Two Big Things to Start:
- Bowing to the inevitable, RailTrends will be virtual this year (11/19-20) –Progressive -Railroading & I will hold our annual railway conference virtually; I will be in NYC, but my guess is you (all) won't be, which is too bad. As in every year past, we believe that you can count on the usual great agenda – www.railtrends.com - but you’re on your own for cocktails., sadly….We’ll be back Live & In-Person in 2021!
- The highest-ranking woman in freight rail e-v-e-r. I think I can safely say that…. Well BNSF named Katie Farmer to be the next CEO, succeeding Carl Ice (January 1). BNSF has been a mystery of late, seemingly hiding behind Berkshire’s broad shoulders, but this is one piece of news that was straight and consistent from the beginning – Katie Framer to be the CEO. She was long thought to be Matt Rose’s protégé; lately, folks began to wonder (without any real reason except for the growing gap between BNSF’s OR and that of arch-rival UP) – was that a good thing? It should have been, but what was Berkshire’s Industrial pooh-bah Greg Abel thinking? Then, in the middle of the Pandemic, BNSF closed the OR gap to UNP. Did that come in the nick of time? Or was the original succession strategy adhered to as planned (and in the absence of a contract, exacerbated by C19, did we outsiders simply imagine all of the ups and downs?). Katie will do a great job (and this opinion has been seconded by colleagues, former colleagues, and other observers). She has cycled through all of the critical positions, from running Intermodal marketing at the best IM player on the planet to being the COO. There was never any question, just reading tea leaves that may never have been there….
Some quick thoughts on rail traffic, etc – this past week’s volumes are too skewed by Labor Day to have any meaning, but we have seen good numbers continue for Intermodal & Ag; and perhaps an explanation (a lumber shortage) why forest products volumes haven’t matched the press around new housing starts. The Railway Tie Association notes that yellow pine is in very short supply; the Farm Journal network stated that building-grade lumber prices were up 200% YOY! That’s a lot of DIY and chick coops and new “victory gardens” and….
- Intermodal is still thriving as the discussion turns to supply chain performance (WSJ hysteria: “Freight Network overwhelmed by a surge of imported goods”). UNP noted it's IM Trip Plan Compliance dropped to 72% in July (down 6 points YOY) and its IM velocity dropped 3mph to 30mph. UNP has also imposed surcharges on west coast IM, to drive (and serve) business that is “committed baseload volumes.”
- LA/LB is still regaining share - & months data show it at 54% US total, up almost 4 points. This is very positive for rails – will it last? Is this “need for speed” (and the re-emergence of the ability to re-route shipments from California) a sign of re-stocking or the new economy?
- The NRF says that August was so strong because it was a combination of re-stocking and the “normal” peak season beginning – but how will the continuing C19 impact (“back to school”?), etc distort the data?
- Container rates from China are up 185% to LA/LB and 93% to NY/NJ (JoC) – in fact, the Chinese government is pulling a Don Corleone and insisting on a sit-down with the big steamship companies. I am sure they will make them an offer that they can’t refuse….
- The ocean business is booming so much that some ships have been recalled from the scrapyard, given a stay of execution, and put to sea….meanwhile, NYNJ saw its largest ship in port, 15K TEUs, sliding under the newly raised Bayonne Bridge….
- Not so fast: the always insightful Larry Gross (October “Trains” and quoted in last week’s WIR) wrote, “Railroads have turned from growth to profitability; this is all part of the PSR mantra”. Now, this is a recurring theme among some rail stakeholders, notably short lines – but I have to push back against my long-time friend here.
- 1) What is wrong with “profitability”? Shippers seek it – I am sure that you, dear reader, do, too. It is really about re-investable returns – this is an expensive business. A focus on the short term (the “Cult of the OR”) is bad, but making freight pay its, er, freight is critical; and remember, these are railways, not the United Way.
- 2) Blending PSR and growth can be done! Such statements ignore the PSR 2.0 successes of the Canadian rails (see below) as well as at KSU – and soon the rest.
- 3) Larry and I will have lots to chat about (along with Rick Patterson) at RailTrends 2020 in November!
