Greetings from the California desert as I prepare for Railroad Equipment Finance, the big rail car event (REF 2022 (railequipmentfinance.com). REF gives a great bottoms-up (commodity-by-commodity, car type by car type) look at the freight rail industry (as opposed to the more typical top-down look from rail management. I will lead off with a mea culpa – Buffett said that BNSF (see last report) was one of his “Big Four”, not “Three” – I guess I was considering the auto industry of the recent Boston Celtics. In addition, kudos to Bill Stephens for sourcing the huge ($2B+) jump in BNSF “joint facilities payments” that corresponds to the lease-buyout expense for the Montana Rail Link, in line with rough estimates based on the gaudy “short line (M&A) multiple” - BNSF Railway paid around $2 billion to buy out Montana Rail Link lease - Trains. At the very bottom please note a proud moment for me from commentary from CN’s (ex) JJ Ruest.
This quick note will have three main points:
- Last week I was at SEARS, the South East Association of Railroad Shippers spring conference in Charlotte where there was both encouraging news from railroads and real (offline) pushback from shippers, so both optimists on rails “talking the talk” and skeptics of their “walking the walk” came away with justification for their positions
- The opposition (or the opportunists) to CPKC came out in force in a counterattack that reminded me, superficially as a history buff/major, of D-Day being as it involved Juno, the Canadian beachhead (CN), Omaha (UP – though they could have been Utah as well), allies who bicker (NS and CSX and the Meridian Speedway), the determined opposition (shippers – really shipper trade associations, as expected) – and even crazed partisans (those communities of 300K folks looking for up to….really….$9.5B in mitigation expenses
- Rail traffic superficially looked good in February but it was mostly the comparisons to the big Texas freeze-out of last year….
- (OK, not three but my own Big 4) – the emerging battle of the Home Front as the AAR, like Britain in 1940, stands alone against the rising forces of oppression, er regulation….
(#1) SEARS Yields support for both half-full and half-empty railroad glasses – in front of a couple of hundred shippers, rails, and suppliers CSX, GWR and NSC gave presentations related to growth, innovation, and the opportunities presented by technology and ESG. Offline, many of the shippers, particularly paper, noted that the (Class One) current service situation was not good, not good at all, with concrete examples impossible for this analyst to refute nor, in the context of the bigger picture, fully compute. One shipper told me they had to leave the room to remain polite in the C1 presentations
- GWR’s Mike Miller saw huge opportunities, and not far off ones, coming from Scope 3 emissions targets (meaning not just what a company emits – Scopes 1 & 2, but their supply chain, 3), citing as examples Walmart, Amazon, FedEx, P&G, GM, Pepsi and old use-more-rail-for-carbon-goals friend, Unilever. He drilled down to P&G’s decision to “grow rail”, with an impact on at least two GWRE-served locations – and noted the cascading effects of Scope 3 as P&G was pushed to this effort by their biggest customer, WMRT
- GWR remains committed to and excited by their joint Rail Pulse proposal, made even more relevant by the greater need and recognition for/of supply chain transparency, moving into “pilot phase”, with another rail car leasing company close to joining the 6 partners (maybe I can suss that out here in the desert)
- GWR’s example in staffing shows the impact – fast, severe but temporary, for the most part – of Omicron on the rails in December and January. After having ~800 C19 stricken employees (missing work at some point) in 2021, they had fully 400+ missing….in January! They also have 200 (“normal”) vacancies….
- CSX’s CMO Kevin Boone said the railroad “was committed to growth” while acknowledging the historic reasons for skepticism (that predate PSR, KB noted that CSX/RR merchandise traffic was essentially flat since….1995). But CSX is coming to grips with its near-term staffing problems (the T&E pipeline was now up to 500 folks; the Jobs Report was certainly encouraging though revealing more tightness ahead) while at the same time CSX was bringing strategic/longer-term thinking to bear, notably in reinvigorating its Industrial Development efforts, long an NS hallmark. CSX has gotten sole-served wins from the new F150EV plant in Tennessee (which I suppose will be part of Ford’s newly separated EV business) as well as from Nucor, Rivian, and Hyundai. CSX wants to leverage its huge real estate portfolio, following the PSR 2.0 playbook we saw/see in Canada. KB also sees tailwinds from ESG, inflation (rails as a counterweight), JIC – and industrial onshoring (where you’ll recall, I am solidly a Missourian)
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- In fact, a study from The Economist shows that the trade gap with China, seen from the (also) D-Day like the sight of ships off of the San Pedro Bay and analyzed as having widened (grown) by 16% in 2021, might actually be undercounted by ~20% (~$100B+). While some interpreted the USTR’s annual report as business as usual, the WSJ noted the potential to increase enforcement of tariff avoiders as well as using “Section 301” to target Chinese subsidization.
