Greetings from Chicago where I have rucked up to speak and enjoy the Association of American Railroad Superintendents’ annual meeting (American Association of Railroad Superintendents - AARS 124th Annual Meeting (supt.org) ) where Pat Ottensmeyer will be receiving an award and the temperatures will approach 100 degrees (see drought fears, below). My slides are attached.
Wow, the news doesn’t seem to be getting better upon my return: “North American rail volume for the week on 12 reporting U.S., Canadian and Mexican railroads totaled 332,226 carloads, down 2.5% Y/Y; intermodal units were 363,156, down 4.1% Y/Y”. Rail service and operating metrics do not (yet?) show any signs of inflection….Railroads (UNP) reducing FY22 Guidance (really just marking to the market)….DC still sending war signals….Labor news not encouraging….Interest rates increasing ()a fair amount)….drought fears increased….Buhler goes on the IL….
First, some good news!! And an update from the tweets: With the lack of real (or GOOD) news from the railroads while I was away there was one positive thing that might have gone unnoticed: UP joining NS et al (Watco/GWRE/GATX/Greenbrier/Trinity and soon another S/L holding company) in the visibility project Rail Pulse – that likely being the game changer for RP, itself a game-changer for rail. Expect more C1s on board “soon”!
- Although I got some hopeful feedback from remaining C1s, I was very likely ahead pf myself in expecting UP’s – momentous – decision to join RP to unlock the logjam for other C1’s to join; that may (should) some after R/P becomes operational in a year’s time but now the momentum lost in on-boarding a massive railway is too big a cost as the newco races to viability
- Longer-term I expect much closer to full industry participation…
Quote of the week: American Trucking Association (ATA) CEO Chris Spear in the house organ, “Transport Topics” noted that autonomous (AV) Class 8 truck operations “were more suited for regional operations whereas human drivers are better suited for long-haul” operations….
Labor Update(s): So the National Mediation Board (NMB) released both parties from mediation in the national rail bargaining/negotiations in this round, which began in 2019, leading to the expectation of a Presidential Emergency Board (PEB) after a series of 3 30-day cooling-off periods, the first of which began Friday. This appears to be labor’s bet on a Democratic congress, which ultimately decides (to approve the PEB recommendations, per historic pattern). Railroads are in this critical labor round having of course sharply reduced their hand of late. They are trying to take advantage of technological change (see FRA, below) before trucking tech (AV, EV) becomes a reality.
- Meanwhile, the west coast dockworkers' negotiations continue. Here I will quote the WSJ, mastering the obvious: “Automation is shaping up to be a key flash point in (these) high-stakes negotiations”. Ya think? Meanwhile, the two biggest US Pacific ports, LA & LB, combine to rank last out of 370 in the World Bank/S&P Container port Performance Index….
- And CN is being struck by its electricians; CN is an old hand at this and believes there will be minimal service disruption in the near term
Washington & the Rails Part 1,000,000: recently there have been four STB actions and 2 related ones in the ongoing battle of “RRs vs. DC” worth commenting on:
- So, CA Congresswoman Katie Porter, who should know better, sent a letter to the STB urging rejection of the CPKC citing rail consolidation (thereby creating those extraordinary powers that have allowed the rails to lose market share this decade. In addition, both Metra (note: Marty O’s old stomping grounds) and the NS filed showing worry over what CPKC volume growth could do tho their operations in Chicagoland and the Meridian Speedway, respectively. And speaking of Chicagoland, the usual suburban town gang also reiterated their calls for rejection, or if not a heft mitigation settlement (is it wrong in the context of Illinois to say “bribe”?). Bottom line: The CPKC will be approved, don’t lose any sleep over this...
- The rail subcommittee of the House T&I Committee held a hearing ostensibly on “rail safety”, thereby allowing rail unions (in the middle of negotiations and with an eye to congressional opinion, remember) to bash rails and PSR, the Federal Railroad Administrator to further show his cards (predicting initiating a rule mandating two-man crews while his government (his own DOT) continues to subsidize driverless trucking). One major focus was on the safety impact of longer trains. The rails had a lone defender against the onslaught – NS’s COO Cindy Sanborn. Bottom line: This is symbolically more worrisome for the long term – the rails need to be free to utilize technological breakthroughs like car and track inspections (etc) and this is (another) sign of fading momentum in the regard….
On to the main event, the STB:
- The STB expressed rather extremem irritation over what they perceive as the rails failure to take their directive on revealing service recovery planning seriously. To wit: They directed the US “Big Four” railroads to “correct deficiencies” in their Service Recovery Plans which Chairman Oberman described as “woefully deficient” (ouch!) and “perfunctory”; a response is due in two days….Bottom Line: The rails have to take this more seriously, but from an investment standpoint, this will provide more and better information. Plus, we want to know when they expect to recover, too….
- The STB allowed Amtrak to see certain NS & CSX “sensitive data” in that ongoing fight in the Gulf region. Bottom line: a mile defeat for those two rails, like losing a regional skirmish in a bigger war. Bottom line: The Amtrak dispute doesn’t seem to be going well for the freight rails, despite pretty good arguments on their side (sign o’ the times?).
