courtesy: Grupo Mexico
Inside This Issue
· Don’t Go Breaking My Start: Bad Weather Makes for a Bad January
· Better Trend at the End: Jan. Finishes Better; Rest of Year Unclear
· Kansas City Beefs: No End Yet to CPKC’s Tense Talks with Teamsters
· Grupo Mexi-Grow: Mexican RR Giant Bucks Trend and Grows Revenue
· Grew Driver: Ferromex Growth Driven by Drivers, i.e., Auto Sector; IM too
· Better, if Not for Border: Ferromex Growth Stunted by U.S. Border Closures
· Sweet Port Alabama: Mobile Furthers Its Ambitions with New CSX Initiative
· Coming Soon: BNSF Earnings; Will Berkshire Share Some Cheer?
This issue is going out just before the start of the Big Game. So, whether you’re a Chiefs fan, a 49ers fan, a Taylor Swift fan, an Usher fan, or just showing up at the party for free pizza and wings… ENJOY!
Track Talk
“January is not necessarily a harbinger of what’s to come for rail traffic in the months ahead.”
-AAR economist Dan Keen
The Latest
· The year got off to a bad start. And for that blame Mother Nature. North America’s railroads saw big y/y declines in traffic volumes through much of January, due to severe weather disruptions. Happily, much of the foregone traffic was eventually shipped later in the month, judging from AAR data that’s now updated through Feb. 3rd. For the week leading up to Feb. 3rd, in fact, continent-wide volumes increased 10% y/y, with all major categories except grain seeing gains. The grain situation is mostly Canada-specific, as described in both the CN and CPKC earnings calls for last quarter. This year’s Canadian harvest, for one, isn’t quite as good as last year’s blowout production. In addition, farmers are holding on to more of their crop, hoping for better prices in the weeks and months ahead. In any case, total North American rail traffic is still down y/y for the first five weeks of 2024 but only by 1%. AAR economist Dan Keen, highlighting the messy weather, cautioned that January’s declines don’t necessarily presage what’s to come.
· We’ll have a better picture of what’s to come after next week. On Feb 20th, Citi will host an investor conference featuring several Class I railroad speakers (CN and CPKC said they’ll be there; J.B. Hunt as well). The following day, Barclay’s will host a similar event. A Raymond James event will follow two weeks later (March 4th). Also, be on the lookout for Berkshire Hathaway’s earnings report for Q4. The privately-held company doesn’t do earnings calls. But it does disclose financial and traffic data for BNSF, North America’s largest railroad by most measures.
· Some quick labor updates: The BLET union representing locomotive engineers is pushing for STB member Robert Primus to be elevated to chairman as current chair Marty Oberman prepares to retire. The SMART Transportation union, representing rail conductors, is in the meantime pushing state-level legislation that bans one-person train crews—one bill is now making its way to Virginia’s governor. The BMWED union, separately, secured a sick pay agreement with the Belt Railway of Chicago. But nothing yet new from CPKC, which is hoping to avoid a strike by Teamsters.
· From the highways: Montreal-based TFI International became the latest trucking firm to use its Q4 earnings call to mope about the weak current state of freight demand. TFI, remember, bought UPS Freight in 2021—this was the latter’s less-than-truckload (LTL) and dedicated truckload businesses. TFI’s LTL business in the U.S., in particular, is struggling right now. But is the answer more cooperation with railroads to convert additional business to intermodal? Not for TFI, which is trying to move more of that old UPS freight away from rail. “When we bought the company, a lot of the linehaul was done on rail. So now slowly, we’re moving less on rail and more on road… our road service is way better than rail.” TFI’s largest customers, by the way, are in retail, auto, and food.
· And from the coal mines: Peabody Energy, the largest coal miner in Wyoming’s Powder River Basin, is thus naturally a big customer for BNSF and Union Pacific. It also operates mines in the western states of Colorado (UP) and New Mexico (BNSF). And further east, it mines coal in Illinois (UP), and Indiana, where it works with CSX and Norfolk Southern. During its earnings call last week, Peabody talked about the struggles of high-energy thermal coal. “In the United States, electricity generation from thermal coal has declined year-on-year due to low gas prices and the impacts of renewable generation.” It mentioned high inventories as well, of both coal and natural gas. On the other hand, several utilities that buy coal from Peabody have postponed the retirement of some plants, “in order to ensure grid reliability.” The steel-making metallurgical coal market is healthier, buttressed by demand overseas. Though steel production in China is waning, production in India is booming. “The outlook for the metallurgical coal market remains positive with seaborne supply remaining below historical levels.” Leading U.S. coal export gateways include Baltimore, Norfolk, Mobile, New Orleans, and Seattle.
Peabody’s Presence in the Powder River Basin:
Alabama Boom
· Last week, CSX announced a new partnership with Alabama’s port authority, supporting a new inland intermodal container port in Decatur. That’s located in the state’s north near Huntsville, a leading hub for the emerging space economy (you can read more about Huntsville’s booming economy in American Places). The new partnership will involve the modernization of an existing CSX facility at the port of Mobile (on Alabama’s Gulf Coast).
Read American Places, a book with deep insights into the most important trends and developments throughout the U.S. economy -Jay Shabat, Publisher, Railroad Weekly
· Imagine for example, a company like Blue Origin (owned by Amazon founder Jeff Bezos). It will now be able to import say, rocket technology into the port of Mobile and then put it onto a CSX train bound for the firm’s facilities near Decatur.
· CSX, incidentally, will also soon operate an inland rail facility in Montgomery, Alabama’s state capital. It’s part of a broader multi-year and multi-billion-dollar effort to aggressively expand Mobile’s activity in the realm of container shipping.
