RRs and Covid-19 - What Can One Say, Really? The data is, at best, incomplete.




Tough times are all around, in large part due to the coronavirus outbreak and the reactions to it; some better news on the Canadian rail blockades….


“If the sun rises tomorrow, don’t thank me. I am just doing my duty”.
Dr. Li Wenwiang, Wuhan China 1987-2020

Big Deal/Reactions may be a Bigger Deal: I was somewhat late to this whole event (it seemed so far
away, and there is a lot of news these days), although being handed a pamphlet right off of the plane in
Canadian customs last week in Montreal (“Nouveau Coronavirus”) should have been a major clue. Then
came meetings cancellations (the first of many?), guidance reductions (or the removal of any guidance)
and non-stop news coverage – this is a big deal. How big, or, in this case, how big for rails? The odds of
a global and local recession have gone up, of course (and is the Fed’s half-point rate cut the last of the dry
powder?). The OECD has halved its 2020 global GDP growth rate estimate (to +1.5). Commodity prices
are plummeting; the Baltic Dry Index is down by ~2/3 since the start of the year. The ISM, after a brief
bump up in January, is heading downward (February: 50.1). Analyzing its impact in the rails is both
simple (volumes, dwell, consumer confidence, auto supply chain) and complicated; analyzing the first
quarter as it was intended by the founders (as a snapshot of a company’s progress on implementing its
strategy) will, once again, be nigh on impossible. Some thoughts:

Cancelations – the following is a (very) incomplete list, mainly through my own schedule:

  • A (the?) major rail supplier’s annual Management/Leadership Conference in Florida this week
  • The JoC’s annual Trans-Pacific Maritime (TPM) Conference, 2000 folks, this week (small beer
    compared to Adobe’s conference cancellation for 20K, but still….).
  • CSX’s Short Line Meeting, next week
  • Lower participation – REF (rail cars) in Palm Springs, by an estimated 15% (not bad but then it is
    a mission-critical even for that sector); other Investor Conferences by up to 50% (due in part to
    increasing numbers of corporate travel bans, which impacted my colleague from a major
    Canadian bank on my panel at SEARS next week). The travel bans will have a broad and
    unfortunately perhaps lasting impact….
  • Still on: the afore-mentioned SEARS, today’s annual Railroad Day on the Hill (which, given all of
    the glad-handing sorta surprises me; I look forward to hearing the feedback).
  • Other notes: huge impacts on airlines, cruise ships (of course), sports (Serie A soccer in Italy may
    end its season; wither the Tokyo Olympics?)


The Impact on the Global Supply Chain:

Perhaps the biggest longer-term risk is this further attack on globalization (after nationalism, ill-informed trade policy, weather events), although judging by the Mexican market’s outperformance, there are some bets that the China-to-Mexico production move may accelerate. That would, of course, be pro-rail, but most of the news is bad, short term, and potentially bad, longer-term, for this trade-dependent industry. The FT wrote yesterday that the virus and its impact is “raising doubts about the merits of outsourcing” (other business press have noted that “supply chains are at risk” – WSJ – or that the virus is “wreaking havoc on supply chains” – several).
This is, of course, a derived demand business – if the virus hurts global supply chains (autos, etc), or
imports from China (electronics, furniture, clothing, etc) or consumer confidence in general, that’s
bad. And the nature of railroading being a network business also has had an impact – if there is a
backup at the ports (Ag, say) that will (has) impacted operating metrics (velocity and dwell, asset
“spin”). More thoughts:

  • Rail earnings impact will likely be bigger in Q2 than this quarter as the safety stock,
    often built up for the traditional Chinese New Year, this out (and remember it takes 2-4
    weeks for the container on the Pacific)
  • Port volumes will show it first – LA has announced they expect Q1/20 to be down ~15%,
    showing an accelerating decline pattern (February down ~25%)
  • A noted analyst of major global industrials said that his big companies factory utilization
    levels were back to 80%+ - but supply chains only at 50-55%. Some medical pros have
    said that China’s encouragement of factory re-openings may risk a second outbreak….
  • On the bright side, if I can say so, the Financial Post noted last week that “this has sent
    retailer Canada Goose into a tailspin”. Oh, if only that were so….

Is this an investable event for the intermediate-to-longer term? Rails are in general in an excellent financial
and very good operating position to ride out this latest storm So, for them, is COVID-19 an investable
event, or not?  I am not sure – unlike the Canadian rail blockades (see next note), where I wrote “this
too shall pass”, will this too pass? Surely COVID-19 will, but the shock to the system may linger. The
impact on rails should be slightly more Pacific-related (in other words, on UP, CN & CP) then the
remainders; the possible good news for KCS is several years from showing. The old saw that before the
ILWU (west coast longshoremen) strike of 2002, most import container business came in through
LA/LB. Afterward, “port diversification” became the rule of the day. Fukajima was a supply chain
shock. POTUS has created supply chain shocks. Now this….


Anthony B. Hatch
abh consulting