Part 2: Large freight railroads will rely on crude oil, domestic intermodal and grain shipments to offset weak coal and international container traffic in 2014
— by Jeff Stagl, Managing Editor
It's impossible to predict the future with a high degree of certainty, but Class I chief executive officers are fairly certain a couple of sectors will remain explosive business-growth candidates in 2014.
Crude oil and domestic intermodal essentially are can't misses, they believe. In addition, frac sand and other drilling materials, automotive and grain are projected to be strong contributors, according to responses six CEOs provided via email to questions posed by Progressive Railroading about the coming year, and comments from BNSF Railway Co.'s Matt Rose during a Nov. 19 interview in Fort Worth, Texas.
The CEOs also agree on next year's top growth-inhibited sector: coal. Both domestic and export coal volumes are forecasted to remain weak because of low natural gas prices and sluggish global demand. Other sectors that likely will continue to lag include international intermodal, due to cautious consumer spending; lumber, due to a still-lackluster U.S. housing market; and paper products, due to dwindling newsprint demand.
Overall, 2014 likely will be an up-and-down year, similar to most years since the recession began to take hold in 2007. Yet there likely will be more ups than downs, the CEOs believe. They're encouraged about business-growth potential both in the coming year and subsequent years, given the long-term promise of crude-by-rail business and breakneck pace of domestic intermodal volume growth.
The CEOs also expressed optimism about several ongoing developments as the new year dawns. Operating ratios are expected to keep dropping as more efficiency gains and cost controls take hold, and capital spending is projected to keep rising. Budgets in 2014 likely will be nearly equal to or higher than the elevated capex levels of the past few years.
"We've pumped $21 billion of capital investment into our infrastructure over the last seven years [to] improve our safety and reliability. And we're not done," said Union Pacific Railroad President and CEO Jack Koraleski. "In April, we'll open a new facility in Santa Teresa, N.M., that will bolster the fluidity of train movements in the region. Union Pacific is investing more than $400 million in the project."
Yet, a few question marks are toning down what might have been a more upbeat vibe about 2014 prospects. Potential regulatory changes could impact operations or competition, and the slow-go economy could hamper business-growth efforts.
"Our biggest concern is the sustainability of the economic recovery. We have seen encouraging growth in some products we transport, but we're still not back to pre-recession levels elsewhere," said Norfolk Southern Corp. Chairman and CEO Wick Moorman. "We need an economic and policy environment more conducive to growth."
CSX Corp. Chairman, President and CEO Michael Ward is slightly more bullish about the economy: "Data supports our positive outlook going forward. Many of the indices that we follow point to continued growth, and manufacturing — aided in part by cheaper energy — has the potential to grow in the U.S."
But he concurs with Moorman that any "excessive" regulatory actions next year — such as competitive switching rule revisions under consideration by the Surface Transportation Board and potentially onerous federal safety rules stemming from two major crude-by rail accidents in 2013's latter half — would have a dampening effect on the economy and growth.
"Can you imagine a company willing to continue to invest billions in tracks, terminals, locomotives and rail cars if regulation will require that we make these assets available to competitors?" Ward asked. "Or can you imagine hiring thousands of new workers if our markets will not be sufficiently profitable to support re-investment? We acknowledge the need for balanced regulation."
Kansas City Southern's economic forecast calls for steady yet slow growth for most of the U.S. industries the Class I serves, said President and CEO David Starling. In Mexico, a bit of economic acceleration is anticipated in 2014 after slower growth in 2013, he said.
Higher volumes likely will be tallied in Mexico's automotive "ecosystem," which includes finished vehicles and auto parts and components, said Starling. KCS expects to serve several new auto plants next year. In addition, intermodal business should be healthy in Mexico as the Class I continues to divert cross-border truck traffic.
In the United States, strength in crude and frac sand volumes should help offset weak coal business, given that a couple of power plants the railroad serves still struggle to compete with low natural-gas prices, said Starling. And as the Midwest continues to recover from one of the worst droughts in U.S. history, KCS' export grain traffic likely will be better in 2014's first half.
"In order to capitalize on the growth opportunities we see in front of us, we need to maintain strong operational metrics and strategically invest in our franchise," said Starling.
Ditto for BNSF, said Chairman and CEO Rose. The Class I's crude business is forecasted to reach 1 million barrels a day sometime in 2014 compared with a projected 700,000 barrels by 2013's end, with two-thirds of it generated in the Bakken Shale.
So, BNSF plans to spend $450 million to $500 million next year on capacity expansion projects along its northern tier, predominantly in North Dakota, Montana and Washington, to accommodate more crude shipments. The work also would address increasing heavy crude traffic heading to the U.S. Gulf Coast from the Canadian oil sands and growing agricultural products demand in the region, said Rose.
"No doubt crude is a growth story. So there will be a humongous capacity addition next year," he said. "It will be the largest capacity expansion year ever in our history."
Total capital spending also will increase "significantly" next year to an all-time high, besting 2013's record $4.3 billion, said Rose.
And, BNSF plans to address capacity for domestic intermodal, which is growing well in excess of the Gross Domestic Product and figures to continue doing so, he said.
Crude and intermodal will be key growth drivers for CN, as well. Oil and commodities tied to North American oil and gas development — including frac sand and drilling pipe — will be strong, and intermodal will benefit from the recovering economy, truck-to-rail conversions and market share gains, said President and CEO Claude Mongeau.