- The USDA adjusted its grain numbers down slightly post storms (both corn and soybean production estimates were reduced about 3%); nothing to shout about (in fact, many traders as quoted on the “US Farm Report” said that more cuts may come. The economist at John Deere stated that the farm belt – and the general US economy - wouldn’t show full recovery until 2022, a feeling that is making the rounds. And on top of that there is the worry about farmworkers in the current political environment (as in, where can we get them?). Corn growers received good news in the nick of (election) time when the USG said it would deny all 67 refinery waiver applications, boosting ethanol hopes….
Some thoughts and updates on earlier discussion:
- Speaking of BNSF – there has been talk in investment and business circles, as part of the ongoing (or concluded?) KSU saga of Berkshire’s ~$147B cash horde; rail consolidation still doesn’t make sense in this environment as best expressed by Matt Rose in his series of valedictory addresses last year. In addition, in looking at Berkshire, there has been a revival of the flawed belief that Warren Buffett “paid-up” for BNSF (Bloomberg this week); in fact, given the timing in the GFR, he faced no viable competition (think Cerberus-Chrysler) and got perhaps the best value investment deal of his storied career….
- Mea Culpa – I haven’t had to offer an apology in a while, but I think I might owe one to UNP and CEO Lance Fritz – I was critical of their decision to enforce unpaid leaves for management, etc as I thought it was a small sign of panic and an effort to dress up Pandemic EPS (as I wrote – “who cares?”). I wasn’t alone; even other railroads piled on. But reading an interview with Lance in the McKinsey Quarterly (which I am guessing UNP largely subsidizes given the billings), Lance said “we don’t need to do this for liquidity. We need to do it to demonstrate to the entire workforce that we are in it together”. This sheds a whole new light on the actions (to me) and can be seen as a sign of Lance’s commitment, as a member of the Business Roundtable, to stakeholder capitalism (more on that topic soon). So – mea culpa! In addition, Lance was terrific at Jason’s virtual conference in discussing UNP’s move away from over-focusing on the (Cult of the) OR – a sign of UNP’s move from PSR to PSR 2.0….
- Other news from the conferences:
- KSU reestablished some guidance, notably to a flat FY20 EPS level; QTD volumes still down 4% but September MTD is up 2%. For the QTD, cross-border business is up 8%.
- CSX fought off illogical questions and pleas for short term guidance at the Laguna Boondoggle (“conference”) which was, of course, virtual. So less tanned investors will be a byproduct. So (too) many questions on Q3 OR! The big questions they themselves are seeking answers to surround the idea of the strength of the economy after the “Big Re-stocking”, especially given the deceleration in retail sales growth. CSX also provides an opportunity for the periodic reminder that hurricanes are not an investable event, but the level of railway resilience is. On the other hand, given the recent extreme weather events (what’s next, frogs? There was up to 15” of SNOW in the Black Hills last week, only three days after 100-degree temperatures!) maybe at some point weather should be taken more into consideration….
- Coal – no kidding? Dept – Yesterday’s WSJ “Market Forces Thwart Trump Coal Revival” – I mean, who have seen that coming? – and the FT’s “Lex” on “Glencore’s commitment to ‘dirty coal’ is a cause for shareholder concern”….
- Trade – no kidding? The WTO came out and said that the US tariffs (in this case against China) broke the rules; not much will come out of that declaration save even worse feelings between the WTO and the Administration. Meanwhile, said Administration removed its 5-week tariff on Canadian aluminum, which was opposed not only by users of aluminum (autos, beer, white goods) but also the larger producers (Alcoa), not to mention those invested in good US-Canadian relations.
- He said what? Ex-CP Chairman Andrew Reardon, as quoted in September “Trains” on CP’s CEO: “Keith (Creel, also an RT20 presenter) has learned from the best but he has taken it to another level. He is in many ways a better Hunter (Harrison). WOW. But there is something there, as KC has guided CP into PSR 2.0 (in their words, from inward-looking reconstruction to a “pivot to growth”), something EHH never did (it was Claude and JJ at CN, it is Jim Foote at CSX; the latter two are also RT20 presenters!).
- EV “hype”, continued….Nikola, the start-up EV truck-maker (maybe) – and I have to interrupt myself that I, for one, can't help but hear an Alpenhorn when I see the company name – admitted that they doctored a film clip of one of their Class 8 units rolling downhill to look as if it were self-powered on flat ground. GM, recent buyer of an 11% stake (which at the time valued Nikola at ~$18B!) defended their new partner – but, come on now, rolling downhill?
- Did anyone get a lottery ticket for AMLO’s 787?