So the plan was a pre-Labor Day revisiting of some of the recent themes in railroading (below) and to outline my fall “back-2-school” schedule (also below). However, the news always overtakes us, and the WSJ has once again provided a scoop in the railway M&A rumor merry-go-round. From my tweet (join!) yesterday (with additions and real punctuations and fully spaced sentences in blue):
Kansas City Southern might actually have gotten a takeover offer - So it’s for real? Once again, the WSJ reports (how did they do it? who leaked?) that Blackstone/GIP (et al?) have actually made what is says is a 2nd(?) bid for KSU. My previous notes apply (see attached slides) – any attempt by or with another Class One RR attempt brings in review by the STB (not great); Remember that KSU doesn’t need this; it’s already a valuable (starting the week with a market cap of ~$17.5B) RR; it is the smallest Class1-but largest available Infra target. And do remember that KSU retains “hand” in this relationship….
On to the re-visits:
On Railroads/Intermodal and Trucking technology – here is the link to the IANA webinar.
And more – there is RV or AV new/hype every day in the business and trade press….the best, recent example was the WSJ this week publishing an article “Robot-Truck Startup Seeks Freight Inroads”, essentially a PR piece for a company called “Ike”….On the Opportunity side:
- CN sees EV in its terminal future: Click HERE.
- The FRA announced final approval of “continuous rail inspection technology”; this isn’t approval of the in-test track inspection (geometry) cars that CN has so proudly highlighted (as I had mistakenly thought – thanks Mike) but IMHO it is a step in the right direction
On the threat/opportunity side:
- NY Times on EV on first/last mile – not long haul: Click HERE.
- Amazon joins Google/Wing (with FedEx) and UPS in getting FAA approval to test drone delivery
- Despite “no urgent need for money” (FT/Lex), Tesla plans to raise $5B through what’s known as the “ATM process”
- Waymo is moving AV testing to Texas and will make Dallas its HQ/hub to develop a SW freight network, which could be one of two things
- A point-to-point network like traditional truckload (but involves the AV complexity of first/last mile)
- A transfer hub network mixing drivers and AV
Also coming up on the Zoom Calendar:
- NEARS will be virtual for a few hours a day 9/21-25, with good speakers over and above the “Jason & Tony Show (9/24)” – note that Pan Am will be speaking…. Click HERE.
- AREMA will be virtual the week before (9/13-17; I speak on the last day) - for anyone interested in the network it’s always a not-to-missed event: Click HERE.
- I am participating in an interesting Geezer Conference (Lordy, have I reached that stage?) scheduled for October 8 (see attached; subject to date confirmation) with some of the great & the good of the rail chattering class….
- Stay Tuned for RailTrends to join the Zoom-Party with seminars leading up to the conference (still scheduled to be live as of now on 11/19-20)….
On Mexico and AMLOphobia – this latest and largest bribery/corruption scandal involving Pemex and a string of prior administrations notably AMLO’s predecessor, Pena. Why does this matter beyond the concept of corruption as a deterrent to FDI? Well, The Economist surmises that it helps AMLO’s public support levels and strengthens his support of Pemex (often thought to be illogical and un-economic) and his case against the energy reforms (at Pemex by Pena) and could even lead to revocation! Now that would be bad news indeed….and this after I was warming to AMLO after I read he was diverting monies in this crisis to support Mexican baseball, saying”
“Baseball is more than a sport. It is a fruitful passion that requires head, heart, and character.”
How can anyone stay mad at someone who says that?
- Here is a link to the recent Freightwaves webinar on the cross-border auto industry: HERE.
On China – the US & China finally held their zoom-conference, where the PRC re-affirmed its commitments to the Phase One purchases of US goods, critical to the Ag markets (below). They are falling short, so far, due in part to the falling prices of commodities. Not much happened in the meeting, it seems (Navarro was luckily preoccupied in areas beyond his scope) – but as the WSJ pointed out, in a time of tension between the two powers, “the main significance of the talks is that they happened at all (after being delayed)”.
Rails’ recovery from the depths of the pandemic impact has been driven, mostly, by stability in Ag (??) and rebounding in Intermodal. Rail traffic is running now rather consistently in the down mid-to-high single digits level, which of course isn’t great but so much batter then we all thought in the late spring.
On Intermodal: Intermodal has busted into positive YOY territories, led by….the USA! And the USA has been led by….the west coast (LA/LB)! One port/liner expert I know noted the share (re) capture form the west coast (really LA/LB) ports and stated: “LA/LB is regaining share right now due to an increased emphasis on the part of several major retailers on minimizing transit times. Much of the rationale for the faster transits is that with more and more people working from home, due to Covid-19, a greater amount of merchandise is buying ordered on-line and a reduced amount is being purchased in stores……..Amazon (which brings most of its Asian imports to West Coast trans-load locations) is catalyzing other retailers to speed up their deliveries to stay competitive”. Larry Gross, “Mr. Intermodal” (whose “Intermodal In-Depth” is essential reading) also notes two-plus interesting trends:
- Rail /IM velocity (not necessarily service) has deteriorated as the volumes have come back – is this, as Larry believes, a simple (and awful) return to the same old pattern? Had the velocity increases been simply the results of an economically decongested network? And not the results of PSR, Capex, and IT? I was assured that the letter regarding rail capacity (crews and power) and service issues jointly from the STB and the FRA was not about IM, but there have been grumblings….again, we mustn’t forget the sharpness of that pandemic sawtooth!
