Maple Grief

Railroad Weekly November 18, 2024

courtesy: Steel Wheels Photography

Inside This Issue

·   Maple Grief: Canadian Labor Unrest… Again and Again

·   Creel Appeal: CP Chief Pens Plea for New Labor Laws

·   Bullet Proof West: Even with Disruptions, CP’s Guidance Unchanged

·   Stars and Gripes: At U.S. Ports Too, No Relief from Labor Grief

·   The Four Cornerstones: UP Champions its Key Avenues for Growth

·   The Joe Show: Hinrichs Takes to TV, Spreading the CSX Growth Gospel

·   Tariff Talk: Will Intra-North American Trade Be Targeted?

·   Board Stiffed: STB’s Primus Has Harsh Words for UP

Track Talk

“It’s been a pretty wild year, really across the industry, and certainly in Canada, and we’re still facing challenges as we sit here today relative to the labor disruptions that we’ve had most recently in Montreal and out in Vancouver.”

      - CPKC’s marketing chief John Brooks (at a Scotiabank event)

The Latest  

·   Conferences, conferences, conferences. In Chicago last week, Union Pacific and CSX presented at an event hosted by Baird Capital. The two Canadian Class Is, meanwhile, presented at a Scotiabank event in Toronto (see below). Last week also featured the annual RailTrends conference in New York, where many of the industry’s “who’s who” delivered remarks. This week is the annual investor event hosted by Stephens—last year, all five of the publicly-listed Class Is presented there. Expect to hear more on the big themes of North American railroading this fall, most importantly the industry’s quest to grow. Surrounding this is a multitude of sub-plots, from dealing with troubled markets (like coal and steel) to Canada’s labor woes. America’s west coast ports are bustling. Railroad labor talks are progressing with minimal drama. Uncertainty reigns about U.S. trade policy. And strong consumer spending notwithstanding, the latest economic trends (think homebuilding, auto sales, manufacturing output) haven’t been kind to railroads. But for more on all that, keep reading…

·   There’s labor drama at the ports again. Work stoppages at the Pacific ports of Vancouver and Prince Rupert (since Nov. 4^th)—and at the ports of Montreal and Quebec City (since Nov. 11^th)—ended after Ottawa ordered all disputes to be settled by binding arbitration. On the U.S. east coast meanwhile, it’s hardly all happy talk. The International Longshoremen’s Association (ILA) and the United States Maritime Alliance (USMX) had only a temporary deal to avert a strike earlier this fall (it granted workers a 62% wage increase over six years). But they need to reach a permanent agreement on thorny matters like automation before January 15th. For now, negotiations are producing defiant statements like those highlighted below. The labor uncertainty in both cases—in Canada and the U.S. east—portends an ongoing surge in activity at U.S. west coast ports like Los Angeles, Long Beach, Oakland, and Seattle/Tacoma. 

·   Keith Creel made his opinions known by authoring an editorial in Toronto’s Globe and Mail. “Canada,” the CPKC chief writes, “has experienced 62 work stoppages in the transportation sector alone in 2023 and 2024, involving close to 20,000 workers, according to Government of Canada statistics.” This pattern of disruption, he concludes, “is forcing global shipping companies to look elsewhere and ship through alternative U.S. ports. They have choices and those shippers are choosing less efficient, more expensive routes simply because Canada has become unreliable and unpredictable.” He cites one example of an international CPKC customer who called Canada’s reputation for reliability “embarrassing.” Creel insists “the federal government must step in to protect the clear national interest by putting an end to the frequent disruptions and mandating the parties to resolve their differences through binding arbitration when deadlocked.”

·   Back in the U.S., the STB scolded Union Pacific in its attempt to build a six-mile rail link in Arizona called “PIRATE”, connecting its mainline to a new steel plant owned by Commercial Metals Company (CMC). An environmental review last year found damage done to historic tribal property, prompting the STB to ask the railroad for an explanation. The Board wasn’t satisfied with the reply, expressing “concerns about the way in which UP responded to Board-ordered document requests.” It directed the company  “to remedy certain deficiencies.” Chairman Primus made his displeasure unmistakable: “This decision serves as another example of UP’s inability to adhere to the Board’s guidelines and instructions and to provide timely and appropriate responses to Board orders. Make no mistake, the sole reason for today’s decision, and ultimate delay in moving the PIRATE project forward, falls squarely in the lap of UP.” He expressed specific annoyance with CEO Jim Vena, who wrote what he called a “rather obtuse and misguided letter” complaining that “UP’s growth is being held up by the Board.” Primus said, “UP’s insensitive and casual malfeasance has resulted in desecration of Tribal ancestral grounds.”

