Rails Mixing Bowl - Updates in between Conferences

April 5, 2019

Greetings;

“(Shippers) point out that the on-time reliability of ocean freight is far below that of other modes”

/Journal of Commerce, noting that east-bound Pacific is running ~40% on time – nice not to be on the bottom

Greetings from Baltimore on Opening Day (before the start of NEARS, which I will “cover” along with the Short Line Convention in the next note).  On the latter, short lines remain a hot topic:

  • “3i Group” announced an agreement to invest in (note) Regional Rail LLC, a small 3-line short line holding company in the Mid-Atlantic run by old hand/friend Al Sauer, ex-Rail America

  • GWR, itself the object of rumor, admiration and desire, added two small-ish lines via long-term lease to its Midwestern ops, a bolt-on, contiguous line (classic old-school GWR)

  • Anacostia & Pacific’s Louisville & Nashville was named Short Line of the Year by RA, while GWR’s Rapid City, Pierre & Eastern (ne’ CP’s DMW-West) was named Regional; Railroad of the Year

  • At NEARS there will be both a Short Line Panel and an address by Gil Lamphere of Mid-Rail, plus days of convention next week….

Change is a constant – PSR personnel shakeups not always easy to decipher:  So, we covered a bit of CSX’s almost constant turnover; this week CN announced (along with a new steamship line, Zim, calling on Prince Rupert) self-described “sweeping changes….designed to forge closer links between operations and technology” (an interesting and helpful twist), and added strategic acquisitions to CFO Houle’s portfolio and operations/integration of new portfolio companies to that of SVP/Consumer Products Reardon.  Clearly we should expect to see more supply chain extension deals like TransX and ports in the future.  Meanwhile, Norfolk Southern’s personnel announcement was a bit harder to read.  Three announcements – EVP John Scheib added strategy; SVP Annie Adams of HR was named Chief Transformation Officer (?? Isn’t that the CEO?), and vanes A. Sutherland, who joined NS last year, was named SVP-Law.  One thing I don’t fully understand – and here I have to note that these guys are friends – but Scheib, in many ways responsible for the positive surprise coming out of the recent Investor Conference, has always been involved in strategy, clearly to NS’ benefit.  But this seems to mean that Mike McClellan, on the of the bright lights of the entire industry, now reports to John who reports to CEO Squires.  Anything that, in reality or perception,  marginalizes McClellan is not good for NSC.  Meanwhile PSR talk (and misunderstanding) is everywhere:

  • RA (“Railway Age” magazine), in a recent article on cross-ties, said for the next few years, the rail-tie market’s “biggest wildcard has to be the effects of PSR” – and not because of some line segment sales etc, but because “as Class Ones look to push their ORs lower through PSR methods, the rails (and Wall Street – emphasis mineseem to be less enthusiastic than in the past about maintenance”.  BALONEY!!  MoW spending has held up this entire decade even as growth capex has waxed and waned, and the PSR2.0 rails have increased their capex (and ROIC, by the way).  But this casual disparagement of PSR and of investors’ role, classic fake news, has now become accepted fact….

  • Of the 10 speeches/panels at NEARS, fully 6 have “PSR” in the title!  Mine does not but it likely come up as question number one….

  • The big WSJ PSR article (“Railroads Revamp Operations”) yesterday was a paean to EHH and to UP and NSC efforts – but really to CSX’ success so far.  While I am concerned about short termism there (no ROIC in executive comp, just OR), its hard to argue with the operating metrics (from worst to first in – US - industry velocity, dwell), despite STB Chairman Begeman’s quote in the article (“The Surface Transportation Board doesn’t want to see any carrier implement so-called PSR the way CSX did”.  So called?!?  By the way, the graphs of CSX’ leadership position in the US come from….the STB!

o   The WSJ’s Paul Zibro got access to the Decatur “clean-sheeting” process with Mike Farrell and the NS (immediately before the big Investor Conference) and highlights customer involvement (though delivers one juicy did: NSC plans to “do less, with less, but not charge less”.  Lets go back to that shipper in a year….

o   My biggest issue with this, with RA above, with what I hear at SEARS/NEARS etc – concerns capex (of course). Quoth the Journal: “Only BNSF has resisted the industry-wide push to reduce Capex”.  NO!  remember the 20-19 Capex Scorecard – 5 rails up, 1 flat, one down!  Look at CN’s plans!

o   Says BNSF Chairman (for a few days remaining in his illustrious 20 year leadership career) Matt Rose: “More volume leads to more investment”.  Says ABH:  “More investment leads to more volume!”.

Border closing trumps any tariff threat!  Just as NAFTA 2.0 might be about to be addressed by Congress, and the China negotiations just might be heading towards “endgame” (with upside for US Ag possibly a part of the deal, even as China now targets Canadian canola perhaps in retaliation for the Huawei mess) , the White House has opened new fronts in North America.  The first was to press both Canada and Mexico for metals quotas (in return for tariff removal), threatening ratification votes in those partner countries, and causing the US Chamber of Commerce to state that “Tariffs are bad; quotas are worse”.

