May 15, 2019
It’s NARS time again – the end of the winter/spring conference circuit is perhaps the highlight. The rail world will gather in San Antonio tomorrow for the North American Rail Shippers Association (NARS) annual meeting (5/15-17 https://www.railshippers.com/wp-content/uploads/2019/05/FiNALNARS2019Agenda.5.13.2019.pdf )- and it will be a great chance to hear & learn from some folks and companies from whom we don’t often get that chance, starting with Carl Ice, BNSF’s CEO, nicely timed after Berkshire Chairman Buffett’s comments at his big party in Omaha a week ago (see attached). BNSF will also discuss CBR (in the person of Industrial Products Group VP John Miller).
Outside forces: NARS will cover the political side, from trade (US Chamber) to regulatory matters, well-timed, through presentations from both the former and current AAR CEOs (Hamberger and Jeffries, respectively, of course), new ASLRRA (short-line) head Chuck Baker, the head of the Association of Mexican railroads, and Commissioner Patrick Fuchs of the STB. These are the highlights (along with Beth Whited. Chief Human Resource Officer of the UP and Clarence Gooden, who needs no introduction). And, yes, there is an analyst panel (Hatch/Hoexter/Paterson). I will be talking about the rewards of capex (see expanded slide deck, attached). But best of all, there will be some 250 shippers (USG, Shell, Honda, Chevron Phillips, Nestle Purina, Bayer, Georgia Pacific etc) 3PL/IMCs and rail executives on the Riverwalk; if you are there please let me know….
NARS is well timed to offer discussions into most of the ongoing or emerging “big themes” of 2019 North American freight railroading – excepting only really the nature of the economy and volume outlook, and at least overtly, pricing (verboten at “ARS” meetings for anti-trust reasons, of course). The top five are:
1. Trade – the big issue since….2017. Wrote the FT’s Global Insight columnist Edward Luce: “(President) Trump has staked his reputation on eliminating the trade deficit (as opposed to changing the intellectual property rules etc) with China. Most economists think that goal to be unattainable – and undesirable”. Remember that the much-publicized AAR figure of “42% of US rail volume is trade-related “greatly understates the total impact on the Class One industry. The recent heating up of the US-China trade war, only a few days ago thought to be resolved, is obviously not great news for rails – impacting Ag, autos, consumer goods, plastics, etc. The chemicals sector is “particularly heard-hit” (the FT, again) – let’s see what PLG says about it here at NARS. The latest salvos have been estimated to include fully 50% of the trade between the USA and China – and The Economist notes that “China vows to fight to the end” on this issue. Q1 US exports to China were down 30%; imports from, down 9%. Overall global trade declined 1.1% for the first two months of this year. Overall subsets of this broad theme of disruption and seemingly permanent volatility (no friend to capital investment) include:
Mexico – Border disruptions related to immigration and our declining relationship have been estimated to cost ~$800mm/day (although that should lead to market share opportunity for rail!). AMLO, meanwhile is both underwhelming in his attempt at broad changes (for example on the use of the army – “meet the new boss, same as the old boss”) and going back even further in time to offer broad support to Pemex, which just received an $8B credit approval, which would constrain US refined products imports, a big growth prospect for KSU. Meanwhile, NAFTA 2.0 is getting pushback – from the US Democratic congress, and from Canada and Mexico who argue, rather convincingly, for the rollback of the metals tariffs (and clearly will not accept quotas as a “substitute”). Meanwhile, the US International Trade Commission, an independent government agency, pegs the impact of 2.0 (AKA “USMCA”) as minimal (increasing GDP by 0.35%) – which makes sense in that, despite all of the rhetoric, it really is an only slightly modified 1.0; they see the biggest, unquantifiable, benefit being the investment/regulatory stability that USMCA (NAFTA resolution) would bring – but “stability” seems like a distant goal from here….The US added tariffs to Mexican tomatoes – so clearly, following the price gyrations in Avocados, this sector of the trade war isn’t auto-focused, but rather, concerns salsa….
