Greetings and Happy RailTrends (2021) Eve!
So we know that at least one tradition is being restored, but is another one – the holidays – at risk? It is if you believe the hype (not to say hysteria)! Just one headline example comes from the FT: “Supply Chain Turmoil Holding Back Recovery”. The crisis has caused White House intervention (albeit more of a mild, bully-pulpit harangue) and even made it to the late-night talk shows and SNL. We’ll list and discuss the much-discussed causes below, opine on its last impact (de-globalization? Don’t bet on it! Near-shoring? Manana). But first, a list of questions I hope to see answered starting tomorrow (Thursday, November 18) at RailTrends (www.railtrends.com – my brief slide deck is attached).
Questions for RailTrends (perhaps beyond the obvious state-of-the-rail questions, and others from the – LIVE! – studio audience):
- For the AAR’s CEO Ian Jefferies – Can you hold the line against the activist STB (et al)? Can we expect positive regulatory changes that may allow better rail technological deployment? Will supply chain issues aid truck size & weight (TSW) supporters? How positive is the new Infrastructure bill for rails?
- For the Trade Associations: The above, plus specific rail car and CAPEX issues; how IANA sees the supply chain fix, and will we see Canada (TC, CTA, etc) become more interventionist a la their southern peers?
- Oliver Wyman/Adriene Bailey – we’ll wait with anticipation their speech after last year’s knockout on the need for (greatly) improved customer relations (etc)
- Rail Pulse – how is the diplomatic achievement progressing? Is another big partner set to join? (At NARS in September, UNP’s CMO Kenny Rocker – see below! – said they “were on the clock for a decision”). Has the supply chain crisis aided the move to accept R/P?
- Analyst Panel – well, my slides are above, but Larry Gross will have his two bits (worth much more than mere pennies) to the IM/SC issue – where rails fit in along with ships/ports/warehouses/draymen/chassis providers/shippers, etc)
- For the aforementioned UP’s Kenny Rocker – What will UP do to protect its great auto parts/IM franchise from CPKC? In fact, what are they thinking about CPKC overall?
- Short Line Panel – Yes, Virginia (or Chuck) we will still have this despite the pandemic-induced competitive schedule change – and we have excellent representation involving an owner, two CEOs, and an ops head; I suggested this as a conversational parameter:
- What is the market for new SL M&A – where does it come from (Class Ones, Industrials, holding company sales, etc)?
- What is your current operating relationship with your many C1 partners? How does the current “supply chain crisis” factor into short lines, and your short lines?
- How do you see the activist STB (etc) role impact, including unresolved issues with Amtrak, Massena, Pan Am, WC (etc!!)?
- Other – what’s new on the horizon? More industrial/switching (Watco, etc)? A larger role in the IM supply chain (A&P, etc)? More ancillary businesses/add one/etc (RJC etc)? All of the above – and more (GWR, etc)?
- For KCS’ COO John Orr – How will your efforts in PSR aid integration with CP? How much will he miss Sameh Fahmy? And as the KCS rep, what can he say about protectionist/populist issues emerging in Mexico (see “I Told You So” part 2), to wit:
- Problems with AMLO and Mexican Energy Reform, not just the over-zealous inspections that cost KCS manifest business efficiency and led to closed storage (shipper) facilities but also the absurd prosecution of a former political opponent (Anaya) on charges of bribery related to said Energy Reform and the (also) arbitrary shutdown of one such storage facility (KKR’s Montrero)
- The evolving USMCA dispute (also including Canada) on US subsidization of EV auto development, to the exclusion of USMCA plants, a big part of the Mexican growth “story” (Mexican auto production, hampered by the global chip shortage, of course, is also hurt by its reliance on cars over trucks and now on EV development being, maybe, confined to the US homeland)
- John’s presentation will be followed by “A Special Recognition of the (also afore-mentioned) Sameh Fahmy” led by CEO Pat Ottensmeyer and his management team, in what will likely be a rare last public appearance (think – the Beatles on the rooftop). Ask your own questions over cocktails.
- For CSX’ CMO Kevin Boone – who has the truly most powerful intermodal franchise in the East? (I will sneak that into Mr. McClellan during the R/P discussion if I can). How can CSX find employees and also shed the target the STB and the trade associations have placed on it as the “Poster Child for (US) PSR”? Wither the Massena Line, the Pan Am, and the Amtrak dispute, issues about cost & headcount cuts, etc? Will they issue a longer-term growth guideline?
- The STB Commissioner Martin Oberman – I really like Marty. I have a LOT of questions for him, and I suspect the audience will, too….This will be terrific.
