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October 2010

Rail News: Intermodal

Has intermodal container business truly turned the corner?

by Desiree J. Hanford

In the second quarter, Class Is registered robust international intermodal volume growth. Large roads expect the traffic growth — which in some cases reached double-digit percentage gains — to trickle into the fourth quarter. But exactly how much longer the uptick will continue and how strong it'll be is unclear, although some Class I intermodal executives expect it to carry over at least until year's end. Making a volume forecast with a high degree of conviction is a tricky proposition these days given the still-shaky economy and year-over-year traffic comparisons that will toughen as the year progresses. "How long it will continue is the question of the day," says Paul Borseth, assistant vice president of international intermodal for Union Pacific Railroad, which in the first half posted a 17 percent year-over-year gain in international volume. "There have been a lot of encouraging signs, and a lot of concerning signs."

Here's one of the encouraging variety: In the second quarter, international container volume increased 20.9 percent to 1.8 million units compared with 1.5 million units in second-quarter 2009, according to Intermodal Association of North America (IANA) statistics. For the first time in nearly four years, quarterly international container growth bested domestic container growth, which rose 16.4 percent.

However, volumes posted in second-quarter 2009 weren't that hard to beat.

"We had really good growth in the second quarter, but it was compared to an extremely weak 2009," says Borseth.

Adds CSXT Intermodal President William Clement: "You need to consider the drop-off in volumes in 2009 and the [second-quarter gain] being more of a restoration of those volumes."

In addition, second-quarter 2010 volumes fell short of second-quarter 2008 levels, which were just shy of 2 million units. Container volume in 2Q declined 10.5 percent compared with second-quarter 2008's level, according to IANA.

"If you look at 2008, the last time everyone felt good about the numbers, international is down," says Tom Malloy, IANA's vice president of member services and communications.

Taking Stock

Whichever way international container growth is measured, Class Is are encouraged that volumes are trending up instead of down. Container volume still was booming for U.S. railroads last month. During the week ending Sept. 25, they handled an all-time weekly record of 206,535 containers, according to the Association of American Railroads.

But it likely will take some time, and perhaps a very long time, before international volumes return to pre-recession levels. The timeframe could be more condensed if consumers and retailers displayed more confidence in the economy. However, recent inventory restocking activity shows retailers aren't exhibiting a lot of faith these days.

Having addressed inventory gluts in the past and worried that they again would have products sitting on shelves and in warehouses, retailers were cautious not to order too many items too quickly when the economy weakened. But by late 2009, they determined it was necessary to restock thin inventories as consumers began to increase spending. Now, retailers are being careful not to have too many items on hand.

"The question is: How much inventory restocking will there be?" UP's Borseth asks. "And how much will consumers open their pocketbooks?"

As international container volume picked up earlier this year, there was talk about whether inventory replenishment was the driver, says Steve Branscum, group vice president of consumer products for BNSF Railway Co., which boosted container volume (international and domestic) 5.4 percent year over year in the first half, and as of Sept. 18, registered a 19.6 percent volume gain in the third quarter.

That discussion continued, but then disappeared, with the conventional wisdom being that inventories must have been replenished to the demand levels that retailers needed, he says.

"[But] if you look at major retailers' inventory levels, which are big drivers of container imports, that level is still low versus historic standards," Branscum says. "Inventory has been building, but it's not back to historic levels."

Up-and-Down Days

Major retailers' inventory averaged between 46 and 47 days in 2004 and 2005, according to Branscum. The average dropped to 44 days from about 2005's end through 2008. Inventories then rose to about 47 days as the economy sputtered, but fell back to 44 days during 2009 as retailers became cautious, Branscum says.

Inventory levels continued to decline early this year to about a 40-day average, but rose to about 41 days in late spring and summer. Inventories continue to hover at about 41 days, well shy of the retail industry's historical average of 44 days, Branscum says.

"So while some people thought [inventory replenishment] had ridden its course, that doesn't appear to be true," he says. "And if you look at the trajectory of when it might get to that [historic] level, it could be the middle of next year, or slightly beyond."

Various economic indicators, such as the continued high unemployment rate and sluggish home sales, need to be factored in to help determine when retailers will continue to replenish inventories, Class I intermodal execs say.

All in all, it's difficult to determine why international container volume has been as strong as it has, inventory restocking notwithstanding, says Branscum, who monitors consumer spending trends, consumer confidence levels, auto and housing sales, and employment rates to gauge their effects on intermodal traffic.

"It's strong versus last year, it's been strong for quite some time and it's not letting up," he says. "In fact, it's increasing a bit, and that goes against the macroeconomic numbers. Nothing that economists generally look at seems to totally explain why this is happening."

