Inside This Issue
· The Great Freight Debate: CP-KCS Merger Hearings This Week
· Freight Rates Abate: Cost of Shipping Now Declining
· State of the Unions: Why the Argument Between Labor and Management?
· Washington Windfall: Infrastructure Bill Brings Billions to Rail
· Short Selling: A Look at the Shortline Business Model
· Port Report: An Update on Container Freight Trends
Track Talk
“I can tell you, we do not have the engineering capability to meet that demand.”
-Norfolk Southern Assistant VP for Government Relations Darrell Wilson (speaking at an AASHTO event), pointing out the limitations on committing to new infrastructure projects proposed by local communities
Latest News
· The big moment has finally arrived. On Wednesday, Thursday, and Friday, the STB will hold hearings on Canadian Pacific’s plan to buy and merge with Kansas City Southern. The event, broadcast live on the board’s YouTube channel, will open with comments by Illinois Congressman Raja Krishnamoorthi. He’s an opponent of the transaction, representing an area of suburban Chicago likely to see more freight traffic—and more congestion for rail commuters—if the two railroads combine. Next up will be Federal Maritime Commissioner Carl Bentzel—he objects to the deal as well, fearing it would disproportionally benefit Canadian seaports. Then come the stars of the show: Keith Creel, Pat Ottensmeyer, and other top leaders of CP and KCS themselves. Canadian National, Norfolk Southern, and BNSF will have their say on day two. CSX and Union Pacific will have their say on day three. And along the way on separate panels, the STB will hear from unions, shippers, shortline railroads, industry associations, local governments, transit authorities, community and environmental activists, etc. Hapag-Lloyd, the ocean liner, is scheduled to speak as well. Some speakers will express support for the merger. Others will try to convince the STB to reject it. Finally, at the end of day three, after 18 panels, CP and KCS will return to center stage with a final chance to plead their case.
· Headlining the economic news last week: another interest rate hike by the Federal Reserve. That will likely slow the economy by further cooling the housing market, and potentially business investment as well. But it’s necessary, the Fed says, to bring down inflation. As you can see from the chart below, stock markets reacted bearishly, with railroad stocks hardly immune. Versus this time last year, only Canadian Pacific and Union Pacific have seen their stock prices increase. Other Class I railroad stock has lost value, though all railroads remain significantly more valuable today than five years ago. On a brighter note for the North American economy, oil prices dropped below the $80 mark. That should itself help cool inflation and lower the cost of transportation. But falling oil prices do have an adverse impact on energy sector hubs like Houston, Calgary, and Veracruz.
· A Journal of Commerce (JOC) report last week noted a sharp rise in trade between the U.S. and India, perhaps indicative of a shift away from China as a production hub. As the article points out, China’s attractiveness among foreign manufacturers has been challenged by Covid lockdowns, tariffs, geopolitical tensions, and soaring labor costs. Here’s a key line from the report: “Total merchandise trade between India and the U.S. rose 48.3% to an all-time high of $119.42b during India’s fiscal year 2021–22 that ended in March, according to data from India’s Ministry of Commerce, pushing the U.S. past China as India’s top trading partner.” Ocean liners are responding with more sailings from ports in industrial centers like the state of Gujarat. China’s role as a global manufacturer has been a defining feature of the global economy since 2000. Will it remain so?
· In the meantime, overall shipping rates continue to drop, whether by ship or by truck. Railroads too, are beginning to implement more dovish pricing moves. Union Pacific for one, according to JOC, just lowered its ramp-to-ramp spot rate on Los Angeles-to-Chicago to $1,750 per container, down from $1,958 per container.
· All the while, rail unions are preparing ballots for their members, to vote yes or no on new contracts negotiated with help from the White House. The SMART union, for its part, will begin a 21-day voting process that will begin in “mid-to-late October.” Results should be announced in mid-November. As for labor talks involving west coast port workers, still no resolution there. Security workers at the ports of L.A. and Long Beach did however reach a contract agreement that removes the threat of work disruption.
· The latest AAR data on rail traffic show U.S. carloads down 3% y/y for the week that ended Sept. 17th, depressed some by the threatened rail strike. But year-to-date, carloads are also down 3%. AAR’s figures are heavily influenced by intermodal units, which account for 53% of all traffic—and intermodal traffic is down 5% year-to-date. That’s still a congestion story, not a demand story, though demand does appear to finally be showing some signs of softening. The Intermodal market aside, grain, metal, forest products, and petroleum movements are also down this year. As FTR’s Todd Tranausky points out on his State of Freight rail podcast, one sub-category that’s down significantly this year is pulp and paper. That likely reflects lower demand for cardboard packaging used in e-commerce, and also perhaps a greater prevalence of pulp and paper shipments by truck.
Highlights from last week’s AASHTO event
· AASHTO (the American Association of State Highway and Transportation Officials) hosted its annual Council on Rail Transportation meeting in Kansas City last week. Much of the focus this year was on the large pool of federal money now available for rail projects across the U.S., money linked to the Infrastructure Investment and Jobs Act that Congress passed and President Biden signed last year.
· Unsurprisingly given the location of the meeting, Kansas City Southern CEO Pat Ottensmeyer was a headline speaker. He of course talked about the pending Canadian Pacific merger, which he said will create numerous growth opportunities beyond even the many KCS has on its own. Two of the biggest areas of potential synergies are in intermodal and automotive business crossing the U.S.-Mexico border, originating and ending in cities across the U.S. Midwest and Canada. Some analysts in fact see the
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