MAFTA & Rails - A Summer Squall

August 30, 2018

Greetings, Happy Labor Day! 

Woken up from a summer nap!  I was preparing to write another “Dog Days of Summer” piece, some of which is below, when the news struck, and optimism reigned – then we woke form our stupor and began thinking a bit….For you “Wise Men” (and you know who you are) – wait a week and I will highlight your terrific insights; MAFTA and reader beach time suggests a timely delay….

MAFTA (Mexico/America FTA) - the US & Mexico reach a deal!  Is this the end to the uncertainty that overhang investment, FX, etc?  Certainly the markets thought so, at first, and plenty went on to upgrade KSU, the most bilaterally-impacted railway of course.  But….not so fast - then everyone remembered that NAFTA was a tri-lateral agreement – where was Canada?  In the penalty box, and given until today (8/31) to agree to join in or remain off by itself.  I must say, Mexico’s craven abandonment of their erstwhile close ally is shocking (Canada had resisted any such doings when it was Mexico in the box and Canada skating freely with the USA).  But politics, as always reigns (US midterms, the change in Mexico’s administrations 12/1, the 2019 election in Canada).  It’s not clear how even the GOP in Congress feel about it, without Canada.  The auto industry once again appears to funding a focus on steel.  The current tariffs (steel, aluminum) still apply, even if tariffs on Canadian newsprint was soundly rejected.  So, looking bi-laterally, what have we got?

From the conservative side of the business press:

  • FT: “An update that will do more harm than good – at best ineffectual; at worst destructive” (in urging Canada to take a pass). The FT noted the overall rather muted response in emerging markets and commodities, which suggests that a deal and the ending or at least reduction of trade tensions is baked into global assumptions, which itself provides some risks as we learn more details and wait for Canadian reaction….

  • WSJ: “Halfa NAFTA”, “threatening Mexico’s role as go-to provider of low priced vehicles” (not good for rails, obviously), and, quoting the Heritage Foundation (the first time that I have ever done so, BTW) “the new rules are so complex and anti-competitive that they invite endless litigation and corruption”.

  • Meanwhile, the subjectively “liberal” NYT stated it wasn’t a new (“NAFTA 2.0”) deal, “simply….a revised one; a symbolic victory” (one aspect they noted was that it only “preserved existing free trade in Ag” (and thank goodness for that).

Whoa!  Some “victory”.  To gain some level of certainty, Mexico cut a deal that may well hurt supply chains for autos and doesn’t help their steel industry.  Trying to dive behind the rhetoric, we see that, by Mexico’s estimation, some 30% of their auto production doesn’t fit under the 75% NA-made threshold (see chart at the bottom, courtesy of Freightwave); Louis Russell lrussell@westcoastgasket.com ; the higher-paid worker provision reduces incentives for new plant development.  It seems that the outgoing Mexican administration was doing its best to protect existing auto plants, but not future ones.  Also clearly in the sites was (containerized) Chinese auto parts imports (that trade cold war is of course unresolved, though the $4.7B farm-aid [package to those crops affected by tariffs is so cynically timed for November  – but railways don’t move welfare, they move crops).  Fewer boxed parts would be bad for carriers (in fact, the deal is a general attack on (WSJ, again – a “strategy to blow up”) longer, global supply chains, and trade, rather than being supportive.

There will be more to come, of course….

 

Also:

  • Maybe the service issue is over-stated? Nah, but this was good news: Logistics Management Magazine’s 29th annual “Quest for Quality” survey ratings came out and they were beyond interesting. For the rail group the overall winner was….Norfolk Southern! They scored a total of 44.23 points vs a group average of 38.62, followed by BNSF< KCS (KSU) and the FEC. NSC won for on-time (really? The numbers don’t lie) and equipment; BNSF won on “value” and IT (see below) and FEC on customer facing. By comparison, the dry-van average was 42.37 (the scale is confusing) and JB Hunt did a rather cool 44.44….

  • Also good for/by NS: Love seeing the “Progressive Railroading” magazine (my RT-partner of course – hype warning!- www.railtrends.com ) cover on NSC and technology; even if the rhetoric maybe ahead of the reality, it’s still critically important to begin talking the talk, and by increasing pure-IT (non-PTC spend from $77mm in 2016 to $150mm this year, NSC is taking baby-steps toward walking that walk, and positioning itself, given BNSF’s silence and CNI’s preoccupation, as the industry leader….

  • “Bin buster”: By-product of the Chinese portion of protectionism – the USDA forecasts soybean stocks at the end of crop-year 2018-19 to be up some 80%

  • Final score – according to the US Commerce Dept, in a (revised up) 4.2% GDP growth Q2/18, corporate profits were up 16%, showing US Rail outperformance (especially if you take out tech & energy). However, taxes contributed more than a little – total tax per rate was down a third YOY; meanwhile Canadian GDP increased 2.9%, slightly better than forecast and, perversely, led by exports (though by the end of Q2 the growth seemed to be stalling a bit).

  • Trucks are well, if you haven’t heard - from also from Freightwave: https://www.freightwaves.com/news/infographic/how-truckload-carriers-performing-bull-cycle?utm_source=FreightWaves+Daily+Newsletter+Subscribers&utm_campaign=3f29c20391-EMAIL_CAMPAIGN_2018_08_30_03_46&utm_medium=email&utm_term=0_6b16748ce6-3f29c20391-104450769

  • There’s something happening there….Rio Tinto successfully tested its “Auto-Haul” trainset – not vehicles but “auto” as in “AV” NSC has visited the Pilbara in Australia to check it out – kudos – it’s far, man….

  • Coal beyond saving? The EPA says that its own rollback of the emissions rules won’t have a major impact – utility coal use would have dropped 29% with the Clean Power Program, 23% under existing regs, and yet still fully 20% under the new regs (the FT “Energy study dashes Trump’s hopes for coal”).

  • Intermodal news:

    • Northwest passage? Maersk tests a 3200-TEU ship over Russia as a Suez-alternative. Maybe it will discover a new “America”….

    • Old friend Larry Gross revised IM market share stats are illuminating: IM share is around 10%. Half-empty glass? After all the sturm und drang, that’s not so much. Half full? LOTS of upside. I will learn more next month when I join Larry and hundreds of our intermodal friends at “Expo” (see www.intermodal.org ).

    • Publications catching on, Dept: “Inbound Logistics”: “A fresh look at intermodal” (really?!?); “Railway Age”: “Continuous Capex Helps Position BNSF for Growth”. ABH: N/S/S.

    • Prince Rupert container growth was +19% in H1/18 (down from a too-rapid to digest +28% FY17)

    • McKinsey global intermodal report states that the so-called “peak container” level is “nowhere in sight”….

Anthony B. Hatch
ABH Consulting
http://www.abhatchconsulting.com/

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