- CSX also emphasized the technology side, noting not only “ShipCSX” but also the fact they’re about to announce a new CIO….
- As for Rail/Pulse, KB notes that the concept works but that they remain in a “wait and see" mode, presumably (I inferred) waiting to see if UP would sign-on, with UP’s CMO Kenny Rocker having been “on the clock” for some time now (his clock resembling the last 60 seconds turning into hours of a college hoops game).
- Speaking of hoops, those listening into ESPN Radio might hear a CSX ad for locomotive engineers! (Does ESPN cover NASCAR on the radio?) Thanks to Bloomberg’s Paul Sweeney for that tip!
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- Norfolk Southern highlighted their new LTL product, Thoroughbred Freight Transfer. The head of it (Matt McLung) came from the LTL industry (as for rails he is as green as the A’s home uniform). But the LTL market is estimated at ~$51B, and interestingly, here the rails actually offer an ease-of-doing-business advantage. Let me repeat – if this works from a transit time perspective, by virtue of a single invoice, NS can offer s simpler, cleaner, easier product. They have engaged with experienced warehouse/hub partners on the key nodes on their system. I am not sure how big this could get (NS wouldn’t publicly venture a guess) but it is a great example of thinking outside of the truck and into the box (car)….
- Speaking of boxcars, that market is as tight as spin on a Kershaw curveball. You can see how the lockout has affected my mood. But at SEARS we got a preview of REF with a rail car panel featuring many of the folks we’ll see this week. The feeling was generally positive, suggesting that inflection in new builds (to replacement plus) and lease rates. Key areas of opportunity included tank cars (with replaceable on the horizon), steel cars, IM, auto racks (there was buzz of auto production in 2023, reflecting the chip-effect pent up demand, going from ~11mm in NA past the recent 17mm average to as much as 22mm!). Not all was bright – the oversupply of sand cars (see US shale, below) was said to be with us “for years to come”. But one thing stood out to me – Infinity Transportation, a rail car lessor, discussed their success pitching rail over truck directly to shippers (working on pie enlargement).
- Steve Sashihara, the CEO of Princeton Associates, so involved in rail data for years, discussed the results of his high-level survey of the freight transportation disruptors looking seven years out, and it yielded some real surprises: the biggest with 82% of responders saying “major to moderate” 7-year impact, was IoT (which includes Rail Pulse, which Princeton has done some development for); in the upper middle of the pack was EV (64%) – and trailing far away was AV (33%). The latter was almost shocking given the hype, and the money-raise, which as spilled into off-highway transfer hub real estate speculation, with Embark now partnering with Alterra Property Group and investments by Cerberus and JPMorgan….
(#2) CPKC – the counter-attack! A new RR D-Day – or the great midwestern shipper gold rush? If anything showed that rail mergers force open the (all of the) books – and why any talk of E/W transcon mergers is foolhardy and like showing miners a god nugget, bring out the greed in all concerned look no further than the STB filings on the merger. You saw venom or some might say sour grapes (CN: the merger application was “riddled with errors, omissions, inconsistencies, and plainly unreasonable assumptions”), misunderstanding – or purposeful ignoring - of the differences between the old merger rules that apply here (“protect competition” and the new rules (that don’t – to “enhance competition), NIMBYism (see Hennepin County opposing increased train frequencies – i.e. growth) and a pie-in-the-sky lottery ticket (the eight counties in the “Coalition to Stop the CPKC”) who combines Minneapolis’ NIMBY with astonishing chutzpah, with communities totaling 300K enterprising citizens demanding mitigation spending (not stopping, BTW) by CPKC up to nine billion dollars ($9B) – or $31, 667 per capita….so let’s look at the real issues:
- The Trade Associations, who yield real lobbying power, had separate demands ranging from thoughtful to….many (ACC, Fert Inst, NITL, Chlorine Inst and individual shippers Bayer and Oxychem) sought gateway protections, echoing the concerns of other railroads UP and BNSF); some (my old friends at the NGFA asked for reciprocal switching (timely – see below – but also see old versus new rules) – the Private Railcar Food & Beverage Assoc called for system-wide reciprocal switching!
- There was shipper – and rail – and the DoA - concern about service disruption, historically an issue but in an end-to-end? Some areas however are expected (according to the Plan) to see big jumps in volume without it was stated, commensurate Capex/capacity increases. Speaking of the DoA, the US Wheat association in outright opposing the merger noted that grain rates in Canada were 30% lower than in the US – in general, one supposes, not on these systems (wheat not being huge for KCS) and I wonder how true but it does ignore the historic and crippling regulation of Canadian grain.
