Railways - Back to School? Plus End-of-Summer Savings on Rumors

Back To School

Greetings;

Let’s start with the rumor mill, a two-ply effort:

  1. OK, maybe the Blackstone/GIC bid for KSU isn’t a rumor – a WSJ report of a rejected $206/share bid – remember who has “hand” in this relationship – is pretty specific.  Exactly how is this known?  Is it great reporting or….is the venerable paper playing a role here? Negotiations are said to be over (source on this one is Seeking Alpha).  Meanwhile, KSU joined a few other rails and e-established Guidance, a sure sign of a move toward returning to normalcy….Their goal is flat YOY EPS for 2020 which would make for quite an achievement in a Pandemic year.

  2. Rumors continue to swirl that a star COO is seeking Street help to push “eject” from one RR rocket ship (having reached as high as possible) and parachute perhaps into another, at that higher level. There are a LOT of succession issues to be resolved in the RR industry – so lots of drama to come

Rail Traffic was mixed in August but Intermodal leads the “Recovery Effort” – we covered some of this  last week, but it bears repeating.  The basic facts, per the AAR’s RTI: North American car loads dropped 14% (not great but better); intermodal was up 1%  - meaning that total North American rail traffic was down 6.7%.  The range within the three NAFTA countries was actually a bit broad:

  • USA (reported Q2 GDP – 32%) - Carloads -15% (RTI points out that’s actually the smallest decline since March); Intermodal +3%.  Only 2/20 carload groups showed gains (somewhat hurricane impacted) – Grain (+5% - but YTD is still -5%) and Farm Products. 
  • Canada (reported GDP -39%) carloads down 13%, 5/20 up (grain was +23% though RTI noted easy comps); IM down 4%
  • Mexico (reported GDP down “only” 19% - see government estimates, below); carloads -8% (5/20) but IM down 12% (auto-impacted, of course)

Some thoughts:

  • Housing rebound? July (US) housing starts were up fully 23% but August combined USA/Canadian lumber was flat
  • Everyone notes anecdotally that “trucking demand has picked up steam” (WSJ, in this example) – but the stats, as always with trucking, are contradictory:

    • The Cass Freight Index was down 13% in July (though up 5% sequentially)
    • The DAT TL Volume Index was up 4% YOY in July (and only up 2% sequentially
  • Coal comeback?  Not so fast!  Though the EIA says with $2.50 Natural Gas, coal share of US power should actually increase to 22% next year from 18% FY 2020; however, we surely aren’t seeing it (yet?) on the railways – US coal volumes were down 26% in August.

The Annual Logistics Management Intermodal Roundtable will be published in the fall, with comments from Brooks Bentz and of course Larry Gross – who will be the featured speaker at next week’s IANA Webinar on Monday 9/14 - as well as myself; my answers to Jeff Berman’s questions are below:

How would you define the current state of the intermodal market?

Surprisingly strong!  As of this writing (Labor Day Weekend), it has resumed what I call the railways’ “lead dog” status and is catching up to all of the massive gyrations that so hurt the IM market and the national/continental/global economy – the supply disruption followed by the demand destruction; all of that is starting to recover, and with empty shelves, that’s an opportunity, for now.

How do things look for intermodal volumes for the remainder of 2019? (The AAR’s John Gray noted last week they are getting very close to pre-pandemic levels, a good sign.)

YTD volumes are still down in the mid-single digits, but the gap is narrowing, fast (QTD is up about 1%, and the last week, obviously not a true barometer, was up fully 21%!)

While talk regarding the “Trade War” has quieted, of late, how is it currently impacting, or influencing, international i.e. ISO intermodal activity?

The Trade War talk only seems quiet because it has been supplanted by even worse news – the Pandemic.  The January “Phase One” truce talks between the Administration and China has helped Ag exports (if not as much as hoped); for IM it served as a “cooling off” moment and pre-empted additional tariffs, but did nothing about the (still) existing ~$360B of tariffs on Chinese goods such as furniture and electronics, “traditionally” the top boxed imports into LA/LB for example….and, we note, the relations between the US and China have certainly not gotten better of late.

On the domestic side, are low truckload rates and low diesel prices still impacting domestic intermodal market share? What can the intermodal service providers that have lost market share over the course of COVID-19 do to be more competitive on that front?  

The trucking market has tightened considerably, which is a plus for IM  (as has the driver market).  Low fuel prices impact the small spot side of the market; over time rail service and available capacity outweigh the fluctuating price of diesel fuel.  The domestic market has been helped by improved RR service, the end of PSR lane cutbacks at a few carriers (CSX & UP), the super-heated Ecommerce market (see 28’ pups), and by west coast port market share gains (“the need for speed”) that translate into transloads!

