficient company, ready to meet the increased demand for products and resources in the United States and abroad, driven by population and economic growth around the world. From a high level, the economic backdrop remains favorable and the company expects solid growth in 58 percent of our markets and stable conditions in 32 percent of our markets in the coming quarter.

Operationally, CSX remains focused on safety and delivering consistently high levels of service for our customers. Great customer service is a top priority and we constantly strive to improve our performance. By doing so, we will continue to drive excellence in our operations and value for our customers and shareholders. CSX remains on track to achieve year-over-year earnings growth in 2012, and to continue to make progress on achieving our target 65 percent operating ratio by 2015.

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