Rails - Summer 'Dog Days" Reflections

Tony Hatch

It's two bullyin' freight trains runnin' side by side
It's two bullyin' freight trains runnin' side by side
They done stole my rider and I guess they's satisfied
They rode from the Delta, kept on easin' by
They rode from the Delta, kept on easin' by
Know I feel just like she said her last goodbye

/Delta bluesman “Mississippi” John Hurt – sing how we want the Delta to just ease on by….

 

Greetings!

First, on the KSU Odyssey – nothing much new to report (how’s that?) so, from my slide deck, and that will be that, or almost.  It’s official – the STB did not issue a decision by 8/16 – it said it would by 8/31 but some folks think Monday is VT Day - so KSU postponed its shareholder vote to 9/3 (10 am eastern); CP applauded.  So the STB still has the ball; the wording will still be key, the possibilities seem endless, including more public commentary by the US Big Four rails, etc.  One recent analyst report states that if CN loses out on its proposal (altogether), it might change its strategy to focus on margins (OR) and not growth – or possibly face activist pressures.  NOOOOOOOOO!  Read the (political) room!  And look to ROIC over OR!  Anyway….

8.19.21

Rail service, the supply chain, JIT vs JIC, etc - Here’s another quote – maybe sadder than singing the Delta Blues:

“The recent shipper backlash against rail congestion in the US has been so sharp that the top US Rail Regulator has acknowledged that re-regulating the intermodal sector isn’t off the table”

/Journal of Commerce (JoC) cover story 8/16/21 – too which my response is “Are you freakin’ NUTS?” but that’s just me, and others who see intermodal as the growth opportunity

 

Supply chain issues continue to garner attention (“West Coast Ports Jammed Again” – WSJ; “LA/LB issues “Red Alert” - JoC) but there was some more reassuring macro-economic news – core inflation increased only by 0.7% in July (m/m); less positive was the retail sales figure, down 1.1%.  Volumes are slowing down only on a comps basis (LA/LB up 4% in July – but Charlestown/Savanah show that if you hit it far enough, outfield walls or 2020 comparisons don’t matter – they grew 38% and 25%, respectively.  I wonder if that means the share recapture on the west coast was one-time, as some have argued, or due to the slow processing times and the 37 ships in San Pedro Bay?  The answer is meaningful for rail IM.  The director of POLA noted that it was warehousing that must be the relief valve to a truly global issue.  And it is - note – the ATA says truckload carriers lose $75B/in delay costs! And the CEO of Maersk said the ocean needed a 25% increase in capacity to handle current volumes.  IANA reports that US container imports from Asia rose 38% overall (YOY) and still 25% over 2019 (remember – a year in which the biggest issue for freight was the trade war.  Oh, simpler days!).  International TEU volume into the Midwest rose 31% and 15%, respectively.  The National Retail Federation (NRF) anticipates growth continuing this quarter led by a strong yet angsty “Back to School” season (August estimated at 15%) before turning down YOY on comparisons.  I expect to debate these and other supply chain issues at the great Intermodal Expo (Homepage | Intermodal Expo ) 9/12-14 in Long Beach itself.

 

The rails had some intelligent pushback in their responses to the STB comments, particularly on demurrage, and request, particularly BNSF and CSX:

  • BNSF CEO Katie Framer noted that “there is significantly more freight coming into BNSF facilities than is being picked up – and that is not sustainable”
  • CSX CEO Jim Foote noted that railroad intermodal terminals (were designed to) “simply transition containers off of railcars and make them accessible for distribution….they were not designed for, and are not physically capable of, long term storage”. CSX, BTW, had a Q2 IM Trip Plan Compliance grade of 89%, not perfect but….Union Pacific reported 71%, down from 82% YOY (perhaps reflective of the west coast port issues) – but still above the 69% reported two years ago….