How do you the current levels of intermodal service? Are things where they need to be/moving in the right direction?

For the big picture, rail service has ended its 2017-19 rut and improved greatly; in the very short term there is congestion as rails have had to deal with the really unprecedented shark’s tooth of a massive drop in volumes in April to early June followed by the equally violent recovery in traffic; spot shortages of formerly furloughed crews have been noted, for example.  This too shall pass….

As a follow-up, what can shippers expect in terms of service over the course of the next year?

We thought 2020 would be the new “base”, AKA “normal” year.

We were wrong.  If 2021 is a steadily, non-violent recovery year, then rail service, thanks to PSR (and the stage of PSR) and Capex and It – will be very good.

Is pricing where it needs to be for intermodal in light of the major capital expenditure outlays made that continue to be made by the carriers?

Never!

How do you think the intermodal market will look over the next three-to-five years? 

Very hard to say?  Trade is critical for rails.  Will we see a return to normalcy in international/trade policies?  A return to stability that is so key to FDI (foreign direct investment) in Mexico (and elsewhere)?  How will technology evolve (in all modes)?  Will the Pandemic really be in our rearview mirrors by the beginning of 2021?  What will the lasting changes be?  Will we dialogue with China for all of the legitimate issues and put “trade deficits” back in the locker where it belongs?

The opportunities – trade/nearshoring/modal share – are there.  Will the rails take advantage of them?  Will geopolitics and environmental concerns favor IM (as they should) or provide further artificial constraints?

I would bet on a good five year period for rail/IM but nothing these days is a sure thing….

Whole new ballgame with autonomous rails?  The ability of rails to run automatically (“zero-to-zero”) will come soon given PTC, Trip Optimizer/Leader, and other technologies – the rails need to wait for politics and regulations to catch up.  Most have thought of this in terms of cost savings (labor, safety, etc) and that is a great possibility, keeping mind that from here, driverless freight across all modes is a big advantage to truck (given rails’ current large labor advantage, one of my “5 Structural Advantages” along with energy, emissions, financial power and, mostly the private network). 

But there’s more!  And bigger – a recent conversation with a C-1 COO lit a bulb over my head – the entire “big train” operating plan, driven in large part by labor costs (see the focus on train starts/volume),  can be rethought and rails can run faster, smaller trains and compete in whole new markets….and not a moment too soon.  It’s rare that I get a “eureka” moment, but that was one….more on this to follow….

 

Also:

  • Conferences:  AREMA next week, as I covered in the last note, and in the first week of October, the annual ASLRRA Short Line Conference which, aside from featuring me twice, has a great lineup including the SL, CEO, and CCO panels, rail shippers, CSX (Arthur Adams) on PSR, the FRA’s Ron Batory, etc: 
  • Amtrak is asking for a $5B subsidy, up from an earlier request of $1.5B.  We just returned from a most comfortable round-trip to the Ocean State.  In addition, many may remember the new ATRK CEO Bill Flynn form his days at Sea-Land and then parent CSX.  His move to Geologistics then Atlas Air was a loss for railroading, so it's great to see him back even if it’s with the black sheep of trains, the passenger side.
  • China’s exports are surging - +7% YOY in July and now up almost 10% in August; imports fell over 2% in August (much of that can be attributed to the falling prices of US and global Ag products.  If you’re scoring at home, the trade deficit with the USA widened  - though that is completely unimportant!
  • The world turned upside down, dept. – In all of my career, I have seen the US Chamber of Commerce  (AKA “The Chamber”) has represented US business, especially big business.  So the last several years have been strange, with spats between the White House and The Chamber (and Chamber members such as Ford) over tariffs and trade wars and the NAFTA/USMCA “process”….So to see the Weekend WSJ Opinion piece by one Kimberly Strassel entitled "The “Chamber of Errors” was sort of the final shock.  One would have assumed that the House Organ of Big Business (the Journal) would support the Trade Association of Big Business….but no.  As for Strassel, there is no truth to the rumor that she, like other WSJ Op/Ed writers, might have been mistranslated from the original German….
  • Green leader and (related!) IM Champion UNILEVER committed to no pet-chems inputs in its products by….2030
  • The drumbeats every day – Daimler and Torc Robotics commit to a Level 4 AV truck by the end of the decade.  We’ll see….
  • Mexico predicts its 2020 GDP to be down 8% (too low?) and 2021 will turnaround to plus 5% (too high?) – the consensus is -10% and +3%, respectively.  The key to the difference is what appears to energy experts as too rosy a level of Pemex expectations, a recurring theme under AMLO,

 

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18