US Ag – Soybean prices have fallen below $8/bushel (an Iowa State University study pegs breakeven at about $9); storage is at record levels; the African Swine Fever outbreak in China has reduced their appetite (even as LatAm competition – and harvests – grow rapidly. Not a pretty picture. The White House’s offer to renew a farmer bailout program (~$12-15B) is aimed at 2020, of course; their discussion on using crops for humanitarian aid doesn’t really apply to soybeans (not consumed by humans, largely). One bean farmer quoted in the Journal had to leave last year’s crop in the field because he lacked storage space (exacerbated by the metals tariffs!) – and thus didn’t qualify for the bailout money (only for harvested crops!). Catch 22….
2. PSR – how could we not talk about it? It will be very interesting indeed to hear from someone other than retired Executive Chairman Matt Rose at BNSF (and Buffett, somewhat enigmatically as is his wont) on the subject! It will be also revealing to hear from shippers (off the record) about their experience. But from an official agenda perspective, this will be an almost PSR-free zone. Unofficially, it will be here, there and everywhere. I continue to marvel at the misconceptions and willing or naïve pontifications on the subject. It is linked to what I have been calling the “Cult of the OR”, to be sure – and to the pure cost-cutting side of that equation. And, it has attracted investors on the shorter time horizon part of the spectrum (pressuring capex). But it can and should (will?) mature into a “pivot to growth” (viz CP) – as I have also stated, look north to the freight rail future (potential).
That hasn’t stopped the critics – in DC (below) of the “Old Guard” rail/transport press. The JoC called it unproven (while correctly noting the poor communication effort at CSX, whose experience will inform that of the reaction to the other US rails undergoing the transformation). The JoC quoted the usually reliable FTR in stating that railcar capacity utilization had only improved slightly (they put it at 78%, up from 75% in 2017 – though how they get that proprietary information is anyone’s….guess).
Change is hard - More egregious was “Trains” magazine’s rip (calling PSR “the latest operating fad”) – saying it is “designed to reduce employment” (no, ideally all assets get reduced due to increased consistency/reliability; also see KSU’s recent proclamations on the subject – “Service begets Growth”). They (Solomon) goes on to say it’s “driven by Wall Street” which makes me wonder of Hunter was aware of Wall Street while initiating this on the Frisco – and why the – focus here – owners of a company are expected to have no say? To be sure, rails get punished by “short termism” – see my push to focus on ROIC and Capex – but rail investors have actually been pretty patient ones this century. Further: PSR seems to be “formulaic simplifications to please investors (here we are again, Kamerade) while glossing over shippers needs”. Is that happening above the 48th parallel?!? One thing they did get right is the reaction – which they are inflaming – to PSR is bringing back re-regulatory threats again….
3. (Re) Regulation. Its seems to be a rising threat – one prominent lawyer, one of my few conservative/communist friends, says that rail assessorial “abuse is rampant” – and the STB will soon be holding a hearing on the issue. But its not just the USA – Mexico has stepped up what we might consider anti-trust oversight and the CTA up north has taken the CN to task for since-corrected congestion in Vancouver. But it’s the USA that is really heating up, as we have discussed since STB Chairman Ann Begeman’s incendiary (but enthralling) speech at last year’s RailTrends. Their recent “Rail Reform Task Force” report was scary – but remember it’s Washington. Things move slooooowly. The AAR’s Jeffries stated it “lacked balance” – I expect him to expand on that tomorrow. And perhaps we’ll learn more from Commissioner Fuchs as well – after all Frank Wilner called him the “Youthquake Commissioner”. Ready, steady, go!
Also of note:
Speaking of the STB, former Chairman Dan Elliott has joined the Board of United Rail, a short line investor. Congrats, Dan!
Infrastructure love-fest at the White House as the President and Dems look to produce a $2 trillion plan – without agreeing on….how to fund it. POTUS has publicly backed away from earlier efforts to focus on PPPs but that wasn’t going to work, anyway. Maybe they can sell the Brooklyn Bridge, retail?
Tech aint going away – Google received drone-delivery approval and Amazon launched its “full truckload service” brokerage.
Last month ITE sold the railcar manufacturing portion of its ARI purchase to Greenbrier – and kept the fleet.
Good call! Wabtec’s succession plans – they announced that the head of newly absorbed GE Transportation, Rafael Santana will become CEO of the newco in July (to those of you with grey hair – not the 1986 World Champion Mets shortstop)
Anthony B. Hatch