The long-term story of coal demand is quite different from the immediate repercussions of the U.S. decline. In the last five years, CSX’s coal export loads have grown from 13 tons to 40 tons, or 207%. Demand in the developing world will boost trade, and in the end that’s likely a positive trend for the U.S. Natural gas, a cleaner, cheaper energy source, could become the fuel that propels American GDP growth. Acting as a catalyst for the overall economy, natural gas can actually translate into growth for railroads as well.
Focusing so heavily on one critical aspect of railroads’ long-term success can distract investors from an even more important development, recently described by The Atlantic magazine as “the insourcing boom.” The return of manufacturing to America and the rise in exports is nothing short of revolutionary — yet many investors are unaware of the implications. For shareholders in American railroads, this trade reversal is absolutely critical.
Slowly but surely, America is becoming an export powerhouse as many companies bring their core operations back to the U.S. Why? Because labor costs are becoming less critical while transportation costs are becoming more influential in managers’ decisions. Since 2000, wages in China have grown fivefold and oil is three times more expensive. America’s highly productive workforce suddenly looks more attractive, and the fuel costs to ship goods look more prohibitive. This is why the industrial conglomerate General Electric Company (NYSE:GE) sees a strong future in manufacturing at its massive facility in Appliance Park, KY. It’s also why Apple Inc. (NASDAQ:AAPL) recently invested $100 million to make Mac computers in the U.S.
As this manufacturing renaissance gains steam, another interesting development is an agricultural-driven commodity boom. As the breadbasket of the world, the U.S. stands to benefit from surging demand for grain and meat to feed a growing Chinese middle class. Many of these commodities will be hauled to East Coast ports like Charleston, SC and Savannah, GA in droves. No wonder the Port of Charleston became the fastest-growing of the 10 largest container ports in the U.S. for the first six months of 2012. Savannah wasn’t far behind, notching an annual growth rate of 11% per year for 10 years. The most interesting development is the prominence of exported goods. One-eighth of all U.S. exports by weight go through Savannah, trailing only Los Angeles. While outbound goods make up about 30% of the tonnage at most U.S. ports, that share is 54% for Savannah.
Looking well into the future, a rise in manufacturing and agricultural exports bodes well for a railroad connecting America’s heartland with some of its most highly trafficked ports. Currently, the U.S. Department of Transportation predicts demand for freight transportation will grow 60% in the next 30 years. Consuming less than a quarter of the fuel as trucking alternatives, railroads like CSX Corporation (NYSE:CSX) stand to benefit immensely from this growth for years to come.
The article Why This Railroad’s a Great Bet for the Long Haul originally appeared on Fool.com and is written by Isaac Pino, CPA.
Isaac Pino, CPA owns shares of General Electric Company and CSX. The Motley Fool owns shares of General Electric Company.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