- CN reiterated its case for CPKC divestiture of the Springfield line to the CN, where CN expects, after $250mm of CAPEX it can take some 80K trucks off the road; CN dryly noted that 80K was 33% more than the total CPKC proposed take (and in fact, recall, how surprisingly rail competition focused was the CPKC merger ap. CPKC already is on record saying this is a spurious call….CN further stated that CPKC has “vastly overstated rail traffic and revenue growth” that will come from the merger; one reason is CN thinks (as does, I would venture, the UP) that CPKC is overly optimistic about rail diversion – reasonable - giving the competitive lengths of haul (the whole single-line service issue). Here’s my naïve question: who cares? If CPKC overpays, it’s on them (and their shareholders) and that – alone – doesn’t impact the rest of the industry assuming no, say, bankruptcy risk. For its part, CPKC says their projections are conservative, which is the side I lean on pending further details TBD.
- UP wants guarantees at the Laredo gateway (with enforceable measures, not simply bland statements) and reasonable Texas CAPEX to fund the expected growth without causing a, say, UPSP-type situation
- BNSF also wants to protect cross-border access (via Robstown TX) and with a “fair rate-setting process” – which might make some of my SEARS friends chuckle) but has dropped its bombshell mention of pursuing trackage rights over KCS to Laredo and maybe attempting to gain direct Mexican concessions – for now. They also want to see Houston beefed up with CAPEX/capacity to match the proposed rail traffic increases. They essentially join UP in wanting to protect their share of to-the-border traffic interchanged with KCSM (and the subject of the single-line versus multi-carrier battle to come discussed above). They note that the Mexica (KCSM) concession could be opened up in 2027….
- NS wants to protect its Meridian Speedway (30% owned) access and may exercise its 2024 option to purchase the KCS Dallas IM terminal
- CSX for its part sees an opportunity to interfere, not with CP, or KC, or even CPKC, but with NS and its exclusive Speedway interchange access!
(#3) Rail Traffic looks improved in February YOY but’s flattered by the comparisons, especially in the US, to the deep freeze in Texas in 2021. Carloads were up 11% in America as 15/20 commodities showed increases – and with even IM up a bit (+1.4%), the US total was up 5.7%. Looking to Canada (so close to the North Star, so far from Texas, except for Alberta) shows a contrast: Carloads dropped 2.5% (8/20), IM dropped 5% so their total was down 3.7%. Mexico, bordering Texas but always mysterious, showed an 8.6% increase in carloads (12/20) but a 5.1% decline in intermodal for a total 2.3% increase in volume. Overall North America, obviously dominated by the biggest sub-market, showed a 7.5% increase in carloads (13/20), flat IM (-0.2%), and a +3.4% total. By contrast, ATA truck tonnage (not units remember) showed a 1.1% YOY increase in February. More questions than answers….
High Noon, part one - There will be a house Transportation & Infrastructure Hearing this week, part of the government’s simplistic attempt to link rail concentration and the supply chain (forgetting the highway – and waterway – competition). The DOT report on PSR actually advocated for increased regulation of railroads. The AAR’s CEO Ian Jefferies will be in the role of Marshall Will Kane. This will also serve as a warmup for the STB Reciprocal Switching/Forced Access hearings next week; this time Jefferies will play “Shane”. The first shots in the gunfight were fired by the DOT last month in the report which cited hearings (shippers only) in 2019 – when the PSR implementation was in full and disruptive swing; it noted rail concentration but never mentioned the word “truck” and cited the huge rail rate increase from 2002 (using data from the Rail Customer Coalition, a noted – not to say notorious shipper lobbyist)….what’s interesting is that it was 2003 that rails, for the first time in the modern, post WW2 era, got pricing power. Bad data, bad source, well-chosen date range. That’s a lot of guns the cattlemen have engaged….
ALSO:
- Consensus oil analysis suggests that the US shale producers won’t/can't step up to fill the oil gaps (to drive price down) after years of chastisement of their rather reckless drill expenditures; capital discipline is the order of the day.
- North America also isn’t able to step up to serve the coming wheat (prices highest since 2008) shortage (at least with carryovers; waiting on the current crop) despite what some have written. But perhaps it will help NA coal by backfilling where, for example, Australia replaces Russian coal, and coal steps up share temporarily to replace lost Russian gas.
- Potash may be another area of temporary pickup, though the CP strike may hinder that short term (again, I ask, when do we get to the locusts?)
- ISM reports that production materials lead times are up by 1/3 in February YOY; Target however sees real improvement in H2/22
- For those of you with ties to Oz, they are (and I am) in mourning over the tragic, early loss of cricketing great Shane Warne, gone too soon at only 52.
- Getting back to transport, many noted POTUS hammering container shipping in the State of the Union speech; I have been searching for any reference to any president hammering shippers for demanding below replacement cost pricing from the liners for 9 of every 10 years this century….
- Meanwhile, first reports out of the annual TPM (Trans-Pacific Maritime) conference sounded both positive and happy – leaving me to wonder if they had invited either the DOT or the ILWU?
- Activist investors won two board seats at CH Robinson…
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18