"An improving U.S. housing market will also support growth in intermodal as well as various other commodities, including steel, aluminum, plastics, cement, roofing and other construction materials," said Mongeau. "CN has the largest forest products franchise in the industry, and we [also] expect lumber and panel shipments to benefit from the continued recovery in the U.S. housing market."
In addition, automotive traffic will grow as vehicle sales rise in Canada and the United States, and market shares shift. Grain traffic will increase in both nations, with the Canadian crop expected to near an all-time record, he said.
For NS, intermodal business remains a bright spot as the railroad completes new facilities and launches new services. Last month, the railroad introduced a service in South Carolina between an inland port in Greer and the Port of Charleston that will convert highway shipments for BMW and other customers, said NS' Moorman. As of press time, NS also planned to open a new intermodal terminal Dec. 9 in Charlotte, N.C. — the last of four new facilities along the Class I's New Jersey-to-Louisiana Crescent Corridor.
"Highway conversion and international growth both represent continued opportunity ahead for our intermodal network," said Moorman.
NS also is counting on natural gas liquids, plastics, frac sand and domestic steel to help drive traffic next year.
Several of the same sectors will help propel business growth at UP. For example, domestic intermodal traffic continues to rise steadily — to the point the Class I is on pace for a record domestic intermodal year in 2013 — and that escalation should continue, said UP's Koraleski.
"We're giving customers flexibility and market reach by offering the most domestic intermodal lanes in our industry," he said.
Intermodal business also is strong in Mexico, said Koraleski. UP recently introduced an intermodal service between Chicago and Monterrey, Mexico, with Ferrocarril Mexicano S.A. de C.V.
"Foreign direct investment in Mexico continues to present opportunities for Union Pacific, which is the only railroad with access to all six Mexican rail gateways," said Koraleski.
Domestic intermodal is flourishing for Canadian Pacific, too. Service improvements have helped drive up volumes and should continue to do so, said CEO E. Hunter Harrison.
"Since summer 2012, we've been working to rethink our intermodal network in an effort to capture domestic intermodal business that's currently moving on rubber tires," he said.
CP previously shortened transit times in the Vancouver-Chicago, Vancouver-Toronto and Toronto-Calgary corridors, and in the fourth quarter shaved the Vancouver-Calgary corridor's transit time to 10.5 hours.
CP also anticipates traffic gains in industrial products, which has registered strong growth for several years, and grain, said Harrison.
"We had a record grain harvest in Canada in 2013. We expect to continue hauling that grain through the winter, giving us a good start for 2014," he said.
A business mix that increasingly favors intermodal and merchandise movements is helping offset soft domestic and export coal markets, says CSX's Ward.
While the evolving energy market has opened up new crude-oil reserves and a valuable traffic source, the broadened availability of natural gas, increased regulation and high utility stockpiles have significantly diminished domestic coal demand, he said.
So, CSX expects to continue leveraging its intermodal and merchandise businesses, which now make up more than 80 percent of the Class I's volume and are projected to grow at a rate above the general economy, said Ward.
CSX continues to add capacity for intermodal, which accounts for 40 percent of total volume. The Class I is investing in terminal capacity and clearances to support double-stack traffic in key lanes, including the National Gateway between mid-Atlantic ports and Midwestern markets. When the gateway is completed in 2015 — the first phase was capped off in September — the percentage of intermodal traffic moving in double-stack lanes will reach the mid-90s, said Ward.
In addition to business growth, the CEOs cited a few other objectives for 2014. Among them:
Although the Class Is don't know precisely when or where Mother Nature will strike, which markets might drastically turn or how government regulations might impact business next year, uncertainty needs to be incorporated into any business plan — an approach that's no different for 2014, the CEOs say. The key is to turn uncertainty on its ear.
"We don't sit back and let things happen to us. We're learning to be more agile on our network and with our workforce in preparation for traffic shifts," says UP's Koraleski. "We're getting pretty good at these things, but there is still a lot more opportunity out there."
AAR Chief: 'Renaissance' to Continue in 2014
Next year will bring "a continuation of the railroad renaissance" for freight roads as a result of slow but steady economic growth, predicts Ed Hamberger, president and chief executive officer of the Association of American Railroads (AAR).
He also believes the railroad industry's hiring trend will be ongoing, as railroads concentrate on replacing the thousands of workers who are reaching retirement eligibility. Earlier this year, the AAR projected freight railroads would hire more than 11,000 people in 2013. Although the AAR hasn't yet made its employment projection for 2014, "I've heard no indications that the hiring will abate in any way," says Hamberger, adding that association members are working closely with the Pentagon to try to help returning veterans find jobs.
Meanwhile, potential government regulation changes, rail safety issues and ongoing implementation of positive train control will be crucial topics of interest to AAR and its members, he says.
On the regulatory side, Hamberger expects additional rail safety regulations will be forthcoming in reaction to the July 6 derailment of a crude-oil train in Lac-Mégantic, Quebec, which killed 47 people. Among them: A Federal Railroad Administration emergency order that followed the Lac-Mégantic accident and relates to train securement requirements likely will be made permanent, he says.
On the legislative front, proposals to increase truck size and weight restrictions remain top of mind. The U.S. Department of Transportation is studying the impact heavier and longer trucks could have on the condition of the nation's roads. The AAR has opposed truck-industry supporters' efforts to change truck regs.
"I expect the proponents of longer and heavier trucks would avail themselves of whatever markup [of transportation legislation] happens to try to raise the level of truck lengths and weight," says Hamberger.
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