Citing a "mixed bag" of indicators, UP's Borseth agrees that it's difficult to use certain indices or measures to gauge the economy and its traffic impacts.

Such varying indicators include the U.S. gross domestic product, which grew at an annualized seasonally adjusted rate of 1.6 percent in the second quarter after rising 3.7 percent in the first quarter, according to the Bureau of Economic Analysis. In addition, Federal Reserve figures show industrial production rose 0.1 percent in April, May and June, while the Commerce Department statistics show retail sales declined in April, rose in May and then slid again in June. Sales of new and existing homes remained weak in the second quarter, but auto purchases increased.

"We're in a camp that says we'll see a slow economic recovery," says Borseth.

When it comes to indicators, CSXT Intermodal's Clement monitors the gross domestic product, industrial production and import-export forecasts, which "really reflect the general economy," he says.

The Class I expects its international intermodal business — which accounted for 45 percent of overall intermodal business in the second quarter — to remain healthy this year if the U.S. economy continues to grow between 1 percent and 2 percent, says Clement.

CSXT Intermodal's volume has soared to above-2008 levels. In the first half, international traffic increased more than 24 percent vs. first-half 2009 volume, and volume might grow at about half that level the remainder of the year, Clement says.

Volume Control

Kansas City Southern expects the higher business levels it registered in the second quarter to be sustainable through 2010, says Patrick Ottensmeyer, executive vice president of sales and marketing. However, there was a strong traffic rebound in 2009's third and fourth quarters, so year-over-year growth rates will start to soften as comparison figures become more challenging, he says. Although growth rates won't be as strong as they were in the first half, intermodal volumes will continue to increase, Ottensmeyer believes.

"Generally, we're expecting growth in our intermodal business, including international, but a lot of it is dependent on the economy," he says. "Will it continue to be fairly stable, will global trade continue at current levels, or will we see a double dip? Our outlook is that we won't see another recession or double dip, but that growth rates will decline year over year because in the back half of 2009, the economy was recovering."

The relative strength of intermodal volumes in 2009's last two quarters and 2010's first two quarters also will impact Canadian Pacific's year-over-year traffic gains. Most segments of merchandise and intermodal likely will register slower growth in the second half vs. the first half as year-over-year comparisons begin to get tougher, said Senior Vice President of Marketing and Sales and Chief Marketing Officer Jane O'Hagan during the Class I's second-quarter earnings conference on July 28.

The Class I hasn't updated its traffic outlook since the conference, CP officials said last month.

While some Class Is are a tad bearish about the near term, ocean carriers are quite bullish after suffering through a trying 2009. They expect full ships and book orders into October — good news for container-volume prospects, Class I intermodal execs say.

"The steamship lines are reported to have lost $20 billion in 2009 as an industry, and many are saying that they're making money now," says Jeff Heller, vice president of international intermodal for Norfolk Southern Railway, which registered a 10 percent year-over-year international volume gain in the second quarter. "Whether the economy recovers now or in 2011, we're optimistic that intermodal will remain strong."

UP's customers are noting "fairly good signs" in their ship bookings at least into October, but then the business outlook is a bit hazy, says Borseth.

"My guess is that they're feeling a little uncertain because they can only see so far out on their bookings, and that's the only concrete sign as to whether their vessels will be full," he says.

The retail restocking question is just as big for ocean carriers as it is for Class Is, Borseth says.

"It's just uncertain how long it will last," he says.

Growth Contained

It's also unclear how long it will take for a lingering container shortage to run its course. The shortage was caused by shipping lines that opted not to replace old containers when demand softened in first-half 2008. Plants that produced containers closed or were idled and many never re-opened, according to CN.

But Class I intermodal execs don't believe the shortage will slow or halt international intermodal traffic growth. Some large roads are taking matters into their own hands.

UP earlier this year increased its capital spending by $100 million in part to acquire 7,000 containers. In addition, CN continues to work closely with its ocean carrier customers to ensure that equipment is moving fluidly over the Class I's network, including the return of large numbers of empty containers to West Coast ports, CN officials said in an email.

"CN [also] is doing everything possible to eliminate the inland dwell time of customers' containers," they said.

The Short and Long of It

Moreover, some ocean carriers are trying to better utilize their containers to overcome the shortage.

"I think it's going to be a fairly short-lived thing," says BNSF's Branscum.

With lingering uncertainty about retail restocking activity and economic strengthening, Class I intermodal execs are hoping this year's international container volume growth is anything but short lived.

An independent rail industry analyst is confident that it won't be.

"Is it an early 'peak season' or a general strong rebound in trade? My chips are on the latter," said Tony Hatch in a column posted on Sept. 13.

Desiree J. Hanford is a Chicago-based free-lance writer.


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