Canadian Shipper


Grain to drive CP Rail’s surging shipments amid high demand for commodities

Grain could continue to anchor Canadian Pacific Railway Ltd. in 2019 following a record-setting year, with recent federal legislation and higher efficiency likely to bolster revenues amidst a China-U.S. trade battle that could benefit Canadian commodities, railway executives and analysts say.

The golden crop accounted for close to one-quarter of the Calgary-based company’s record revenues of $7.32 billion in 2018.

“As we enter 2019, we expect continued strength in Canadian grain for the first half of the year, given solid crop inventories,” CP head of marketing John Brooks said on an earnings call with investors Wednesday after markets closed.

Experts have pointed to global trade tensions between the U.S. and other countries working to the advantage of Canadian shippers. A Chinese tariff on U.S. soybeans and retaliatory European tariffs on U.S. corn in 2018 spurred more shipments from Canada, which enjoyed a strong corn crop last year.

The sweeping Canadian Transportation Modernization Act that went into effect last May incentivizes rail companies to buy newer rail cars that could allow CP Rail to haul 44 per cent more grain per train, said analyst Dan Sherman of Edward Jones.

“The overall effects should be a much more efficient grain business for Canadian Pacific,” Sherman said in an interview. “You think there’s only one way to haul grain, but a couple rule changes and that’s no longer true.”

An extensive infrastructure overhaul by GCT Global Container Terminals is on track to expand capacity.

“Essentially what CP is doing is running more freight and using less labour and less assets to do it,” Sherman said.

CP Rail’s operating ratio, a measure of operating expenses as a percentage of revenues, improved by 370 basis points to 56.5 per cent year over year in the fourth quarter.

The railway’s revenues increased 17 per cent leap to a record $2.01 billion in the quarter, fuelled by grain, oil and other commodities.

Quarterly revenues for grain rose seven per cent to a record $453 million. Revenues for energy, chemicals and plastics jumped 49 per cent to $369 million amid surging demand from Asian markets. Coal leaped 22 per cent to $187 million.

Net income for the country’s second-biggest rail company, however, plunged 45 per cent to $545 million or $3.83 per diluted share in the three months ended Dec. 31 compared with the same period in 2017. The decrease was mainly due a $527-million deferred tax recovery last year due to U.S. tax reform.

Excluding one-time items, adjusted earnings were $648 million or a quarterly record of $4.55 per diluted share. That’s above analyst expectations of $4.22 per share, according to Thomson Reuters Eikon. Adjusted profits in the fourth quarter of 2017 were $469 million or $3.22 per share.

The railway’s fuel costs for the quarter rose 25 per cent year-over-year to $247 million.

For the year, CP Rail earned $1.951 billion or $13.61 per diluted share on $7.32 billion of revenues. That compared with $2.4 billion or $16.44 per share on $6.38 billion of revenues in 2017. Adjusted profits reached $2.08 billion or $14.51 per share, up from $1.67 billion or $11.39 per share in 2017.