 But that was nothing compared to the threat of a southern border closing – again, the US Chamber: “unmitigated economic debacle!”  Even the threat and some redirected TSA personnel has led to truck delays increasing (at El Paso 2 hour waits increased to 5-6 overnight).  So far, AMLO (who presented a balanced budget two days ago, to great relief)  has been friendly to POTUS and US – but given that his top economic/business backer, Ricardo Salinas, says that AMLO has issues with “trust & delegation”, and the USA and US-owned railroads are a constantly tempting target, I am not sure why provocation, in a period of slowing Mexican GDP (even the government reduced 2019E form +2% to +1.6%) is the best tactic at present.  Recently, it seems the White House is “walking back” some of the border closing threats, even noting that they would exclude trucks from the potential closing (no mention of rail!), what does this turmoil do to potential FDI?  “Security is more important to me than trade”, said POTUS.

UP – Backing off the Brazos?  Trainswire reports that UP is slowing down its construction on the much vaunted $3.2B New Mexico hump yard (and “repurposing” it?); it seems it might be the influence of the new COO….it’s not covered in the new cover story on UP2020 in the current issue of “Progressive Railroading” magazine (“Unification Effort”).  Author Jeff Stagl delves into great detail on that new COO Vena’s arrival and his efforts and CEO Fritz’ commitment to change.  It highlights my belief in that commitment (although also my worry about capex, both in the real and the political worlds – not relived by UP’s latest efforts to rejigger their $3.2B 2019 Capex budget to provide more for sidings, etc – as opposed to raising it to accomplish the same).

Volume opportunities!

  1. Imperial Oil is back in the Alberta CBR game, slowly, after having withdrawn form the market after Alberta’s production curtailment made the moves uneconomic.  Meanwhile, the provincial election is April 16, and the “United Conservatives” have said they will cancel the C$3.7B program (it isn’t clear that they will be able to, legally) and Alberta expects, somehow, to get to 4400 cars by….July.  Meanwhile Enbridge has announced delays, to 2020 second half, for its “Line 3” replacement; on the other hand POTUS cleared the remaining environmental review process for Keystone XL (still of course not started).

  2. The big Shell plant nearby Pittsburgh, the biggest plastics plant not on the Gulf in the shale , will be big indeed  (costing between $6-10B, covering 386ac) and has led to other announcements from foreign producers (China of course, but also Thailand and South Korea).  If and when it gets to 3.3B pounds of production, that means somewhere on the order of 15-16K car loads/a year (from Dick Kloster) and is sole served by CSX!

  3. Recent economic numbers seem to be supportive, with near term manufacturing activity picking up in the US (March at 55.3 vs February’s 54.2) and China (50.5 vs 49.2 M/M).  Housing appears more mixed, with the FT calling recent data poor (LEX: “US Housing – That Sinking Feeling”, noting that “fears of a slowdown in US construction appear justified” while the WSJ, increasingly cheerleadery, noted the 17% YTD increase in homebuilder stock prices).  Auto sales were down 2% for the month and Q1/19….

  4. Helping to bring the big rail network advantage into focus, the American Road and Transportation Builders Association says 47K  (8%) of US highway bridges “structurally deficient and 38% need repair….

Updates on last week’s note:  rarely does a rather innocuous note come with so much feedback or news-updates….

  • Regarding the Cooper Hewitt future mobility exhibit, housed in their former Carnegie (not Vanderbilt – thanks Scott!) mansion home, news came that Virgin Hyperloop (one of the exhibit sponsors) had raised $295mm, as the largest of three related start-ups – and was targeting, after people moving, high-value goods transport; in addition the Times wrote about drone-freight moves noting that the FRA had 10 sites listed for its pilot (sic)  program….

  • Despite the rather shocking news that Bill Ackman was, for now anyway, turning form activism, the head of Sidley & Austin’s “shareholder activism practice: noted “activism was (remains) the ‘new normal’ in corporate America”

Other news:

  • “One of Russia’s largest rail-transport companies” (FT), Rustranscom,  filed for an IPO in London; its an Ag carrier….

  • Dreyfus’ CEO was fired in September, it turns out, for initiating consolidation talks with Glencore….

  • Trains and others have noted the 20 years since Conrail was sold/split – some wonder what would have happened if they had gotten the SP’s “Cotton Belt” lines (now the UP gulf chemical business!) in the UP/SP merger; I wonder what an intermodal lock on NYC and the east would be worth as mix shift and intermodal growth opportunity make railroads very different now than in 1999….

  • Nodal Exchange debuted, a unit of Deutsche Bourse, and data-partner with the now-ubiquitous FreightWaves, a futures exchange for spot market trucking, inspired by the Baltic Dry (Freight) Index….

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com