We got in touch with CSX CFO Fredrik Eliasson in the last few days in order to better understand what the rail behemoth is seeing in the global economy and what important trends are driving the industry these days. Attached are his thoughts:
1) 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?
We continue to have confidence in sustained economic expansion, albeit at a slower pace than in the past few quarters – our leading indicators predict moderating economic growth for the balance of the year. Discussions with many of our customers support this general assessment. For CSX, strategic investments, including new terminals and double-stack clearance across our network, have positioned us to take advantage of the growth in some sectors while responding to fluctuating demand in others. Excluding the company’s coal business, the volume of CSX’ shipments is up 4 percent year-to-date, as well as quarter-over-quarter. This strength in the other areas of our business reflects the diversity of the markets we serve, as well as our commitment to developing new opportunities such as shipping crude oil by rail.
2) 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?
The global economy is slowing from the growth rates we’ve seen in previous quarters, reducing demand for U.S. coal globally. The rate of growth in China has moderated, adversely affecting demand for the near term and the weak state of the European economy is suppressing export coal demand. Overall, export coal volume is expected to decline in the fourth quarter, even though full-year volume will actually grow, year-over-year. While near term conditions are softening and export coal will always be volatile in the near term, we expect the U.S. to continue to be a strong supplier of world coal in the long term.
3) What’s CSX’s outlook for commodities in general? Is the commodity bull market over?
In the short term, we recognize the economic environment has moderated. Growth in commodities like coal and agricultural products is slowing as a result of certain external drivers, including low natural gas prices which impact coal demand, and a severe drought in the U.S. Midwest which resulted in much lower corn shipments. While we expect stable or favorable conditions for the majority of our markets, we have an overall neutral outlook for the fourth quarter.
But over the longer term, we expect many of the commodities that are weaker today will strengthen, and our diversified business will continue to capitalize on new opportunities in recovering and emerging markets. Low natural gas prices are driving an expansion in the chemicals industry and we see some growth in the manufacturing sector as well. Demand for construction materials is continuing its growth pattern thanks to the economic recovery and automobiles volume is increasing thanks to pent-up demand.
4) What’s your broad outlook for the rail industry and CSX’s integral role in this industry going forward?
Overall, despite market conditions that are less than ideal, our outlook remains positive – new technology, new partnerships and emerging market expansion are helping to continue the growth trajectory for our industry and our company. At CSX, we’re finding new and innovative ways to drive fuel efficiency and better service for our customers while investing in safety and productivity gains. Our revenues were down 2 percent this quarter on lower volume and fuel recovery, but our ability to adjust to near-term market conditions while staying focused on building our capabilities for the long-term bodes well for us once sustainable economic growth resumes. As more people demand more things across the globe, and highways continue to be overcrowded, the fundamental competitive advantage of our industry is intact. Freight rail will continue to drive American business efficiency, promote America’s competitiveness worldwide and encourage environmental stewardship.
Thanks to Frederik for taking the time to pass along his thoughts.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.