Thanksgiving and Rails - a Catsup

November 21, 2018

Greetings and Happy Thanksgiving!

We gather together learn more railway lessons:  This fall has been a busy one, filled with earnings, Big Announcements of operational/philosophical changes at the railways, and lots of travel to some interesting meetings that I allowed to get lost in the headlines; now’s the time to catsup, er, catch up on some of the unique events that I attended.  Typically, I “sing for my supper”, speaking at these events in return for attending and soaking up some rail tidbits, often interesting appetizers, sometimes whole meals….I have attached an abbreviated slide deck from one of them (the 2018 Met-Coke Conference in Pittsburgh) as an FYI.  Meanwhile, rail traffic indeed slowed a bit in October, as some have been fearing, but intermodal (as well as chemicals/petroleum and metals) showed there’s still some life in the demand story yet.  In last week’s Review, in formatting I listed Union Pacific’s Q3/18 OR as 67% – when it was 61 point 7 (61.7%).  That’s a big, Bucker-esque error, and I expect to be taken to task for it by UP’s CEO Lance Fritz at RailTrends next week.  There you’ll see two trends in this short piece – shamelessly hyping RailTrendsand technological incompetence; the irony on the latter will be seen in my speech topic in Toronto, below….

The conference breakdown of the last month, in chronological order, was as follows:

  • The Railway Tie Association provided reassurance that network spend would be healthy next year:  I believe we’ll see a 10% or so increase in capex despite pressure form short term investors.  RTA provided some evidence - projected tie installation is 15.9mm, a 2% YOY increase after a 3% increase this year.  There were clear signs that from a network perspective (that is, excluding rolling stock, etc), we will see another slight increase in overall Capex in 2019.  CN and BNSF outright stated that – and this is coming in another year of CSX reductions.

  • The 2018 Met-Coke conference, an outlier for me, showed the disruptions of the trade war impact, and a few worrisome trends emerging in China (peak met coal demand reached this year?) and in the dry-bulk shipping markets (over supply entering the markets next year?).  The US suppliers such as Sun Coke were all over me about poor rail service….

  • The Scotiabank Canadian Transportation & Industrials Conference allowed me to catch up on CN & CP while engaging in a “fireside chat” with their excellent equity analyst Turan Quettawala on rail technology.  On that note we discussed the major differences between the build (UP and their huge gang of coders) versus buy (CN) models, the emergence of PTC as a “digital backbone” (at least in name, so far) for the rails; the importance of visibility (notably for inbound empties), and how the “magic beans” behind PSR was not simply having a Canadian on board, as is the current fad (ironic, given PSR success up North was led by Americans), but data.  And we happily noted the public re-emergence of Canapux!  (that’s the “hockey-puck” plastic casing over oil sands crude that could allow Canadian petroleum to use the coal supply chain).

    • Canadian National stated that their big growth plans for CBR over the winter and into next year are truly a sign of confidence in their recovered fluidity (a form of managed growth).    They are backing up their confidence with Loonies – record capex this year – and likely, next (some 25% of revenues).  But – the ROIC justifies this, as I have long stated myself.  They have and will easily exceed, a 12% hurdle rate.  Their purchase of a trucking company, TransX of Winnipeg, is an interesting development, though I remain in the “show me” phase having remembered similar (though to be fair, different) rail/truck deals by NSC, UNP and others, none of which worked out well.  We’ll hear more about it at RailTrends next week from CEO JJ Ruest.

    • Canadian Pacific also focused on demand management, as they did so eloquently at their Investor Conference mid-fall.  They noted that PSR created a lot of capacity for them (to grow CBR significantly, for example), and re-emphasized their banked land position (vs. CN) for future growth, and their new 8500’ Ag train model, backed as well by investment into new cars.  One interesting tidbit – as we see frac sand “roll over” for the rail industry (trucked Texas dirt taking precedence over railed Midwestern white sand), CP also sees a drop in its Texas-bound sand, and overall sand volumes,  but diversification into higher margin fields (Marcellus, Bakken) means that for them, 2018 will see fewer carloads but flat revenues.  We’ll catch up more with CP’s CFO Nadeem Velani at RT.

  • Finally, the CONECT (bear with me:  Coalition of New England Companies for Trade – essentially international intermodal shippers) showed the difficulty of making volume projections in that field in this political environment.  The National Retail Federation (NRF), usually a reliable provider of inbound container estimates, basically gave up trying.  The sense was, the demand is there but….who knows.  Meanwhile, two big players on either side of the rail portion I handled on the supply chain panel, MSC (Med Shipping)  and drayage in the form of Ken Kellaway of Road One, essentially made the case for higher rates for their services, or else.  The former’s US head said that he provided container transportation shipping – he was “NOT a charity” – and that demurrage and other assessorials were coming, and soon (shades of CSX).  The latter (Road One) also made a similar case, noting the acuteness of the driver shortage on the first/last mile.  Everyone was concerned about CSX’s IM changes (up to 295 O/D pairs to be eliminated) and what that might portend for the other carriers just now taking up PSR….

The demand for rail transportation is still there, though expected trends are mostly asserting themselves:  The AAR reported that October volumes, defined by RTI as US+Canada and carload+intermodal grew just under 3% YOY last month.  13/20 commodities increased (for the US; Canadian results were 12/20).  This is solid but down the April-September average of 15.  The decline was lead by the headliners – sand down 11%, Forest Products down 3% and Ag down 2%, respectively; showing a surprising gain was Coal (+3%) and Motor Vehicles (+2%).  The pre-buying of soybeans is clearly over – and with Brazil getting an excellent growing season, that may prove to be a fatal error (and the charity seems disappointing too – only $838mm of the supposed $12B bailout fund has been allocated, well below the loss figures).  Showing expected gains were Chemicals/Petroleum (+12%; split as +4% and plus….33%) and Metallic Ores/Metals, up 4%, led by Primary Metals up 9%.  US chemical loads increased only 1%, which isn’t the expected plan – is the Chinese tariff on resins a factor?

Intermodal is more reassuring, though not spectacular (up  3.5%, held down by flattish Canadian numbers against tough comparisons).  IANA’s October numbers are even more reassuring: they put the total volume for October up 6%, with a deceleration in trailers, (TOFC was up 4% as opposed to the 14% YTD numbers) – but an acceleration in the critical Domestic Container segment (up 7% versus up below 6%).  International was still strong (up 6%); we’ll see how long that lasts as the trade war heats up.  The good, on-trend IM numbers still leave me, like thinking about Mickey Mantle’s career numbers, thinking “what might have been?”

Congratulations – you have given birth to a baby railroad!  Congrats to new rail announcements from Watco (the Decatur & Eastern, the CSX segment) and RJ Corman (the twins Nashville & Eastern and, yep, Nashville & Western).

Finally, some holiday treats:

Anthony B. Hatch 
abh consulting

CP Trains.jpg