KSU, Mexico, and the Maybe-Manana of Near Shoring

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Greetings;


Pandemic schedule update: The Intermodal Association of North America (IANA) pulled the plug on their September “Intermodal Expo” and that hurts =- it is always a vital event. They will have some virtual/webinar announcements soon. Meanwhile, the Short Line Association (ASLRRA) will be going entirely virtual for 5 days starting October 5th; I will be a zoomish presenter. So far, AREMA, NEARS and the RTA are still on for the fall, as is RailTrends (our late November timing maybe giving us schedule luck for a change after our timing of Hurricane Sandy, the stock market crash, the oil price crash, etc in the past – check-in at www.railtrends.com.


Southbound, baby - CN co-hosted another mid-quarter conference call last week, but this one, on post-C-19 plans, may have more heft to it than usual….we’ll address this next time, so pending that, let’s go South of the Border, down Mexico way….as the late Angels’ owner and singing cowboy warbled:


“Then she smiled as she whispered "ma'ana"
Never dreaming that we were parting
Then I lied as a whispered "ma'ana"
'Cause our tomorrow never came”


Kansas City Southern is rushing towards tomorrow; will AMLO allow them to get there? OK, that’s a bit more alarmist than I had intended, but lets first catch up with KCS in their call(s)-from-the-conferences, and then turn our attention to the South.


KSU’s KCS weathers the storm with help from PSR - KCS volumes were hit very hard by the demand destruction/C19 plant shutdown, but they have joined their peers in pulling down costs (adding in a surprise 7% management headcount reduction). With auto plants re-opening (in fits and starts) in Mexico, they, too, see the bottom in their (near) rear-view windows; Mexican sequential volumes are running up mid-teens. With carload volumes down ~25%, they have pulled train starts down 40%. 40% - that’s a big number. The national breakdowns are interesting – the US volumes down ~19% (better than the peer average) and strain starts down ~30%; Mexico is –35%/-45%. Train lengths are running up some 20% from the beginning of the year, and at just under 7K’ are already ~10% ahead of their FY
goals. So KCS is, for the most part, continuing its recent successful PSR journey and preparing for the post C19 world, one that, judging by the number of questions, might be even enhanced by the aftereffects of C19, and of the running China tensions – summed up as “near-shoring’, the most hopeful “shore” in Mexico since the first hotel was built in Acapulco. But….will the effect of the reign of the “Tropical Messiah” (AMLO) overwhelm the distance advantages?


I am not as sanguine as most on the topic of near-shoring, as far as rail volumes go. For Pharma, yes, certainly, as the C19 pandemic has shown, that makes sense. But for other industries, I see two major reasons why this may be another “Manana Daydream” (and while I am no expert on Mexico, the following is I am sure discussed heavily in boardrooms around the globe considering changes to their supply chains):

  • “China is a hard habit to break”, as the Times stated last week, and their built-up infrastructure, knowledge and supply chains are not simple to re-arrange. And, as we continue to learn, our tempestuous relationship with now, once again, our biggest trading partner is not so simple as “trade war’, tariffs, etc would imply (see Bolton’s book for the POTUS/Janus complexity on these issues….
  • “Mexico’s unfolding presidential tragedy”, to quote the FT, has driven down FDI and the peso….some anecdotes:
    • The C19 performance is considered by global leaders to be bizarre and poorly executed (even on a relative basis) – massive under-reporting, late starts, etc leading to employee health issues even in the “re-opening”
    • No stimulus packages or bailouts (save for Pemex, below); businesses in an uproar and possible GDP declines in the….double-digits; meanwhile AMLO says he has “other data”
    • No changes to pet project development, such as the $8B refinery in Tabasco or the Mayan Tourist train
    • Terrible relations with the corporate community – witness Grupo Modelo, already burdened by the “Corona” brand name, and being labeled “non-essential” – having their planned Mexicali plant rejection by an AMLO-led “plebiscite”, as well as the clawing back of other economic reforms (notably of late in the electric power sector)
    • Despite finally seeing sky-high approval ratings tumble as a result of the perceived handling (or not) of C19, a grip on power increasing
    • PEMEX! Downgraded to “junk” status, its auditors (KPMG) expressing doubt on its ability to continue as an ongoing concern, losing….$23B in Q1/20 (before C19), yet increasing its drilling and production and Capex (by 25%!) during the period of the greatest demand destruction in petroleum history; even the recent oil price increase isn’t of help as analysts seem to think that Pemex’ B/E is $70/bl! All in the name of “to save Pemex is to save Mexico”
    • One growing issue – storage! Maybe those old tank cars can find a home down Mexico way! (kidding. Sort of.)
    • Also:
      • New energy rules push “security” over “efficiency”
      • What will all of this mean to one of the best growth markets in freight railroading, refined products exports south, post C19? For better answers, I turn to my energy analyst source, Mark Bononi, who is not only more knowledgeable but on this topic, more sanguine: Mexico’s latest “reform” is more like a “reversion” to past policies than new ones.

After being swept into power in the 2018 election on promises of big changes in the country’s energy markets, one of President Andres Manuel Lopez Obrado's first “reforms” was to suspend one of his predecessor’s “reforms” — the lively oil and gas production auctions that ended Mexico’s eight-decade-long state oil monopoly.


In 2013 President Enrique Peña Nieto sought to reverse Pemex's aging oil fields decades-long production decline by allowing international investment. The change also aimed to boost government revenue, which is about 40 percent dependent on the oil and gas industry.


While not canceling any of Peña Nieto's energy reforms outright, Lopez Obrado has slowed them. The actions have left investors cautious after several successes under the earlier reforms, including a sizable deepwater oil discovery.


Still, Lopez Obrado has maintained some of Peña Nieto's downstream ambitions by advancing the construction of a long-planned $8 billion 340,000 barrels per day refinery. But many doubt the project’s chances of success given the cost, funding, and 2023 start-up goal.


Until then, Mexico’s petroleum product imports should continue to ascend with growing demand and an undercapitalized refining system. Short-term growth might be faster due to bulging inventories on the U.S. Gulf Coast and few other export options. Currently nearly three-quarters of Mexico’s gasoline comes from U.S. refineries, a
substantial and increasing amount by rail.

Also!

  • GWR (remember them) had the same Q1 as the rest of the industry, only as far as North America goes, less so – meaning that once again they outperformed their Class One peers by showing a volume decline of about 2%, and running down “only” about 16% in Q2TD; in addition to what was likely a pretty good financial performance in the last quarter before the lockdown (etc), their already terrific safety record improved. I am not sure that the UK/Europe did as well, but that’s no longer under our bailiwick post-Brookfield….
  • The dystopian future?
  • Unilever has launched a new attempt to unify its’ duel-home existence (rather surprisingly but to this Anglophile, pleasingly, to the UK) and this so far has pleased the market – whatever is good for Unilever is good for rail intermodal.

 

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