Holiday Rail Reflections 2021 (Anything New?)

Greetings and Happy Holidays!

Since nothing much has happened* since the last write-up as everyone panics about Christmas shopping and cream-cheese shortages, this was intended to be a reflection on global events that impact the rails as we close out the year; likely my last missive of 2021 pending….events.  NEARS, meanwhile, did a “Holiday Special” Zoom chat, featuring, among others, our latest “Jason & Tony Show” episode: https://www.nears.org/christmas-special/

*OK, this happened -  Another RR surprise – CN (not TCI) states Vena withdrew his CEO candidacy (the very essence of the TCI “challenge”), leaving more questions (Who is still in the running?  What will TCI do? Etc) than answers. Vena was rumored to re-set his sights across the border to the US.  See the local paper’s coverage: Jim Vena withdraws, investors react - La Presse+.

• So what’s all about, Jimmy?  Is Mr. Vena receiving pushback (perhaps on length of contract?) from CN?  Concerned about not knowing the identity of his potential boss, the un-named incoming Chairman?  Or is this, as some have posited, game strategy from Vena/TCI to show his value; after all, the man I once called the “$8B man” after his appointment at UP (to be COO) caused CNI shares to drop 6% after this (CN) press release.  But if that was the case – where were comments from Vena/TCI?  Perhaps he has set his sights on the Ponte Vedra Country Club?  And where is Elliot in all (any) of this?
• CN (and the rail industry also got good news when, at long last, the STB approved their sale of ~800mi of short line properties in Wisconsin and Ontario (formerly WC lines) to Watco.  Some have viewed this as an inflection on the STB’s part, what with hold-ups so far on other line sales (Pan Am, Massena) and that may be true, but I have heard the delays in Wisconsin were due to agitated shippers as opposed to stubborn regulators, still mad at the original sale of the WC to CN at the turn of the century!
• And THIS:   Like a bad penny?  I may have spoken too soon when I congratulated MIRA for winning the RailUSA auction to capture their first North American S/L platform piece; it appears that a semi-notorious SL legend is suing to block the deal (backed, it’s said, by the largest US bank) and a stay was issued and the STB was asked to get involved (how? Why?); stay tuned….Also, RailUSA’s illustrious leader, Barbara Wilson, wasn’t awarded an RA “Railroad Woman or the Year” notice; she is a lifetime member, de facto, and therefore was a judge of the 2021 candidates.  That was a 5-yard penalty on me, failure to read carefully.
• ** and this happened, as well, though it was hardly a surprise:  KSU’s vote did indeed top CP’s in favor of the CPKC union (at 99.6%), and the shares were put into the Voting Trust, the last allowed (ever? Or at least under the Old Rules).  Dave Starling is the Administrator, back overseeing KCS….
• *** and then, finally, this didn’t happen –  North American rail freight traffic for the week ending 12/11/21 was (remained) down 8%, split carloads down 4, and intermodal still down 11%  (and that’s with Mexico, anyway in recovery-mode, with intermodal up 10% - Merry Christmas Mr. Starling!) – see IM, below

Supply Chains, In Perspective:

“The pandemic put capitalist globalization to the test, with sudden and enormous swings in demand (after a full-stop!) and….it passed with flying colors (note that durable goods and even semiconductors production above 2019 levels).  The best lesson for global supply chain policy?  Leave well (enough) alone!”/FT 12/15 “Global Markets are Delivering the Goods”

And…

“Global Supply Chains aren’t broken – in fact, they are delivering more goods than ever before”/NY Times, same day

The Supply Chain problems as seen in rail intermodal persist, and the debate continues concerning inflection.  The Intermodal Association of North America (IANA) November volume numbers show, as did the separate, red apples-to-green apples comparison from the AAR, a tough month:  Intermodal volumes down 9% (the AAR’s figures, rail-only, are worse – down almost 12% for North America – and that’s with Mexico “only” down 1.2% as Lazaro re-opened).  IANA’s splits show domestic down a tad (-1.2% - domestic containers down “only 0.5% YOY), while ISO, 40’ internationals were down a whopping 17%.  YTD numbers by both trade associations report gains in the +5% range.  This a big complex situation impacted of course by global events and, as reported today by the WSJ, by unequal global growth:  with US ports up ~20% YTD (note the gap to IANA YTD ISO container growth of 7.4%), EU ports are essentially flat YOY.  Maybe that will change – November US retail sales were up only modestly (month/month – still up 18% YOY).  Are things getting better?

