Inside This Issue
· Praying for Grain: CP, CN Hope This Year’s Crop is Better than Last
· Patriot Act: A Merger in the Short Line Space
· The U.S. Economy: Signs of Cooling Inflation
· Norfolk Southern: Its Latest Plans to Boost Efficiency
· Railcar Needs: Will Smoother Ops Reduce Demand?
· Legend’s Passing: Remembering former CSX Chief Hays Watkins
Reminder: Railroad Weekly publishes 48 issues per year, with no issues during the final two weeks of the summer and the final two weeks of the year. Next week’s issue (August 22nd) will the last before resuming on Sept. 12.
Track Talk
“There [are] far fewer, more efficient modes of transportation and shipping product than there is by rail, right? So rail continues to be a great value proposition. And once railroads are able to get back on track… and customers see improved service levels, improved velocity, lower dwell... It absolutely sets itself up for an improvement in overall railcar demand.”
- FreightCar America CCO Matt Tonn
The Latest
· With Q2 financial reporting among the Class I railroads now complete, attention turns to investor events. The first post-Q2 conference will take place this Tuesday, hosted by Deutsche Bank in New York City. Union Pacific, CSX, and Norfolk Southern will all be presenting, as well trucking and intermodal partners like J.B. Hunt. Other bank-hosted events will follow. And then in late September, the big event will be the STB’s scheduled hearings on Canadian Pacific’s planned takeover of Kansas City Southern. Stakeholders from across the industry—rival railroads, labor unions, shipper associations, local governments, etc.—will be eager to share their opinions.
· Speaking of the KCS takeover, the STB, published a draft of its environmental impact statement. This attempts to gauge how a CP-KCS merger would impact safety, intermodal facility traffic, noise, climate change, and so on. One conclusion is that air quality would benefit thanks to an increase in truck-to-rail conversion. The report separately noted that the largest expected increase in rail traffic from the merger would occur on the CP mainline between Sabula, Iowa, and Kansas City, Missouri. Here, CP and KCS expect an additional 14.4 trains per day on average.
· In the meantime, railroad service woes linger on. The issue continues to come up as companies that rely on the rails report their quarterly earnings (see below for more examples). The American Chemistry Council, for its part, shared its thoughts with the STB last week. Based on a survey of its members, it stressed that “the crisis has not subsided, and it is unclear that the U.S. rail network is on a path to recovery.” Many members report longer transit times, missed switches, reduced service days, and higher rates and demurrage charges. They’re also being forced to add additional tank cars to handle all the chemical products they need to ship. A separate and more specific frustration is BNSF’s current embargo on shipments into California, recently extended into August. The Council called out difficulties with CSX in the Cincinnati area. Another problem area is the New Orleans interchange, keeping in mind that chemical and plastics production is heavily concentrated in the Gulf Coast, with much of that shipped by rail through New Orleans.
· Turning to the economy, inflation was top of mind as the U.S. Bureau of Labor Statistics (BLS) showed consumer prices cooling in July. The July Consumer Price Index (CPI) was in fact unchanged from June, thanks in part to falling energy prices. That has some economists expecting the Fed to ease up on its interest rate hiking. Fed officials themselves, however, were quick to emphasize that annual inflation remains too high, implying no rush to become more dovish. The Fed’s policy committee has its next scheduled meeting September 20th to 21st. Financial markets, incidentally, don’t seem to be too concerned about longterm inflation, judging from ten-year yields on Treasury bonds—they’re now well below 3%. Rates for 30-year mortgages too, have been trending down this summer, notwithstanding an increase last week (see market indicator chart below).
· Another economic data point to highlight, also from the BLS last week: Inflation-adjusted hourly earnings for American workers rose 0.5% from June to July, even as the CPI remained flat. That’s a welcome change from recent trends, in which inflation has outpaced real incomes (real hourly earnings were still down 3% in July when comparing to July of last year). Put another way, Americans improved their spending power from June to July, but their spending power is still down y/y. This of course doesn’t account for savings and credit, which can also boost spending power; it’s looking just at income.
· Still another BLS report showed that while labor productivity declined throughout the economy in Q2, it increased in the manufacturing sector. This essentially means that American manufacturers are producing more with less labor, and this was true for both durable and nondurable output. Manufacturing sector output is now 3.6% above its level in the fourth quarter of 2019, the last quarter not affected by the pandemic. But hours worked in manufacturing remain 1.3% below the Q4, 2019 level. It’s encouraging news for railroads, which care a lot more about what’s happening in the manufacturing sector than what’s happening in say, health care or education.
· A quick word about Mexico’s economic policy: Its central bank last week raised its target for overnight interest rates to 8.5%. As you can see, credit is much more expensive there than it is in the U.S. or Canada. Inflation in Mexico is running at about 8% annually.
· Some merger news in short line world: Patriot Rail, based in Jacksonville, Florida, is acquiring Denver-based Pioneer Lines, which operates 15 short line railroads across 12 states (Alabama, Arkansas, Georgia, Illinois, Indiana, Iowa, Kansas, Michigan, Mississippi, Ohio, Pennsylvania, and Tennessee). Patriot will now operate 31 freight railroads, up from 16. Typical freight items carried include agricultural and food products, iron and steel, plastics, chemicals, building materials, and forest products. Besides just moving freight though, Patriot generates revenue from services like railcar storage, contract switching, transloading, railcar cleaning, engineering, excursion railroads, real estate, and track access.
The Canadian Grain Crop
· In accordance with Canadian law, the country’s two Class I railroads published their plans to handle the 2022-23 grain crop. The 2021-22 crop was a disaster, with production 38% below the prior three-year average. Chiefly at fault was western Canada’s worst drought in two decades. Also having an impact on grain movements were unexpected demand increases, shifts in trade patterns, congested coastal ports, shortages of shipping containers, and severe weather disruptions. Canadian Pacific and Canadian National each moved roughly 18 million metric tons (mmt’s) of bulk and processed grain products via carload during the 2021–22 crop year, down 44% for CP and down 36% for CN (versus the three-year average).
· Canada is expecting a more normal grain crop this year, and both railroads are preparing by adding locomotives and hopper cars. But they warned that forecasts are just forecasts—they can be wrong. As CN stated: “rail capacity cannot quickly adjust to demand shocks driven by sudden changes in market conditions or significant global events.” It provides some reasons why: “There are only so many trains that can move through the mountains at any point in time. Train counts cannot simply be doubled overnight to recover from a major mainline disruption or to accommodate a spot market opportunity measured in weeks.” Locomotives can move with relative ease throughout the network, from areas with less-than-anticipated demand to areas with greater-than-anticipated demand. But labor is far less mobile.
· CN did say that overall demand for rail capacity between Edmonton (the epicenter of Canada’s grain-producing region) and the West Coast ports of Vancouver and Prince Rupert is expected to exceed capacity during some weeks this fall and into 2023. But it also highlighted the significant grain throughput capacity in the east.
Keep reading with a 7-day free trial
Subscribe to Railroad Weekly to keep reading this post and get 7 days of free access to the full post archives.