- They warned us – the STB orders directed service, intervening in a service dispute in CA between the Union Pacific and Foster Farms, a poultry producer. This came in the form of encouragement, not bringing in another carrier (which almost never makes operational sense). Bottom Line: This could be a one-off, though that doesn’t seem likely (we know kids like to play with their newest toys). No specific impact – perhaps further encouragement to bring in short lines to help in first/last-mile service as we have seen so successfully in Louisiana (CN and Watco)?
- Beware Sanimax! The ongoing case involving Sanimax claims that Union Pacific is violating the very nebulous, ill-defined “common carrier clause”, which dictates that the railway must provide a reasonable service/price option to any freight that is tendered. Interestingly, usually, this is thought of as a price issue, but here it is a service one. Sanimax wants 5X/week switching and they say UP is offering 3X (and really doing 1-2X in these current conditions). The House recently discussed better defining what those “obligations” are. Bottom line: This could be the most ominous of all of these four – PSR often used price as a carrot/stick to change customer behavior and this could well, if pursued, counter some of that. And, going back to the Chairman’s speech at RailTrends last year, it is clear that the STB wants to pursue this….
Bottom Line/Bottom Line:
Did we think the STB wasn’t an activist? No, we did not; we think they came in with some notions on rail market power (sadly per their purview ignoring other modes) and the rail service meltdown, though part of a global supply chain issue in the face of a once every 100 years 9we hope) Pandemic gave the Board more leeway, support, and power. Each of those four represents a lost skirmish in a bigger war, but for now, the news from the front lines isn’t good….
AND: Are rails being held hostage by their own shareholders (AKA "owners")? I think that is the last war - but not everyone agrees, including, perhaps, some of the rails themselves (see my last report, attached). https://www.trains.com/trn/news-reviews/news-wire/how-wall-street-holds-railroads-hostage-analysis/
Also:
- Not so fast: with high prices and seemingly great opportunities for both shale oil and potash, one would simplistically expect greatly ramped-up production. But in both industries decisions made today would take a year to see on the ground, or in the railcar, results. In the case of the former, the economic history of the last boom and a hard-nosed Street expectation of results (and valuations based on cash flow, not production) is the root cause (and maybe why Continental is trying to go private, saying it is being held back by Street “woke ESG”. Yeah, Wall Street doesn’t care about….money). for the latter, the market conditions may lead to BHP bringing forward their big Jansen project by a year – but that year would still be 2026….
- The IAE sees oil demand outstripping supply in 2023 as well….
- The CSX attempted sale of the Massena Line (essentially Syracuse to Montreal) is now officially dead. The deal started way back in 2018 as part of the Hunter-led restructuring of CSX but was rejected (rather, accepted with conditions found unattractive by the participants) and those conditions were continued after review, so…no deal. CSX says it isn’t going to put the 263 miles back on the market (though they would likely have a long line of bidders). CN also called off its lawsuit versus the Board, which always struck me as at minimum poorly timed….
- Reducing China tariffs would reduce CPI by ~130bps according to the NRF
- FedEx to install PSR? Well, maybe not, but as part of their restructuring they did add Jim Vena to their board; some principles might actually apply as FDX has been criticized for running two separate delivery supply chains – think of the PSR efforts to combine some Im and manifest trains, for example…
- Real estate valuation war – Amazon (now entering the market as a lessor of space) versus Prologis, buying Duke….right now the market likes the AMZN case, knocking some 1/3 of Prologis’ market cap off in the selloff, despite the still sky-high occupancy rates
- ESG is being held to account – raids on some fund managers in the US and Germany, etc – but this is really a “truth-in-advertising” battle, not a sign of the end of the carbon focus that will provide tailwinds to the rails
- BlackRock is starting a new mega-fund focused on “transitioning” old-economy & energy companies to a low-carbon future
- West Virginia warned B/R and several investment banks about pulling their business if they pursue ESG; Texas may come next
- The Senate is joining the SEC to investigate, with the goal of reducing, the power of the big passive funds’ proxy voting power, which could impact future activist campaigns, etc
- Target (and Macy’s and…) inventory issues counter, to some degree, my sense that increased supply chain resiliency and safety stock (ie; increased inventories, multiple channels, redundant capacity – Just in Case/JIC) will be the one strategy to actually emerge from the pandemic. However, I still believe for manufacturing – and freight movement – very well applies
- Russia’s outdated supply chain capability is cited as a major reason for its struggles in the war; the World Bank ranks them at #75 (out of 160) as a nation (the USA is #13). They are barely containerized….
- Inquiring minds want to know- will the Ocean Shipping Reform Act do….anything? It may – may – allow for more backhaul rail business in 40’ containers (ag)
- Reverse MLB? The Norfolk Southern/Union Pacific/Hapag Lloyd partnership plans to bring boxed landed in Norfolk to western destinations, reversing the historic mini-landbridge...
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
anthonybhatch@gmail.com
Twitter @ABHatch18