- Our 2021 Railroad Innovator of the Year CN CEO JJ Ruest. I don’t know where to begin, here, actually….We certainly didn’t expect this to be a valedictory address (of sorts) when we announced this at the beginning of the year. We will want to know if CN is going to fight or negotiate with TCI (and….Elliott Management?) – Their actions taken so far seem to support both positions. And we will want JJ to expound on his pro-growth career, involving technological (and capacity) investment, innovative M&A to “feed-the-beast”, his development of Prince Rupert and IM in general, etc. Whatever happens in 2022, JJ leaves a legacy of customer-forward, growth-focused management, choosing ROIC of (simple) OR – a legacy to be celebrated not run form….
- New Power Options for Locos – Wabtec’s EVP/CMO Gina Trombley is last but, in this age of ESG and COP26, this will be so far from least. They have innovative projects in power development with BNSF, CN, Carnegie Mellon, etc. This may prove to be the biggest takeaway of all….
- For all of the Class Ones – what the heck is going on with the labor negotiations? Has this endless round dragged on long enough to be advantage unions (the administration, but even more the overall labor shortage, rising wages, and demands – strikes at Deere et al, as well as some increasing questions on safety – see the FRA’s letter to, of all carriers, Norfolk Southern (also note unionized UPS relative outperformance of non-union FedEx!) ….and discuss the traffic issues as it pertains to demand vs performance, because….
October Rail Traffic was pretty lackluster (according to the AAR’s much-ballyhooed RTI). Total North American traffic was down almost 4 (3.8)%, with carloads up 1.8% (14/20 commodities showed increases) and IM down 8.9% (see IANA below). That breakdown was:
- USA total -2.8% - Carloads up 3.8% 15/20), IM – 8% Coal bounced up 8% (ex-coal carloads were up 2.2%). Coal benefitted from the high NatGas prices and shortages helping domestically (the EIA predicts a 22% increase in utility coal use in 2021 – but – bounce! – a 5% decline next year) and the China effect helping exports (look for more margin bonuses at Eastern rails in Q4)
- Canada Total -12% (!), as both carloads (12/20 were up but big declines came from the hammering by autos and grain, which was down 21%, more than 3X the US decline), and IM dropped 12%
- Mexico Total – 7%, breaking down to carloads -8% - - 12/20 (despite Petroleum/Products up 48%) and IM down 5% (which might/should improve now that the teachers’ blockade of Lazaro Cardenas has been lifted)
- Railcars in storage continue to decline
- IANA reports Q3 IM numbers and they ain’t pretty, either – Overall -2.8%, which is Domestic down 6.5% (Trailers for sale or rent, down eleven percent; Containers up 1%
Supply Chain Problems and Causes – a rather Random List based on experience, shipper meetings (NARS, Intermodal EXPO), calls, and the news – see if you can spot the rail-caused versus the rail-influenced versus….all else:
- The Pandemic – a boulder in the global economic puddle
- Labor shortages, pandemic or not – ships/ports/rails/dray/truckers/warehouses/shippers – not to mention Vietnamese shoemakers, etc
- The specific US driver shortage – an evergreen but now acute problem (question – does this accelerate AV? TSW?)
- The specific port issue – up to 100 off of Normandy, er, LA/LB but issues at Hong Kong, Savannah, Singapore, Shenzhen, etc
- Brexit
- Chinese (port of origin) quarantines
- Lingering Impact of the Trade War
- Strikes & Blockades
- Differing labor rules (Asian port productivity versus LALB, for example)
- Unsynchronized global economic recoveries leading to unbalanced trade lanes
- Weather spikes (the unusual becoming normal) for example typhoons, Ida, Polar Vortices, wildfires, now Vancouver mudslides
- The Suez incident
- Asset shortages (containers, especially in the US – chassis)
- Power Shortages (China et al)
- Parts Shortages (this is an effect AND a cause)
- Inflation (ditto)
- JIT
- Low inventory levels (related to JIT of course) recent I/s ratio of ~1.1 compares to summer 2019 1.45
- PSR- and in some ways PSR allowed rails to weather the shark’s tooth traffic pattern of 2020
- Ecommerce/Next-day expectations
- Unanticipated and lingering demand
- Shift between services to goods purchased (services 2019 69% of US GDP; by August 2021 down to 66%)
- Odd demand changes (remember the great TP-shortage?)
- Who’s complained about the SCC (Supply Chain Crisis) – Everyone! Including….Whirlpool Bed Bath & Beyond, the entire advertising industry, diaper manufacturing, Tesla (boo!), Nike, Costco, Target, Home Depot, Samsung, H&M, P&G, the Houston Astros (I just don’t like ‘em, still) – and UPS, Walmart and FedEx joined Biden’s effort
So, we’re having RailTrends 2021 – will we have a holiday season in 2021? Well, international IM numbers were up (a bit) on rails, there appears to be some light at the end of the long congested tunnel (maybe not car lights), retail sales beat expectations in November (pre0buying live B2B did during the trade wars? Or has retail managed to condition shoppers to spread out the peak?); meanwhile, the NRF says November/December Xmas sales will be up some 8-11%. Sounds pretty jingle-bellsy to me….Talk to you after RT!
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Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18