Bloomington, Ind.–Rail carload has been a “substandard performer” since the Great Recession, while intermodal has been the growth star and shown the quickest recovery, said FTR Senior Consultant Larry Gross in the March 10 State of Freight: Rail Outlook webinar.
Intermodal results outpaced those of trucking, and trucking has only recently regained the heights shown pre-downturn, Gross said.
Both cyclical and secular issues explain carload’s substandard performance.
The cyclical factors include the transition of recovery from industrial to consumer, weak overseas economies and the strong US dollar suppressing exports.
The industrial sector is probably in recession, Gross noted.
“When we look at rail carload, we look at the segment of transportation that focuses on the industrial part of economy, which has been suffering of late as industrial growth lags the consumer sector, which is not favourable for freight,” Gross said.
Secular factors include the permanent coal decline due to economics and environmental regulations, and crude by rail/frac sand suffering from low prices/narrow spreads.
In 2015 there was a 5.8% drop in carloads.
“If there is a ray of sunshine, things are starting to stabilize if not turn around. Weeks 5-9 of 2016 are looking a little better. This could be normal seasonal activity but nevertheless the plunge is stopping, Gross said. Looking at the four week moving average for carload numbers, the precipitous decline of 2015 is now heading to an upswing,” he said.
Looking at North American coal carloads, the plunge for the moment has stopped but it is too soon to call a turn, while North American carloads are still dropping for crude.
“One of the values of rail carload statistics is that they are timely and accurate. If you pull out coal and crude the picture starts to improve. Year over year comparisons have moved into the black. There are possible ‘green shoots’ of improvement on the industrial economy,” Gross said.
The challenge for 2016 is that if coal stabilizes it still leaves a giant hole in carload numbers since 2015.
Automotive has been strong but is very limited upside at current levels – its exposure is more negative. Agriculture is also already running at strong levels and the strong dollar will discourage exports, Gross said.
Crude by rail’s potential is limited at current prices and spreads, and recovery is still some ways off barring the unexpected.
Petrochemicals could provide growth but are probably a “2017” story in terms of when they come onstream, he said.
Housing improvement offers some hope on lumber with 10% growth = 40K carloads .
Highway and other government construction could boost aggregates, etc . and offset frac sand decline.
While train velocity numbers are up for mixed trains/merchandise trains, yard dwell is not showing as much improvement.
It’s somewhat better than 2014, 2015 levels but it’s not nearly at the levels of the early years of recovery post Great-Recession, Gross pointed out.
“Costs are being held down by carriers by them running longer trains, with good air brake response, and distributive power. The downside is it takes longer to accumulate the volume, and the trains run less often. This increases the variability the customers would be seeing on single car/loose car deliveries,” Gross said.
Looking at the longer picture, comparing 2015 to 2006, there are only four commodities that were higher in 2015.
“The rail renaissance that occurred is not then a volume story but a cost and rate story, the ability of railroads to raise rates higher than that of inflation, lower their costs through technical innovation, and achieve operating ratios that have been steadily improving in this timeframe. These strategies could run out of steam eventually,” Gross said.
While shorter lengths of haul, more responsiveness and reliability is the trend across the industry, rail has not been heading in this direction.
A “reformed” Rail carload product that is reliable enough to take commodities off the highway needs to be developed, Gross said, adding “Intermodal doesn’t have the horsepower.”
“‘It’s an interesting and difficult challenge’ the industry is only just beginning to come to terms with,” he said.
Commenting on the trend of volumes moving from West-to-East coast, Gross said that with the Panama Canal opening, the efficiency of all water movements going through the Canal should also eventually go up.
Ports on the East Coast, however, are not all ready for these larger ships, so wholesale adoption and deployment won’t occur until all the ports can realistically accommodate these larger vessels.
In consideration of CP’s proposed merger with Norfolk Southern, and any potential benefits to rail capacity, Gross said “That is a relatively less potent combination in terms of affecting the overall US railway marketplace. The theory is if you put these two railroads together some of the gateway issues (at Chicago, Memphis, New Orleans, and St. Louis, for example) could be better addressed by a unified carrier. But the marketplace would have a great deal of concern with the market power these large entities would yield. It’s fairly unlikely we will see anything occur along these lines-it doesn’t seem to have the support of industry or the shipper community and would need approval by the Surface Transportation Board,” Gross said.