June 13, 2018
It’s almost time for the World Cup – but before we consider whether “Football’s coming home!” (it is), a few thoughts….So, after time to reflect on Union Pacific and to worry about world events, I hadn’t commented on a series of dealings with either company-specific or broad rail import, starting with a mea culpa (#3 of 2018, if you’re counting):
MC3: Last week I misidentified Canadian National’s esteemed CFO – it is of course Ghislain Houle (and not the former CEO as I so-Freudianly wrote)
CP’s strike issue didn’t last long, did it. Never an investable event, we’ll see over time what the impact of the contract will be; meanwhile CP jumped into the grain car market with both feet, announcing a 5900-car 4-year plan, 1000 ordered. Canadian grain is a great test case for the evils of financial regulation and the negative effects on capital investment– changes to the “Maximum Revenue Entitlement formula” under the newly signed act (C-49) finally unlocking investment of a modernized (286) grain car fleet….
Another great example of the havoc that regulations can place on business is the huge brouhaha in Queensland, Australia pitting Aurizon against the QCA - note, the C is for “competition” not “Communism”. We have covered this before, but the fight appears to be a three-sided one (the big mining companies are siding against AZJ after they began to curtail service given the reduced ROI under the so-called UT-5 regime (as rather short termed response, I would say). The billion dollar difference in outcomes comes from a reduced MoW allotment (subsequently corrected), and a ridiculously low WACC allowed (compared to, say, that in neighboring NSW). Railroaders here remembering the bad old days pre-Staggers (1980) and deregulation will remember the impacts of this kind of interference into the (railway) marketplace – slow process (some 18 months late) not tied to real capital allocation cycles; unnecessarily complex, signs of mission creep (the QCA is now proposing to insert itself into rail operations review!), and cross purposed. And now, to top it off, perhaps rife with conflicts of interest (and perhaps even outright fraud). Australia is the “lucky country”, but railroads in North America – and their stakeholders – are luckier here.
Speaking of Canada, when did they replace Russia in the Cold War? Just as the Journal of Commerce was declaring this to be “Canada’s Moment” (and, in truth, their recent intermodal performance has been ~2X that of the USA), all heck breaks loose at the G7 (or G6+1), eh? Canada has replaced NAFTA teammate Mexico as the POTUS Punching Bag – and that’s not good for the North American Freight Rail Group, or any sophisticated company (as the NY Times “Intelligent Investor” put it over the weekend – “today we take pity on the supply chain managers….” Reacting strongly were not just the allied political leaders but also companies with huge US involvement (Volvo, set to open a major plant soon in South Carolina; ABB, PSA, etc….).
Linda we hardly knew ye….Linda Bauer Darr will leave the short line trade association (ASLRRA) on July 27 after a short (but positive, choosing the Gaylord notwithstanding) tenure. This was a surprise (to me anyway) and now the search begins – with the best candidate right there in DC under their very noses….
CSX adds six more line segments (now 8 total) to its short line bidding process. This clearly shows that the process of review and analysis – and asset allocation - is for real (and a sign of rail group leadership, not group-think – see below) and look to see others follow suit to varying degrees. Are we entering a second Golden Age of short line creation? Oh boy – this could be big! Meanwhile their dropping form the boxcar pool is most interesting as they try to change customer behavior on the one hand, and pick up increased carload business on the other….
Rail traffic continues to accelerate and outpace the economy – overall Northern North America (ie; the USA + Canada) volumes (car-load + intermodal) were up 5.1% in May, as in both countries 15/20 tracked commodities showed increases. Intermodal grew over 6% (we’ll await he IANA breakdown). US coal was up 1.7%, US grain 2.7%, steel/metals +7% (don’t read much political input into this – imported steel goes by rail too). There may be some political factors behind US lumber up 8%, however, although a pickup in construction is the rising tide. Also of note, US chemicals (finally showing the long-predicted secular lift) +6%. The as-usual great AAR Rail Time Indicators (RTI) notes that, according to the ATA, trucks still hall over 2/3 of chemical transport revenues….stone/sand (still life in the old frac sand boy) +14%. Not all positive: Autos were down 2%. Truck tonnage was up 9.5% (in April)….
The Fortune 500, just out, shows the growth of the new transports – Berkshire Hathaway was #2 (down one spot), while Amazon was number 8 (from 12) and UPS #44 & FDX #50. Topping the rails was, of course UNP (#141, up 2), which was also subject of a highlight in the issue, followed by CSX at #265 and NSC at #284. In the subset “Best Return on Revenues” NSC was….#2, UNP #3 and CSX#4. And speaking of that Third Place performer, Berkshire Hathaway, Warren Buffett said in a recent interview that all of their stock deals were “a mistake” – except for BNSF….
Intermodal and infrastructure – I wrote this for the upcoming IANA (Intermodal Association of North America) publication Intermodal Insights timed to preview the September “EXPO” in Long Beach, where I will be leading a panel on “Intermodal Network Capacity in a World of Unpredictable Demand”: “Capacity has to earn a return, whether its government supplied or privately financed. Within the intermodal network, the former disadvantage to the railways of being (expensively) self-financed has turned to a competitive advantage in light of intractable political barriers to refinancing the highways (etc), as the rails build-out their intermodal system (terminals/corridors/gateways, etc). This comes at a cost – rails spend some 15-20% of revenues on capex, compared to an overall average of around 3% - but so far in the 21st century the returns on investment have supported that heavy expenditure. One disadvantage to all modes, however, is the complete failure of demand planning, which leads to periodic capacity shortages….”
Shooting from the hip leads to missed targets: The recent cover story in my RailTrends partner Progressive Railroading Magazine on the CN comeback quoted an analyst who picked up coverage late last year as thusly: “CN has a deep bech that came from (their former CEO Hunter) Harrison; but that leads to Group Think, which contributed to the ongoing (service) issues….” And concluded that CN “needs a fresh set of eyes and (that) they should extend their CEO search to outside of the company and interim CEO JJ Ruest – who is clearly the man for the job). ARGH!! EHH retired from CNI on December 31 – Two Thousand and Nine (2009)!! Was it group-think of the “post hunter world” that transformed the CN under Claude Mongeau to becoming the best freight railway on the planet? Should the other two railways led by former EHH disciples, CP and CSX, be worried about group-think? Is a (very) little knowledge combined with almost NO experience a dangerous thing?
Questions: Is the Perry Plan (the FERC-rejected DOE effort to interfere in the energy markets and direct utilities to use coal and nukes) coming back? Is Doug Ford really the Premier of Ontario? Did the Koch Brothers really praise a Democratic Senator – and come out strongly for free trade? Did the United Steelworkers come out against the steel tariffs ? (Yes). Why is the global thermal coal price up 130% off its 2016 lows? How will the perpetually troubled steamship industry handle a fuel cost increase of some $50 (Mitsui OSK) to $60B (Wood Mackenzie) for emissions reductions? Are activist campaigns now everwhere 24/7?
Anthony B. Hatch