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Rail News Home Rail Industry Trends

June 2013

Rail News: Rail Industry Trends

Forest products rail traffic will take a turn for the better this year if lumber demand remains strong


By Jeff Stagl, Managing Editor

Seven years ago, Class Is' forest products traffic was at high ebb. U.S. housing starts soared to a record 2.2 million units, propelling lumber demand, and millions of newspapers and magazines were printed, spurring graphic paper usage.

Since lumber and paper generate the vast majority of Class Is' forest products business, those trends were favorable in 2006.

But three years later, U.S. housing starts tumbled to about 500,000 units, and a number of newspapers and magazines went out of business. Railroads since have waited for trends to swing back in their favor.

It appears the pendulum is on the way back up for lumber. U.S. housing starts are increasing this year due to low mortgage rates, home prices and inventories. In addition, lumber exports to Asia — predominantly China — are rising to accommodate busy home and commercial construction markets.

As a result, U.S. railroads' forest products traffic through 2013's first 19 weeks rose 2.7 percent to 207,995 units compared with volume from the same 2012 period, according to Association of American Railroads (AAR) data. Lumber volume in the period, which ended May 11, climbed more than 12 percent.

Among the Class Is, several reported forest products volume and/or revenue gains in the first quarter largely because of higher lumber consumption.

For example, CN reported a 1 percent dip in carloads, but a 2 percent gain in revenue primarily due to the U.S. housing rebound and a 2 percent increase in exported lumber.

"We're seeing a gradual recovery. U.S. housing starts are projected to hit 950,000 in 2013," says Doug MacDonald, CN's vice president of industrial products. "They appear to be more sustainable at about 1.4 million. But we're not going back to the peak of 2 million-plus in 2006."

Norfolk Southern Corp.'s Scott McGregor concurs.

"We are cautiously optimistic about the housing market," says the Class I's group VP of paper, clay and forest products. "I think we'll see lumber grow at a moderate pace, and keep the peaks and valleys out."

However, paper traffic figures to remain sluggish despite some growth in pulpboard that's used to produce boxes, milk cartons and grocery store bags.

U.S. and Canadian railroads' paper volume was down about 1 percent and 3 percent, respectively, through the year's first 19 weeks, AAR data shows.

"Graphic paper has struggled and I think it will continue to struggle a bit because of the communication and electronic age. Catalogs do well, but newspapers aren't doing so well," says McGregor.

The bottom line for Class Is' forest products business: Carloads and revenue won't be stellar for the remainder of 2013, but likely will exceed levels from the past five years.

More modest than boastful

That's the general take at BNSF Railway Co. It's encouraging that housing starts are posting growth this year, even though it's modest growth from a fairly low base, says BNSF VP of Industrial Products John Miller.

"This isn't close to a full recovery, but numbers at least are up from 2009, 2010 and 2011," he says.

Overall, BNSF's paper business has at least stabilized after declining for some time while lumber business is slightly increasing, says Miller. The boost from lumber exports to China is important to note, he adds.

Since lumber traffic is picking up, BNSF has taken centerbeam cars out of storage to accommodate demand. But that task was made difficult in the first quarter by a series of bad snowstorms, says Miller, adding that most stored centerbeams now are back in service.

CN has pulled centerbeams from storage, too, and only a few hundred remain mothballed, says MacDonald. A lot of lumber is heading to healthier housing markets in Texas and the U.S. Southeast, while more Canadian lumber is heading to Asia, he says.

In the export lumber sector, a trend has emerged. The commodity now is mostly moved in containers that can be shuttled back and forth instead of via break bulk, says MacDonald. The containers are shipped from Port Metro Vancouver in British Columbia or from loadout facilities in Prince George, B.C., Edmonton, Alberta, or Saskatoon, Saskatchewan.

On the paper side of CN's forest products equation, business is down about 10 percent and likely will remain at that level through 2013, says MacDonald.

Nonetheless, CN acquired 1,000 60-foot, double-door box (TBOX) cars last year and plans to acquire 600 more this year to comply with a North American shift from 50-foot, single-door box cars to the high-capacity TBOX cars. In addition to transporting paper rolls, the double-door cars can be used to move such products as aluminum ingots and metals.