• There are only about 30 ships staged outside of LA/LB – but of course, as we all know now that’s as much to do with staging ships (queuing all the way across the Pacific; totaling still ~100) – talk about “optics”!
• The administration has put in place plans to speed up certification and apprenticeship for truck drivers
• Warehousing scarcity is real and unbalanced – the US vacancy rate is 3.6% (tight) while California’s is 0.7% (diamond-creating tight). 
• UP and BNSF have stopped metering traffic into Chicago, etc – and, rather bizarrely on the surface, are encouraging more ‘Intact” (40’) volumes at the expense of trans-loaded 53’ containers, to help the storage issue at AL/LB.  I am sure this pleases the Ag interests who have complained about the lack of 40’ boxes to stuff backhaul west, but how does JB Hunt feel about that?
• The real tragic, Grinch-like news from BNSF is the “re-idling” of Harvard Yard.  So now where does one go to pahk ones’ cah?  Of course, this is an IM yard in Arkansas, as far from Cambridge as may be possible, but still….

What will be the permanent impacts?  Well, a) who the heck knows? But b) maybe not as much as some think, given the reality of those quotes.  This was (is) a pretty impressive performance in a completely unprecedented situation.  There has been – always – a lot of talk about near-shoring (notably of late by KSU – perhaps the last time I will type that ticker – and CSX).  McKinsey (OK< take it for what it’s worth) noted that 93% of its clients predicted major supply chain changes a year ago; only 15% of them have acted in any way on it (and many in a “China Plus One” format, not fully disengaging but reducing risk, which could well be “North America Neutral”).  The FT’s Big Read this week on “Supply Chain – Just in Case” noted that many near-shoring plans “failed to materialize” and that inventories were up significantly as a response.  This is – or should be – pro-NA Freight rail.  But the FT went on to write that the key wasn’t just delays and supply chain velocity but volatility – which echoes what we have been hearing about rail service my entire career (“it’s not speed, per se, but consistency”)! 

Grain returns to its role as the Riddler or, a riddle wrapped in a mystery inside an enigma (had to get my Churchill quote for the holidays) – having been the Hero and such a source of stability in the 2020-2021 pandemic period, grain goes back into the box of imponderables.  It's 10% of NAFR volumes, and a heckuva contributor when it moves, especially to export.  But after a great ~18 or so months, it’s starting to turn.  November AAR/RTI numbers showed an almost 15% drop in NA rail volumes, though still up 10% YTD.  That monthly number reflects across the board weakness: the US down 7.4% but Mexico down 23% and Canada, whose wheat harvest was dismal, down 29% (pushing YTD numbers down  5%.  What's 2022 going to be like?  There are so many variables: 

1. US-China relations – and China will finish the year at about 85% of its Phase One (2020-21) commitments for purchases
2. Other global politics (Russia and the Ukraine?) – US exports in September dropped by 50%
3. Global weather – conditions in Oz, big Brazil soybean crops (and Brazil authorized a $9B plan for 9 new rail lines)
4. NA weather – oh, Canada
5. The $
6. Farm income – which is up 23% YTD in the US, and cropland values are up 15%
7. Inflation – but the price of inputs is matching that, especially in fertilizers – so in fact the Purdue Ag Economy Barometer for November at 115 represents its low level for the year and is 30 points down YOY
8. Crop choice – a rotation from corn to beans makes sense from a ferts perspective, but corn exports are up 12% YTD and beans down by 1/3 (with big crops expected abroad)
9. Other issues – COP26, ethanol, and oil prices
10. Hope?  The United Airlines experimental flight with “recycled” (“sustainable” bio-aviation fuel has the farmlands humming – there would need to be a huge infrastructure push, but where there’s a will ($) there’s a way ($)