 

The debate is – is this the same old rails or (shudder) is this time really different?  Can rails pivot to growth and provide service in an increasingly service-focused world?  Freedom Focus Reports out of Cleveland (your guess is as good as….) puts rail revenue growth at a ~5% CAGR through 2025, but others, including some folks I respect, think it is “illusory”, noting that the Canadian “pivot” was really all about BC port share gains.  My counter is that Prince Rupert doesn’t work without CN (etc) and that even superior service doesn’t create growth (rails cannot stimulate imports, but help decide where they enter the continent, in this example), just create growth opportunities.

 

Some further thoughts:

  • The steamship lines are doing well, so well after a long (long!) drought that they made the Biden hit list.  Hapag Lloyd reported a tenfold increase in mid-year results; Maersk increased its FY Guidance by 50% (rates were up 65% in the quarter).  They also made two landward deals, one in the US, totaling about $900mm, and are looking for more – “no megadeals are in sight currently” (emphasis mine).  While the JoC has been taking IM to task, to a degree, it is interesting that they chose to report on the EO strictly from a steamship perspective.  See the Drewry World Container Index showing performance 2020 (Pandemic Year Zero) and ’21, at the very bottom…
  • See rising price chart from Bloomberg, below – many, many companies cited increased supply chain issues in Q2 earnings calls, from partners like K&L, Schneider, Hub (see below) to shippers such as (to name but a few) Kimberly-Clark, Colgate Palmolive, P&G, General Mills, Hasbro, Con Agra, Harley Davidson (it’s interesting that the OEM of the world’s slowest vehicles complains about cycle times), etc etc….
  • I firmly believe a (gradual) move to JIC will benefit the rails
  • NS tries carrots – while the two western rails tried re-routing or embargoes, Norfolk Southern tried incentives ($200/box), which some others copied.  Still doesn’t solve the labor issue….
  • Don’t believe the hype!  The $66B in the infrastructure bill has been described as going to rails (some even stated “freight and passenger rails”).  Nope.  Not at ALL.    But ports will get $12B (short of the AAPA goal of $42B but still, a positive for the IM supply chain.
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One recent interesting example:  Service Issues/PSR – the Problem of Long Trains on High Grades, Dept:  I received the following observations over the transom, from a rail ops/fan web-thread, blaming PSR (“pretty much all of this you could attribute UP's PSR binge”); it’s too granular for me to comment on, but I thought you lot might find them interesting:

  • “UP is now (trying) to operate very long monster trains, in both directions, on a mostly single track piece of railroad (in mountainous Oregon).  For trains operating over 9000 feet in length, there are only three places between Hinkle, and the double track at La Grande, these trains could meet (a 105-mile territory).  Even if a siding could barely hold this much train footage, most engineers won't do it (can you imagine trying to creep up on a signal with a 10,000+ ton train on a mountain grade and take a risk of getting by that signal?!?!).  I heard crews telling dispatchers (probably the less seasoned ones) that they would not take that chance). NOTE – the end result being held trains and crews “out of time”
  • (At the Hinkle OR yard, formerly a hump): “UP was "flat" switching trains over the hump into the bowl tracks….” RESULT – a full yard”
  • I asked a rail ops pro (and the funniest man alive) about this and he responded that too-large trains for the sector was a “common complaint directly tied to PSR” (or, I would add, to how it is sometimes applied); further, “flat switching at (former) hump yards was all too common, in-efficient – and dangerous!”  Finally – “What happens when we see (real) growth?”

