More Rail "Bits 'n' Bobs"/March '19

Arial View of a Rail Park


Before I jet down to Savannah for a tour of the port and SEARS, I needed to catch up on a few events/announcements, etc in the rail space, starting with recent sluggish traffic, CSX (personnel and reorganizations) and the still crazy trade scenarios in Mexico and US-China (etc).

  1. The economy might very well be slowing, as expected, if rail traffic is any indicator (though we will need some time to unpack the impacts of the Polar Vorti (yep – “degree days” were up 17% last month) and the trade /”Lunar New Year” disruptions. That the overall market anticipates this is well known; the S&P 500 2019FYE has gone from expectations of ~6.6% earnings growth to +3/4% (FactSet) – since New Year’s Day!  The February Rail Time Indicator made for some alarming reading – quoth its author “On the surface rail traffic in February 2019 wasn’t very good”.  Indeed only 6/20 commodities showed increases in volume (US + Canada).  US intermodal volumes fell for the first time since January of 2017, a depressing month for us all.  US coal shrugged off the weather opportunity to drop 7%.  CBR helped, of course – the US Petroleum/Products traffic was up 21% - but Canadian CBR showed the Bizarro World impact of the Albertan intervention, growing at half the rate of January.  No coincidence, the largest shipper, Imperial Oil (half the market) shipped nothing due to the collapsed spreads.  The most recent weekly results (3/9), showing for all of North America, were actually slightly worse (volumes down 4.3% (carloads down 6.3% and Intermodal -2.4%)….On the other hand, the American Trucking Association’s economist (Costello) sees a good freight year ahead, “just not as great as last year’s”.

  2. CSX – Change Seems eXpected:

    1. CSX announced some (more) management changes, additive in this case with new positions created within Mark Wallace’s Sales & Marketing to include VPs of Marketing/Strategy and Sales/Customer Engagement; the former being headed by promoted IR honcho Kevin Boone (congrats!).  CSX has a long history of really engaging their IR folks and promoting them; in addition CEO Jim Foote served as IR head at the C&NW (where we first met) and the
    2. CSX stated in the related press release that there was to be “increased focus on port and short line development” – not just short line creation but developing short line related partnership business – which was over a quarter of the volumes historically but down to ~22%.  That fact and below came from conversations with attendees in Florida (3/3-5).  CSX admitted that they needed to refocus here and in merchandise traffic in general, and didn’t shy away from their plans to push down pre-blocking and to maintain the stick portion of the PSR plan (demurrage, etc).  CSX service is measurably improving (velocity/dwell but also meets, dead-heads, recrewing, etc.  CSX plans to increase manifest train size significantly in 2019 (by ~20%?) and at the same time achieve 95% reliability – a tall order. 

3. Trade – back to Crazy Town? Even as the trade deficit – always a distraction  (and really, no way to view trade or the economy) but now actively “managed to” – has reached a 10-year high, the President stated yesterday that he was now in “no rush” to conclude a China trade deal.  The 21% drop in Chinese exports got a lot of “play”, but the timing of the Lunar New Year means that two-month numbers, January/February, down 5%, are more realistic.  But it’s Mexico that wins this week’s “The president said what?” award: after announcing in a UK roadshow a redirection of $2.5B from a controversial refining effort to Pemex (E&P) – and getting kudos for facing up to reality  - on Monday, yesterday AMLO over-ruled his own Finance Department to say he is going forward with the refinery plans!  This is important for two reasons – general confidence in Mexico (FDI was down 15% in Q4/18) and the refinery plans, as disparaged as they are by professionals, is an effort to reduce “dependence” on imported refined products from the US (on the KCS!).

Other items of note:

  • “You understand, Captain, that this mission doesn’t exist”: After announcing that they lost ~$600mm in annual revenue due to Amazon logistics changes, XPO then announced that they had “terminated” (their words) their COO.  With extreme prejudice, one can only assume.  Meanwhile, AMZN’s 10-K includes a discussion of their “natural competition” between AMZN and logistics companies….

  • 3D printing – back as a threat?   Or still a party trick?  The WSJ reported that such alchemy could be used to build a house in 2 days at a cost reduction of some 30% (a lot of that obviously in supply chain costs).  My “Rails & Tech” luncheon showed a crowd much less accepting of the near term prospects of the technology than the national business paper….

  • Still counting the money….Buybacks and dividends added up to $1.25 trillion in the USA in 2018 (split ~2/3-1/3 in favor of repurchases).  That was an increase of about a third, which compares favorably to the 8% boost in earnings from the tax cuts (much higher at US rails, of course).  Bloomberg analysis revealed that the cuts added just 0.1% to US GDP; Capex did increase ~7% (but it increased 5% in 2017) – Bloomberg stated that the leading driver of Capex growth was “business confidence”.  Well, duh!

  • ”Every minute I stay in this office I get weaker; every minute Charlie squats in the bush he gets stronger” - The decision by famous “traditional” institutional investor Wellington to become more active (coming out against Bristol-Myers strategy) is interesting (the FT “historic”).  Activist investing may become even more prevalent….

  • Realism:  Model railroad car builder Walthers lists a new product, an HO-scaled small cubed (sand/cement) hopper, ready to roll out to your storage facility in the basement….

  • “The (expletive) is piled up so high in (DC) you need wings to stay above it” - There are rumors that railroads are downsizing state and DC political affairs office (supposedly as part of their OR-driven cost focus); boy I sure hope not.  Given the PSR changes (and technology challenges) facing the industry, the need for good government representation (in a world of empowered regulators and a new congress)  is more important than ever (though we still have the AAR to “walk that wall”).

  • Toutes nos Felicitations to JJ Ruest, Railroader of the Year, who picked up his “Hunter” statuette this week….

  • You either surf or fight!” Two big rail interested funds are getting together as Brookfield is buying 62% of OakTree (the $450mm backer of Watco) – can only be good news for rail investment.


Anthony B. Hatch
abh consulting