Troubling Times

Railroad Weekly Feb. 27, 2023

Inside This Issue  

·   Troubling Times: Rail Woes Mount as Derailment, Demand Distress Darken Mood

·   Farmer’s Market: BNSF Reports Weak Revenue Growth

·   Boxed In: More Talk of Intermodal Malaise

·   Shore’s Law: More Talk of Mexican Nearshoring

·   Coal Concerns: Is the Export Party About to End?    

·   Sick Succession: UP, NS, BNSF follow CSX in Granting More Time Off  

·   Can Hinrichs End Conflicts? CSX Vows More Attention to Workers, Customers

·   Pacific’s Optimistic: UP Sees “Undisputed Demand” Ready for the Taking

·   Maple Grief: Canadian Rail Demand Softening Too, But Commodity Strength a Plus

Track Talk

“I want residents to know that Norfolk Southern will be in their community to help for as long as needed.”

-NS CEO Alan Shaw

“We understand this is very much a defining moment for Norfolk Southern.”

-NS CFO Mark George   

The Latest

·   It’s been a rough several months for North America’s railroads. Acrimonious labor negotiations failed to conclude without Congressional intervention. Demand is clearly weakening. Costs are rising. And now, the industry faces potential repercussions from a Feb. 3^rd train derailment that’s upended lives in East Palestine, Ohio. Norfolk Southern CEO Alan Shaw has been on site speaking with community members, safety officials, accident investigators, and journalists. The accident raises the prospect of new regulations governing the transport of hazardous material and deployment of various braking technologies. The NTSB, in a preliminary report, highlighted an overheating wheel bearing on one of the train’s railcars, which may have led to the failure of one of the car’s axles. The Congressional Research Service (CRS) published a summary of events that provides further detail; you can read it here: https://crsreports.congress.gov/product/pdf/R/R47435 And here are some other worthwhile links regarding the derailment incident:  

o The NTSB press briefing:

o Alan Shaw’s appearance on CNBC:

o Alan Shaw’s appearance on the PBS Newshour: https://www.pbs.org/newshour/show/norfolk-southern-ceo-defends-ohio-response-as-epa-orders-company-to-clean-up-toxic-spill

o The DOT’s call for action: https://www.transportation.gov/briefing-room/usdot-secretary-buttigieg-calls-rail-industry-take-immediate-commonsense-steps

o AAR’s response to the DOT’s call for action: https://www.aar.org/news/aar-statement-on-dot-east-palestine-rail-safety-response-announcement/

·   The CRS report provides some key facts about rail safety in the U.S., noting that they occur approximately once every 500 thousand train-miles. Roughly 2%-to-3% of those derailments involve hazardous materials. In 2021, there were 1,087 derailments nationwide, of which 25 were reportable hazardous materials incidents. These figures are roughly in line with 10-year averages. The accident by the way, is getting attention from hazmat shippers throughout the country. Westlake, a chemicals producer, fielded a question during its Q4 earnings call about transporting vinyl chloride. Its response: “I think people are waiting for the Surface Transportation Safety Board to come back with the report. I’m sure there’ll be more government regulation on railroads, and possibly on the shippers, on safety.”

·   As the fallout from East Palestine unfolds, railroads were separately dealing with more harsh winter weather hitting much of the U.S. north and west. BNSF for one said “our operations and engineering teams confronted high winds of up to 80 mph on the western end of the Transcon from California to Texas [while] frigid temperatures and blizzard conditions across the Northern Corridor also caused delays in traffic operating from the Twin Cities through Montana. BNSF crews worked around the clock in challenging winter conditions to safely move as much freight as possible.” Union Pacific said “Winter Storm Olive has generated heavy snow, blizzard conditions, sub-zero temperatures, significant ice and road closures across our Northern Region, stretching from the Pacific Northwest, through Colorado, Wyoming, Iowa, Minnesota, and Wisconsin.

·   Some more welcome news on the labor front: Norfolk Southern, BNSF, and Union Pacific all announced new union deals covering paid time off for medical needs. These follow earlier deals announced at CSX.

·   Nearshoring production to Mexico continues to get more and more attention. It was the topic of a New York Times “Daily” podcast last week, which noted that more imported goods are now coming across the border in Laredo than via the ports of Los Angeles and Long Beach. Monterey, a large northern Mexican city benefitting from the nearshoring trends, is seeing lots of Chinese investment, from manufacturers looking to avoid U.S. tariffs and cut transportation costs. The trend even came up during an earnings call for one of Mexico’s big airport operators, GAP. “We think that we are just in the beginning of what the real potential [nearshoring] will bring for additional passengers to our airports.” It specifically mentioned new auto investment (i.e., Nissan in Aguascalientes) while noting a jump in warehouse activity near the Tijuana and Mexicali airports in Baja California.  

·   A few notes about the economy: The biggest data point of the week was the Commerce Department’s PCE inflation report, which rose 0.6% from December to January, more than the Fed’s inflation fighters had hoped. PCE inflation is now running at about 5% annually, still well above the Fed’s 2% target. Service sector wages are a worry. Anticipating more rate hikes, investors again sold off stocks, including railroad stocks. Energy prices are down including diesel and natural gas prices, a trend that’s not so great for railroads. U.S. GDP rose a healthy 3% in the third quarter, similar to its growth rate in the second quarter (recall that GDP shrank in quarters one and two). Existing home sales have now declined for 12 straight months. Walmart reported strong sales but feels uneasy about future demand. And the Institute for Supply Management shows in its latest manufacturing report that new orders, industrial production, backlogs, exports, imports, customer inventories, input prices, and supply chain delivery times are all falling. But manufacturing employment is not. Citing its survey of purchasing managers, the ISM stated, “Panelists’ companies are indicating that they are not going to substantially reduce head counts as they are positive about the second half of the year.”

·   Publisher’s Note: Last week, the Chartered Institute of Logistics and Transport (CILT) invited me to speak about the North American freight rail industry. You can watch it here:

Q4 and Full Year 2022 Financial Results: BNSF

·   Warren Buffett’s Berkshire Hathaway reported its Q4 earnings on Saturday, detailing the financials for its railroad unit BNSF. That’s North America’s largest railroad by many measures, employing about 36,000 people. (Union Pacific for comparison employs about 33,000). BNSF also works with about 200 shortline railroads throughout the western U.S. And last year, it generated 38% of freight revenues from consumer products, 23% from industrial products, 23% from agricultural products, and 16% from coal. As of December 31, 2022, the total BNSF Railway system—including single and multiple main tracks, yard tracks and sidings—consisted of over 50,000 operated miles of track.

·   Buffett’s annual letter to shareholders made one mention of railroads, quoting his partner Charlie Munger: “Warren and I hated railroad stocks for decades, but the world changed and finally the country had four huge railroads of vital importance to