A problematic pattern

However, the pattern employed by paper shippers to load 58-inch rolls in the TBOX cars isn't as effective as they would prefer to prevent damage and promote more efficient unloading. There currently are two recognized loading patterns, and CN continues to work with customers in the United States and Canada to develop more effective ones, says MacDonald.

"Customers want to load different sizes of rolls in the cars," he says. "And the cars can be a problem for receivers in terms of the double doors and the loading pattern."

Paper companies find it problematic that the TBOX cars, which are considered the industry's car of the future, have no standardized loading pattern, said Glen Courtwright, Georgia-Pacific Corp.'s director of strategic operations, during a presentation April 29 at the American Short Line and Regional Railroad Association's (ASLRRA) centennial convention in Atlanta. There are initiatives under way by the AAR and forest products consultants to determine optimal loading patterns, he said.

Moreover, there's something that's been even more challenging for paper shippers over the past 18 months: a shortage of box cars, said Courtwright.

"How can you run out of cars in a down market?" he asked. "There have been more retirements than new builds."

Car builders are producing more tank cars and frac sand hoppers for crude oil, but are not building a lot of box cars, said Courtwright.

"The railroads are running well, but I'm not sure it makes up for the shortages of cars," he said.

Fleeting moments

Union Pacific Railroad is trying to ensure it has enough rail cars to meet shippers' demand. The Class I acquired hundreds of TBOX cars in the fourth quarter and now has more than 13,100 box cars in its entire fleet, said Susan Brown, UP's senior business director of forest products, during a presentation April 29 at the ASLRRA convention.

The railroad also has taken hundreds of centerbeams out of storage, upgraded cars and assumed leases to accommodate lumber traffic.

UP is averaging 171,000 forest products loads per week, which is below the 2006 peak but higher than the weekly average of the past several years, said Brown.

While overall housing starts are up largely because of pent-up demand given the five-year trough, multi-family housing starts are increasing, as well, she said.

However, multi-family housing has a tempered effect on lumber demand because multi-family buildings use about 50 percent less lumber than single-family structures, says NS' McGregor. In addition, more steel building products are used in multi-family buildings, which tend to feature units with shared walls, he adds.

In terms of single-family starts, regionality is key because there are growth variances, says Doug McNeil, NS' director of marketing for paper, clay and forest products.

"Toward the end of 2012, there was a lot of growth in the West, and now we see the South and Southeast trying to catch up," he says.

In the paper sector, NS — like the other Class Is — is acquiring TBOX cars despite a downturn in graphic paper business. Last year, NS sponsored the acquisition of 250 TBOX cars for the national pool managed by TTX Co.

"We believe there are enough cars in the national pool to meet needs," says McGregor.

Paper-thin margin

The paper downtick was the primary reason Kansas City Southern's forest products revenue was flat and volume was down 6 percent in the first quarter. Nearly 85 percent of the revenue is related to paper, containerboard and non-construction volumes, and paper business variations are the main impacts to revenue changes, KCS officials said in an email.

Nonetheless, the paper portion of the railroad's forest products business is expected to be generally stable through the remainder of 2013. In addition, two mills on the Class I's system have announced plans to restart later this year, which will help to boost lumber volumes, KCS officials said.

"During the housing downturn, many lumber mills in the Southeast closed down," they said. "Many [lumber] buyers are limiting inventories and ordering just in time, which tends to favor truck shipments. Mills will need to reopen, expand operations and develop large enough markets/orders [to] warrant shipment by rail."

Housing hopes aside, the Class I's largest forest products concern is the paper industry, and "the strong competition faced by those in the industry and competition among the transportation suppliers to the paper mills," KCS officials said, adding that good service can help offset the issue.

Overall, as the economy slowly recovers, KCS officials are optimistic about the industry's prospects for providing packaging materials for consumer goods, as well as lumber and plywood for the improving housing market, they said.

Whether there will be enough housing starts by year's end to meet Class Is' expectations for a lumber-driven business gain remains to be seen. At the very least, their forest products volume figures to receive a boost from a slightly healthier U.S. housing market.

"You always hope to see a return to 2 million units," says BNSF's Miller. "But housing starts are at least trending at 950,000 — or maybe to 1 million, if you're very optimistic."


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