 

Labor Updates –

  1. Rail labor news?  RA’s venerable Frank Wilner managed to pry some info out of the national rail negotiations, ongoing since 2019, which has heretofore been so secret it felt like they were being conducted by monks sworn on high to total silence.  Wilner reports that the Class Ones achieved a big step towards consistent reform (rail-speak for “crew size reduction”, from, in this case, 2 to 1, after the billions spent on PTC and the fact that both the Acela and the Indiana railroad run one-person crews).  The step was 4 binding arbitration awards covering, he estimates, 60% of the (US) C-1 T&E workers….
  2. What would the political impact be?  And how might, ultimately, a PEB (Presidential Emergency Board) go?  We have to factor in a Democratic administration (with mandated 2-man crews on their platform!), but in a period of worker, not job scarcity.  And remember, the crew and headcount reductions come with buyouts, not boots in the butt.  Finally, in 2009 (under the Obama administration), the FRA, administered by a former union official, found no factual basis for 2-person crews being safer….
  3. Workers needed!  The most recent job report was a bit more encouraging, but Walmart is still offering signing bonuses for warehouse workers!  The reasons for this job scarcity boom are many (and I realize once again I am skidding out of my lane) but include:
  4. Pandemic impacts on the existing workforce
  5. Pandemic/Delta impacts on any potential workforce
  6. Such as reduced childcare options, and uncertain schooling, etc
  7. Federal unemployment benefits (especially out of high-rent districts), which may simply lead to a delayed response
  8. Demographics/aging workforce - a secular issue that Larry Summers (former President of Harvard as well as holder of less important positions) believes is a threat to cause a Japan-like stagnation
  9. Automation, including cargo-handling robots, which has, as always, accelerated in a crisis period as it did in 2008-9 (etc).  As  stated by The Economist – “Increased automation may be a legacy of the pandemic” – see also the steel industry’s output versus employee count, etc
  10. Rising worker power (NY Times “Ohio Factory Tests raising Worker Pay”) – which has implications for railroads – job switching to construction (always an issue), demanding a more modern employee/manager work relationship (already on the rails’ ESG radar – see UNP’s EVP-Human Resources speech at RailTrends ’19)

 

Also:

  • Not so fast, Elon!  The NHTSA is investigating Tesla and robo-crashes and the NY Times editorializes against free street running of AV tests - “We are all Tesla’s Guinea Pigs”.  Then, there’s this: For Robot Trucks, Navigating Highways Is Just One Bump in the Road - WSJ although the article points out that the recent raise by 4 companies (Tu Simple – one with CNI and UNP invested in, as well as Plus, Embark and Aurora)) has given them collectively ~$4.2B for research & development….
  • “Inbound Logistics” magazine’s list of 2021 Top 10 3PLLs listed old friend Hun Group at #2!  That’s a great score considering “only” 44% of the surveyed buy ocean/IM and the same amount rail/IM
  • War on coal or sound business?  The decline rate of coal production was 5% CAGR 2009-2016 and 10% 2017-20….
  • BHP exits oil & gas and bets almost $6B on Canadian potash – the Saskatchewan project will likely benefit both Canadian carriers, maybe slightly more CP (?), by the end of the decade
  • Roaring 20s – although most disbelieve the comparisons, it is worth noting that analyst “BUY” ratings are at their highest this century (note – analyst ratings are poppycock as professional investors, of course, make their own decisions on asset allocations and timing – that’s why they get paid the “big bucks”.  The press obsession over analyst Buy/Hold/Sell ratings has always been nonsense – still, this fact is interesting….
  • Trudeau to call a snap election?  That’s a sign of confidence and stability….
  • Speaking of Canada, oil sands CAPEX will be 1/3 this year (1/3!)  its 2014 peak of C$81B
  • “I don’t expect the chip industry is back to a healthy supply-demand situation until 2023….it’s still getting worse before it gets better” – Pat Gelsinger, CEO, Intel Corp
  • Hydrogen, the fuel of the future (and always will be?) – is now under attack from ESG circles.  It burns much better than oil & gas, but producing it is not so green (see Cornell/Stanford study as quoted in the NYT “Hydrogen’s Status as the Fuel of the Future May be in Doubt”)
  • As some early pandemic “winners” sowed down in Q2 (facing tougher comps, which don’t really start for rails till this quarter), AMZN is expanding its supply chain business to take on volumes even from rival retailers, selling its logistics capability
8.19.21 (3)