A Higher Order Purpose

Railroad Weekly October 14, 2024

courtesy: Steel Wheels Photography

Inside This Issue

·   A Higher Order Purpose: CSX CEO Says RRs Not Just Money Machines 

·   Intermodal Up, Carload Down: AAR Reviews the Latest Volume Trends

·   Supplier in a Crowded Theatre: Leading Figures Gather for Big RSI Event

·   Momentum for Milton: Court Says a Major CN Project Can Proceed  

·   Ag Drag: Farming Giant CHS Reviews Sector’s Challenges

·   No Response, No Action: AAR Chief Blasts Unresponsive Gov’t

·   This Week: Q3 RR Reporting Season Begins This Week

Track Talk

“All participants in the industry, and the FRA, need to work together to embrace technology, not fight it.” 

      - CSX CEO Joe Hinrichs, speaking at an RSI event in Chicago last week

The Latest

·   We’re about to get gondolas full of new information and insight, pronto. Railroads will soon start reporting their Q3 financial results, starting with CSX on Wednesday this week (Oct. 16^th). Other Class Is will follow next week, in advance of CSX taking center stage again on Nov. 7^th, for its much-anticipated investor day event. Their collective remarks will build upon commentary from the AAR, which just published its latest monthly RIO report, as in Rail Industry Overview. The backdrop includes a series of disruptions to the freight market, including the brief east coast port strike and two major hurricanes. AAR also raises concerns about “continued stagnation in the manufacturing sector,” as well as rising costs, new potential supply chain disruptions, and the prospect of higher energy prices caused by conflicts in the Middle East.

·   That’s not to say the AAR is all doom and gloom. On the contrary, American consumers are still spending at a healthy clip, underpinned by a still-healthy job market and wage gains outpacing inflation. And that’s contributing to a spike in international intermodal traffic. It’s not the highest-margin traffic for railroads, to say the least. But it’s mostly profitable traffic, and traffic that’s enabling what all the Class Is say they want: Growth. Sure enough, total intermodal traffic across North America is up 8% y/y so far in 2024 (through Oct. 5th). And that’s enough for total traffic to show a 2% increase, despite a 3% decline in non-intermodal volumes. The pattern is similar in just the U.S. market alone, where total volumes are up 3% year-to-date despite a 3% decline in carload traffic; intermodal traffic by itself is up 9%.

·   Of course, there are other reasons—besides the shopaholic American consumer—why intermodal is having a good year. West coast ports specifically have seen a surge in container imports due to labor disruptions on the east coast and in Canada. Uncertainty about U.S. tariff policy is likely a factor as well, encouraging importers to pull forward some of their shipments. The AAR also mentions “heightened port activity as industries rush to replenish inventories ahead of the holiday season.” As industry analyst Tony Hatch made clear at a Railway Supply Institute (RSI) event in Chicago last week, when southern California’s ports in particular get busier, so do railroads (see more below). “If L.A. grows,” he said, “railroads grow.”

·   To be clear, even with this year’s surge in container imports, total North American intermodal traffic is still about 1% below where it was two years ago. AAR figures don’t provide a breakdown of international versus domestic, but just looking at the busy international port of Los Angeles, its container volumes (TEUs) are up 17% this year versus last (through August). But they’re still down 7% from the same period two years ago.    

·   We’ll get a better feel for the latest intermodal trends from J.B. Hunt this week. The Arkansas-based company, North America’s largest intermodal marketer, will report its Q3 earnings on Tuesday.

·   Back to AAR’s RIO report… it features a “Freight Rail Index,” which rose by 0.4% in September, versus August. Versus September a year ago, the FRI is up 7.3% (seasonally adjusted). The index gauges U.S. rail traffic trends, excluding coal and grain. Coal, remember, is seeing big declines this year, while grain traffic was actually up sharply in recent months, “reflecting a recovery from 2023’s weaker grain export season.” Nonmetallic minerals including crushed stone is another category besides coal that’s weaker this year than last. Same for primary metal products and steel. On the other hand, railroads are seeing healthy gains this year in chemicals and petroleum products.

·   AAR’s report does close with some caution, specifically that “the full extent of the impacts from the port strike and hurricane recovery efforts has yet to be fully realized.”

·   Separately from the AAR’s latest assessment, Wells Fargo analyst Chris Wetherbee shared his thoughts on the Bloomberg Intelligence podcast last week. He said, “the freight market remains quite uncertain” as the peak retail season approaches. But speaking specifically about railroads, he explained his bullishness on Canadian National stock, as the railroad will presumably face fewer operational disruptions in 2025—it’s dealt with labor unrest and severe wildfires in 2024. In addition, Canada’s grain harvest is so far looking good. Wetherbee, in summary, thinks CN stock declined too sharply in reaction to management’s recent cut to its financial guidance. As you can see from the MarketWatch chart below, CN has the worst performing Class I railroad stock over the past year.

·   Wetherbee also discussed CSX, which he said has the best or nearly the best operating ratio of all the Class Is if you exclude its Quality Trucking operation. He thinks Norfolk Southern stock should improve as it “plays catchup” to the rest of the industry. CPKC, he thinks, has a compelling longterm growth story.

Other Developments

·   Good news for Canadian National. A federal court ruled that construction of a controversial major rail hub in Milton (near Toronto) can proceed. CN says the project is needed to handle future intermodal growth and support the country’s economy. Ottawa approved the project in 2021. But it was stalled by a court decision earlier this year, prior to last week’s reversal.

·   CN separately signed a new contract with Duos, which builds wayside detectors