Coal has been in the news for the past couple of weeks after the announcement of new restrictions on carbon emissions, which are likely to reduce U.S coal consumption in the coming years. But this year the coal market is actually expected to slowly improve. Despite this projected recovery, coal companies including Alliance Resource Partners (NASDAQ:ARLP) and Arch Coal (NYSE:ACI) won't benefit from the rise in coal consumption because of low coal prices. But CSX (NASDAQ:CSX), a transporter of coal, could benefit from the rise in coal demand.
Higher coal demand -- rise in volume transported
Elevated natural gas prices have driven the demand for coal in the past several months. Moreover, in 2014, the U.S Energy Information Administration expects coal consumption to increase by 5% year over year. This higher consumption is likely to result in an increase in inventory buildups for coal. As stated earlier, coal companies such as Arch Coal and Alliance Resource Partners aren't likely to benefit from this modest rally because of an ongoing fall in coal prices.
Further, coal production from these companies is projected to drop this year: Arch Coal estimates its annual coal sold (in tons) to fall by 3.5% compared to 2013. Alliance Resource Partners expects to produce 4% less in 2014 than in 2013.
But on a larger scale, the expected rise in demand for coal is likely to benefit coal transporters such as CSX. The company's executive vice president and chief financial officer projects CSX's earnings will grow by single-digits in 2014, and by double-digits in early 2015. Part of the rise in sales is due to an increase in the amount of coal transported: "...volume growth has picked up strongly, and we have visibility to several million new tons of domestic coal as inventories are normalizing and natural gas prices have risen."
Despite the expected rally in coal volume, CSX's revenue from coal declined by 8% in the first quarter of 2014. Most of this drop is due to lower coal exports. Looking forward, however, the ongoing rally in the U.S. coal market could keep driving up the company's revenue in the coming quarters.
How big is coal in the company's operations?
In the first five weeks of the second quarter, the company's volume transported increased by 9%. Part of this growth is likely due to higher volume of coal. During the first quarter of 2014, revenue from coal accounted for 22% of CSX's total revenue. Thus, for every 1% gain in coal volume, assuming all else equal, the company's total revenue is expected to pick up by roughly 0.2%.
This might not seem like much, but if coal consumption picks up by 5%, as the EIA estimates (and assuming this will translate to a 5% gain in volume of coal transported), this could mean a 1% rise in CSX's revenue. In comparison, last year's total revenue grew by 2.2%. So a 1% bump in revenue from coal alone translates to a 50% hike over last year's growth rate (a rise from 2% to 3%).
Foolish bottom line
The expected rise in coal volume is likely to augment CSX's top line. Revenue is projected to slowly pick up in the coming quarters, which could translate to a higher growth rate than last year.
Lior Cohen has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners. The Motley Fool owns shares of CSX. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.