Pan Am and CSX choose DC over MARS – well, that’s not entirely true as the estimable Arthur Adams will represent CSX at the Chicagoland gathering (here’s hoping: TENTATIVE TOPICS & SPEAKERS (mwrailshippers.com) ) as that event conflicts with hearings on the CSX acquisition of ~1200 mi Pan Am (and the creation of the new ~600mi Pan Am Southern involving NS and GWR).  The deal has been guesstimated at ~$700mm, with what I would classify as not very aggressive projections but clear capital spend to bring the large sections with 10mph restrictions up to 25mph – seems like a local winner to me.  Interestingly, CP has joined the Vermont Railway and Amtrak in opposition (which perplexes me, as well as CSX’ Jim Foote).  The hearings, January 13 (and 14^th if necessary), will be virtual.

• Hello STB Commissioner Karen Hedlund, newly Senate-approved, and goodbye to Commissioner/former Chairman (and RT-speaker) Ann Begeman.  Remember that IMHO the changing party., R-to-D, isn’t important in the case of the STB; Begeman’s views hewed very close to Chairman Oberman’s  (and as I always say, where is the “progressive” or “conservative” position on (for instance) Dow Chemical vs. Union Pacific?

Also (Stocking-Stuffer Edition):

• (Speaking of which) Amtrak announced that RT-presenter Stephen Gardner will succeed Bill Flynn as CEO in January; a solid choice, the only one, although I am sorry to see Bill go as well.  Gardner will have ~$66B to invest thanks to the new Infrastructure plan; will face immediate labor issues (even shortages in their HR department!)
• And so it begins – does anyone notice the list of towns – in Illinois, of course where they know this game - opposing the CPKC?  Think of this as an opening gambit….
• BNSF joins CP in testing hydrogen-power (with CAT); Aurizon is doing so Down Under
• Lump of Coal/One word we hope is absent from analyst-speak in 2022: “cadence”
• We do like our phrases and sound-bites but last week The Economist noted that “evidence for the ‘Great Resignation’ was rather thin on the ground….”Instead, they cite “pent-up resignation pressure through the cycle makes things look more normal.
• Battle’s a-brewing: Rest assured that Canada and Mexico have noticed the recent spate of new EV production facilities announced for MI, TN, NC, and KY on top of the Time Man of the Year (and what a year), Musk in TX
• The WSJ/Drucker (US) “Management Top 250” last week listed….NO railroads.  Microsoft was #1, UPS #96 (and Berkshire Hathaway graphically included in “Year’s Biggest Losers”)
• A great graphic look at the port of LA/LB and its impact from the WSJ: Stuck at Port for 54 Days: How One Ship’s Delays Hurt Small Businesses - WSJ 
• Let’s hear from another Tony, via Trains: Analysis: Retired exec says Precision Scheduled Railroading gets a bad rap - Trains
• Class 8 truck orders “plunged to a twenty-year low” (ATA)
• Nikola, Nikola, Neee-co-lah! The EV truck-maker had its first delivery and sent $125mm to the SEC for, essentially, false advertising.  Their market cap is $3.7B, down from $20B a year or so ago.
• So this is where they’ll spend their windfalls:  Maersk is paying over $3B for HK-based logistics company LF and Med shipping has offered $6.4B (!) for an African logistics unit
• Watch out for locusts or toads – with 10 days left in the year, British Columbia has already faced three “large scale natural disasters”: heat/drought, fire, and floods
• Michigan may join WA, NV, IL & CO in mandating 2-man rail crews; this retrograde, anti-tech move carries – so far - mostly symbolic weight as this is an interstate commerce issue but if the FRA or Congress weighs in….
• A heartwarming tale of holiday meals cooked in an 18-wheeler: How Truck Drivers Cook on the Road - The New York Times (nytimes.com)
• I told you so – Christmas IS coming!
• Christmas is coming, part one – parcel carriers have improved their delivery on-time performance in 2021 (“for the most part” WSJ), with UPS and USPS showing improvements and FDX less so
• Christmas is coming part two – so have yourself a merry one!

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com 
abh18@mindspring.com
Twitter @ABHatch18