Increase in Carload Traffic Levels
Overall carload traffic levels moved up toward their five-year average in the last few weeks. The increase is being led by coal and grain.
Electric utilities are rebuilding inventories ahead of the winter burn season as weaker natural gas prices are not expected to continue through the winter heating season.
Utilities want to make sure their remaining coal plants are available as needed to help their reliance on higher-priced natural gas.
While the additional coal traffic provides a needed bump to overall carload traffic, it is unlikely to have legs into 2023. A number of coal plants are slated to be retired next year which will reduce the overall demand for coal even if utilization increases at the remainder of the installed fleet.
In terms of grain volume, the harvest in Canada and the U.S. has buoyed volumes over the last several months, and that strength should continue for the next several quarters. Canada is having a much more normal harvest season than 2021 and the U.S. is also performing well.
Grain volumes are expected to experience a significant tailwind from the low water levels and reduced tow sizes on the Mississippi river. In some portions of the upper Mississippi where navigation will close in the coming months, shippers will need to access the rail network or wait until spring.
Of concern for the carload market, is the fact that economically sensitive freight is essentially flat over the last month. Some sectors are growing, but they are essentially offset by weaknesses in other areas, like lumber and pulp and paper. It is these economically sensitive freight categories that will drive growth in carloads over the longer term, so the lack of growth is concerning for long-term freight growth.
Flat Intermodal Volumes
Intermodal volumes have also been largely flat in recent weeks as shippers avoid west coast ports to dodge any work slowdowns or stoppages as the dockworker labor negotiations continue. Intermodal traffic moving into east and Gulf coast ports is much more likely to move by truck than rail intermodal because of the shorter lengths of haul involved.
The potential diversion of traffic to truck due to the shift of ocean traffic to the east is exacerbated by a loosening of dry van truck capacity. Moreover, the shift to the east could last for a while as it appears that the west coast port contract will not be resolved until 2023, extending the time it will take for shippers to move freight back to the west coast.
Ongoing Rail Contract Negotiations ...
The wildcard in overall volumes for carload and intermodal is how ongoing rail contract negotiations will end. At least one union can go on strike as soon as the middle of November, which would likely grind the network to a halt as other unions fail to cross the maintenance of way picket line.
In September, there was a significant decline in volumes around the potential strike date that took weeks to recover from. A similar phenomenon could be expected to occur this time around, though the more often these disruptions occur, the more likely shippers are to keep volumes moving in other modes. This is especially true as overall service levels fail to exceed historical average levels.
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