- The growth is being driven by domestic IM (which he notes was up M/M in July while ATA-reported truck tonnage was down 5% even as the driver-shortage issue is rising again like a vampire).
- Also noted was the 16% YOY growth of what he calls “short trailers” (say 28’ pups) which are….E-commerce!
- But in the current (October) issue of “Trains”, Larry does come down too hard on PSR as a reason for rail/IM share issues (what about Canada!) and in support of rail mergers (don’t get me started!)
The excellent IANA/TTX webinar (link is at the top for reasons unclear even to me) also adds some needed color to the dynamic – to say the least – IM environment”
- They agree with my expert (above) on what they called “the need for speed” driving LA/LB volumes at the expense of cheaper but slower – and less rail-intensive - “all-water” east coast port moves; this has also driven the 13% /14% YOY growth in June & July in trans-loading (3 40’ international boxes to 2 53’ boxes now labeled “domestic”)
- They remind us all that the January “Phase One “ agreement with China was not a trade-war peace treaty, just a cooling-off – tariffs remain on ~$361B (B) of Chinese goods that includes furniture (in the midst of a housing boom-let) and electronics (as everyone sets up home offices and schools)
US Grains provide a stabilizing factor for rails – when did you ever expect to read/hear that? Last month Ag was up almost 6% YOY, one of only two of 20 commodities up in the carload sector (farm products were the other, +5%; IM was up 3% - we’ll have more after RTI is published next week). Following the grain markets has always fascinated but also perplexed me – remember that what’s reported as “bullish” or “bearish” in Ag discussion (for example in the weekly “US Farm Report”) can be counterintuitive. The huge but not really unexpected jump in USDA production estimates (summing up, corn +12% YOY, soybeans +25%, and wheat -4%; the Pro-Farmer numbers are a tad lower) is bearish for prices but could – could – be bullish for rail transportation. Indeed, with demand uncertainty (hurt by the big drop in ethanol), logistics and storage are increasingly the talk of the farm belt. Will we have too big a crop? Is there such a thing? Very recent weather has been dry as well as extremely windy (“derecho”) which is bad (good/bullish) – but there seems to be already nervous talk about 2021! So what’s the key ingredient? China! And how will the mix of declining grain prices and the declining USD factor, as well as the tension between the Phase One promises and the, well, tension between the US and China (as well as the tension between China and Canada and Australia)? Which leads us to….
US Rails and the big harvest – can they handle it? This is an issue for the western rails as they begin what an expert I know calls “the delicate dance” of staging shuttle trains to haul grain to the Texas Gulf and the PNW. And, he notes, they are doing it with reduced market expertise and fewer marketing “boots on the ground”, not to mention the whole PSR thing (PSR and Ag have never been the best of pals – it’s the opposite, in normal times,. Of “stable” – it’s episodic, weather and event-driven, unbalanced, etc – but can still be a strong contributor). BNSF’s turn to an OR-focused machine (it seems and I have heard) may have contributed to their amazing Q2/20 performance but it’s not reducing the growing angst in the big grain trading houses. Those same big shippers are also watching China, obsessively. Big late-year purchases to satisfy political urges could tip the supply/demand balance in grain transportation as the bumper crop roils the Chicago markets. The UP/SP gridlock (look it up, young ones) started with grain train congestion in Texas….Could this be the issue/commodity that caused the STB/FRA to issue their letter? If I were a betting man, I would bet on the two biggest railroads; BNSF in particular has proven to be a good “dancer” in the past. Can they shake off the rust and get back on the dance hall floor?
Sogo Sosha - On Warren Buffett: his $6B “bet” (FT) on the 5 major Japanese trading houses (at roughly 5% each) is interesting indeed, coming as his stock-picking his coming under increased critical analysis (see banks). Note that the Japanese trading houses have strong historic ties to the railroads – through steel and steel rail manufacturing, rail car ownership, shale, and other energy investing, commodity trading, and more….maybe we can see some cross-pollination(“synergies” was seen by the Buffett-obsessed as the reasoning, as well as value) as the historic trading houses themselves have done for over a century. They are also deal-driven entities, as I found out on my visits to 3/5 three years ago in Tokio….
- I neglected to mention in this buyers’ market for short lines (see “Dealers’ Choice”) that SLHC RJ Corman pulled off a deal, buying a transload operator and two short lines in PA and another shortline in nearby NYS.
- CP is already running containers from its newly acquired (CMQ) access to the Port of St. John, although that early business was “helped” by the ongoing strike at the Port of Montreal (and that strike isn’t helping said port in the increasingly competitive eastern Canadian port battle).
- The current issue of Progressive Railroading magazine (my partners, of course, in RailTrends) has a terrific but so sad piece “Remembering Rich Zemencik”; those who knew “Z-Man” will surely do so for the rest of our lives….
Have a great Labor Day weekend!