The recent boom in shale gas has been tough on railroads. Natural gas has begun to replace coal for electricity generation, meaning railroads are carrying less coal, which is one of their largest lines of business.
Weak coal shipments have sent ripple through the entire railroad industry. Coal volumes have fallen for rail lines like CSX Corp. (CSX), Union Pacific (UNP) and Norfolk Southern (NSC). Ironically, the shale gas boom could be the thing that actually comes in and saves the industry. It is not often that an industy'es main problem turns into its savior, but that is exactly what is taking place for railroads.
The main reason why shale gas is a positive for the industry is because most of it is being discovered in remote areas, with little or no access to pipelines. With so much oil production taking place in areas that do not have adequate pipelines, railroads have become a vital link for the industry.
At the same time, we are also seeing a rise in natural gas prices. Last year when prices were at historic lows, a lot of electrical companies shifted from coal to natural gas , but natural gas prices have been on the rise. Should prices continue to rise, we are going to see a reversal of last year's trend, and electric companies could start to shift the balance of fuels back toward coal.
Either way, railroads will benefit.
Two other factors that are creating a positive outlook for the railroad industry are improvements in both the auto and the housing sectors. As these industries continue to improve, railroads will find higher demand for their shipping services.
Railroads offer the most affordable means of transportation, so any time economic activity picks up, railroad companies prosper. While the overall economy remains fragile, the improvement we have seen in the auto and housing sectors bodes well for the railroad industry.
Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.