·   Joe Hinrichs took to the airwaves last week, promoting the vision CSX presented at its investor day earlier this month. Appearing on CNBC’s Mad Money, he addressed topics ranging from the railroad’s improved employee relations to its effective response after the Baltimore bridge collapse. Speaking on Bloomberg TV, he said tariffs could depress CSX’s traffic that’s tied to imports. But on balance, they’d be helpful if it leads to more things made in America. The best thing a government can do, he said, is to help grow the economy. He also repeated a line he’s been using a lot, that “over time, technology is undefeated.” His underlying point: That unions need to accept that reality.

·   Ed Elkins of Norfolk Southern spoke on Bloomberg’s “Talking Transports” podcast. NS, he boasted, is the largest rail provider to America’s integrated steel mills. Its auto network has more origin points than any other railroad. Its intermodal network is second in size behind only BNSF’s. And “100m consumers wake up every morning within 50 miles of an NS intermodal terminal.” Most of its intermodal hauls are less than 800 miles. And in some of the densest lanes, they can be less than 400 miles. “We’ve demonstrated in the east… that you don’t need a 2k mile length of haul to make those economics work.” Elkins said the freight recession is now in its 26^th month. But NS is still growing intermodal volumes this year and doing so with existing capacity. He did add that intermodal’s peak season is happening later than usual this year. As NS seeks new IM business, he clarified that the goal is not to take share from truckers, with whom the railroads work closely. The goal is to merely take more freight off the highways. Targets include packaged consumer goods, food and beverages, coiled steel, etc. Separately, he said the coal export market is “quite strong,” though seaborne coal prices have been a “roller coaster” over the past three years. NS is currently looking for more ways to serve the Mexican market. It has new labor deals done with 10 of its 13 unions. Elkins talked too about the recent changes to the company’s management and board of directors.

·   Some other developments of note: Bill Stephens of Trains Magazine has a story on CSX’s plans to expand its strategic railyard in Waycross, Georgia. Ondas discussed its latest efforts to upgrade the rail sector’s wireless communication networks. FreightCar America said “Demand for railcars remains stable, largely tracking replacement cycles.” Rival Greenbrier issued an update on its sustainability efforts, noting for example that 56% of the steel it’s purchasing (for building new railcars) is recycled content. Greenbrier, by the way, will be among the companies presenting at this week’s Stephens conference in Nashville.

The Economy

·   Still no major change. Americans are spending. The latest retail spend report from the U.S. Census showed a 2.8% y/y increase in October, or closer to 4% excluding gas station sales. Consumer prices, meanwhile, rose 2.6%, according to the Bureau of Labor Statistics.  

·   Economist Mark Zani of Moody’s Analytics says he’s watching four policy areas as the new Trump administration takes shape: 1) tariff policy, 2) immigration policy, 3) tax policy, and 4) the preservation of Federal Reserve independence.  

·   A quick immigration-related stat from The Economist: “Roughly half of the workers on America’s farms have no legal status.” Besides agriculture, other sectors that depend heavily on immigrant labor (legal and otherwise) include hospitality (think hotel housekeeping), construction (think homebuilding), and health care (think home health care aides).

·   And one stat from the Bank of Canada’s Carolyn Rogers, speaking at the Economic Club of Canada: “More than 4m mortgages—or about 60% of all outstanding mortgages—will renew over the next two years.” Most of those borrowers, she explains, “will likely face a significant increase in their payment.” That’s very different from the U.S., where most homeowners have 30-year mortgages, protecting them from rate hikes in the short-term.

·   Mexico’s central bank lowered overnight interest rates by a quarter point last week, to 10.25%. “The Mexican peso, it wrote, “depreciated markedly and registered volatility mainly in response to the effects of the electoral process in the United States.” The country’s GDP has been “practically stagnant” for almost a year now. And it’s “expected to exhibit a lack of dynamism in 2025.”

Highlights from Last Week’s Investor Events

Union Pacific

·   Baird Capital hosted its Global Industrial conference in—where else?—Chicago, the railroading mecca of North America. Union Pacific was among the presenters, reviewing highlights of both its Q3 financial results (they were industry-leading) and its recent investor day event, where CEO Jim Vena and his team presented the railroad’s vision to grow volumes, profits, and investor returns. UP proudly boasts that it’s indeed growing this year, with Q3 volumes up nearly 6% y/y. Adjusting for fuel surcharges, freight revenue increased 5%. And that’s despite a double-digit plunge in coal traffic.

courtesy: Union Pacific

·   CFO Jennifer Hamann explained that volume growth outpaced revenue growth for this simple reason: Much of this volume growth was driven by lower-yielding intermodal