· Last month, the Alabama Port Authority’s Rick Clark spoke with FMTalk 1065, highlighting Mobile’s rapid growth, its connection to a network of inland waterways, and the city’s emergence as an industrial center thanks to companies like Airbus. Mobile’s McDuffie terminal has long been a major gateway for exporting coal, specifically Alabama’s metallurgical coal, which Clark said was among the world’s best for making steel. Alabama is a big user of steel too—it’s after all, the third largest auto-producing state in the U.S. according to Clark, noting the giant Mercedes plant near Tuscaloosa. Honda, Hyundai, and Toyota build cars in Alabama as well.
From the website of Made in Alabama, the state’s economic development agency:
· Recall that last year, Canadian National announced a new Gulf Express service linking Mexico with Canada via the Port of Mobile, working with the marine shipper Crowley and the CGR company (see Grupo Mexico discussion below).
· Final note: Much of the rail freight traffic handled at the port of Mobile ultimately moves onward for classification at terminals in Memphis or Chicago.
Norfolk Southern’s Annual Report
· Most publicly traded companies publish their annual reports around this time of year. And while they offer no new income statement data, they often highlight some new or noteworthy facts and figures. Below are a few from Norfolk Southern’s report published last week. Nothing new, however, about the investor revolt that NS now faces, as reported a week earlier by the Wall Street Journal:
o In 2023, NS produced 176b revenue ton miles. This was down from 179b in 2022, and down from 194b in 2019.
o So, yes, NS is a shrinking railroad. But it’s also a more productive one. Divide revenue ton miles by headcount, and NS last year produced 8,719 RTMs per railroad employee, up from 7,939 in 2019. On the other hand, this 2023 productivity figure was below what NS managed in 2022 (9,513) and 2021 (9,694). Management surely wants to boost its 2023 figure. But keep in mind: Those 2021 and 2022 rates might have been unsustainable, given all the accompanying operational distress.
o NS groups its freight business into three big categories. Intermodal generated 25% of its revenue in 2023. Coal was responsible for 14%. The other 61% (all else other than intermodal and coal) falls under the heading “merchandise.” A somewhat more detailed look is shown below (breaking merchandise into four subcategories).
o NS ended 2023 with 3,336 locomotives and 40,582 freight cars. It also held 39,460 chassis; 17,662 containers; and 1,110 roadrailers. Interestingly, 85% of the railroad’s locomotives were built before 2009. In recent years, many railroads have elected to modernize rather than replace their older locomotives.
o Approximately 95% of NS’s revenue base is covered by contracts that include negotiated fuel surcharges
o Approximately 80% of NS’s employees are covered by collective bargaining agreements with labor unions
· NS highlighted six of its busiest corridors:
o 1) New York metro to Chicago (via Allentown and Pittsburgh)
o 2) Chicago to Macon (via Cincinnati, Chattanooga, and Atlanta)
o 3) the Appalachian coal fields of Virginia, West Virginia, and Kentucky to Norfolk’s Atlantic seaport and the Lake Erie port town of Sandusky, Ohio
o 4) Cleveland to Kansas City
o 5) Birmingham to Meridian
o 6) Memphis to Chattanooga
The Economy
· The Institute for Supply Management, known for its surveys of purchasing managers, said the U.S. service economy expanded for the 13th consecutive month in January. It’s now grown in 43 of the last 44 months (December 2022 was the outlier). A week earlier, remember, ISM surveys showed the U.S. manufacturing economy still in recession. Service sector companies, the ISM’s Anthony Nieves said, are generally “optimistic about the economy due to the potential impact of interest rate cuts; however, they are cautious due to inflation, associated cost pressures, and ongoing geopolitical conflicts.”
· The ISM report showed ten service sub-sectors growing (titles abbreviated here): health care, agriculture, professional services, public administration, utilities, accommodation/food service, construction, “other” services, education, and management support. On the other hand, seven were in contraction: IT, retail, real estate, mining, entertainment, wholesale, and finance/insurance.
· The earlier manufacturing survey showed just four sub-sectors in expansion. But one of those is especially important to railroads: the chemical business; the others expanding were apparel, textiles, and transportation equipment. The thirteen sub-sectors contracting were: wood products, machinery, plastics/rubber, nonmetallic mineral products, furniture, computers/electronics, fabricated metal products, petroleum/coal products, food products, electrical equipment/appliances, paper products, miscellaneous manufacturing, and primary metals.
· What’s going on in the farm economy? The US Ag Department (USDA) expects farm incomes to drop again in 2024, after reaching a record high in 2022. Reasons include lower prices for farm products, higher input costs, and less federal government aid.
· Fun fact from the Bureau of Labor Statistics: What U.S. metro area currently has the lowest unemployment rate? The answer is Burlington, Vermont, with Fargo, North Dakota, and Manhattan, Kansas, just behind. And the highest unemployment rate? El Centro, California, an agricultural economy on the Mexican border. Of metros with more than 1m people, Baltimore has the lowest jobless rate (2%). Las Vegas has the highest (5%).
Q4 Earnings
Grupo Mexico
· Grupo Mexico is a giant conglomerate whose transportation division operates several railroads, most importantly Ferromex. The latter itself published its Q4 operating results, which—like those of its Class I peers in the U.S. and Canada—were worse in 2023 than they were in 2022. On the other hand, looking not just at Q4 but the entire year, Ferromex in fact improved its operating ratio from 2022. None of the U.S. or Canadian Class Is did that—it was after all a year of shrinking freight volumes and elevated cost inflation. (Note: Berkshire Hathaway hasn’t yet disclosed its Q4 and full-year 2023 figures for BNSF; it’s tentatively scheduled to do so on Feb. 24th).
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