Looking at railroad results through the second quarter of 2005, equity analysis firm Morgan Stanley noted that despite the slowest growth rate in six quarters, rail volumes remain strong and capacity is tight. Demand is good for coal and intermodal capacity, which accounts for 50% of the industry’s volume.
Utility inventories are below normal and with natural gas prices high, it is unlikely that coal will be replaced by natural gas, translating into a tight coal market through the middle of 2006, says a Morgan Stanley report.
Intermodal growth, which has been setting weekly records, has moderated. Current expectations balance double-digit growth in international traffic and low single digit growth in domestic volumes to suggest single-digit growth during the second half of 2005.
Fuel prices have had their impact, but most railroads have been somewhat insulated by fuel hedges. An estimated $810 million in hedges (assuming oil prices of $60 per barrel) will expire in 2006, having the greatest impact on the Burlington Northern Santa Fe (BNSF) and CSX, according to Morgan Stanley.