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Today's rail industry reminds me of baseball, particularly a developing team that has great hope for its younger players in the big leagues or down on the farm. This year will be seen as a bridge year, and it's off to a decent start. There are some near-term trends — and there is hope — emerging from new rail revenue sources as old ones begin to eclipse.
Rails' Q1 results confirmed a step toward the transition to the new rail world that will blossom in the decade's middle years. The industry met or exceeded diminished Street expectations, a pattern that likely is continuing into Q2. Once again, bulk traffic held overall volume down to just over flat while the cyclical components actually grew more than 5 percent. Q1 also confirmed that eastern U.S. carriers took the greatest hit from the restructuring utility coal business; they also were the farthest from North Dakota and the crude-by-rail explosion, which they participated in, but to a much smaller extent than did the western carriers.
Q1 also showed a return to more normal weather (compared with the warmest winter in modern history in 2011-12), and seemed to have more unusual items (tax rates and such) that impacted results by a few pennies. We didn't get as much evidence as I had hoped for the coal stabilization, although several carriers saw it coming, especially in the West, helped by gas finally going over $4/mcf. At some point this summer, a lower plateau will be formed in domestic utility coal. For grain, there's a supply problem thanks to last year's drought; starting in the fall, supply looks to be plentiful.
Pricing remains stable at "rail-inflation plus" (roughly plus-4 percent). Also resurfacing was the old theme that it costs a lot of money to play the railway game. Three railways — CN, Kansas City Southern and Canadian Pacific — increased 2013 capex from record levels announced just three months before! Meanwhile, there were hints (some public) that others would join the parade.
Near term, the rails were cautious. For example, CSX — with 63 percent of its commodity base rated "green" or "positive" (23 percent "neutral," 13 percent "negative") — labeled its Q2 outlook overall as "neutral" (despite the Class I's esteemed CMO's positive comments at the Southeast Association of Rail Shippers' spring meeting!) All rails can point to improved or improving service indices, velocity and fluidity after the winter. Through mid-May, Q2 traffic was modestly better than Q1's, but there should be no dramatic change — just a continuation of the transition trends while some momentum should build in second-half 2013.
Of course, playing .500 ball in the face of the Great Utility Transformation (GUT) and its GUT-wrenching impact on rail volumes and yields is in of itself remarkable. But over the year's course, coal will stabilize, first in the West then everywhere, and perhaps even show some year-over-year growth, depending on gas pricing. Grain could have a terrific end to the calendar year if we get the crop we think we might. Cyclical traffic, led by autos, chemicals and metals, will show above-normal recovery, housing (forest products) also should continue to build momentum. Crude-by-rail growth will be spectacular but still small in the grand scheme, while the higher gas pricing could reignite drilling and the ancillary rail services (sand etc.). Intermodal growth should continue to surprise internationally and grow at two to three times GDP domestically; Union Pacific projects a decent peak at peak season. Already benefitting from the diversity of its great franchise, UP looks to be the first to turn the corner on coal.
For the rail group, there remains a lot of excitement: Mexico, maturation of the new energy markets, massive new service offerings in intermodal, super-cyclical recovery in housing and autos — and down on the farm, re-industrialization in chemicals, fertilizers, autos, aluminum, etc. KCS calls many of those opportunities its "strategic growth areas," and they are up 36 percent so far this year.
So, the old Brooklyn Dodgers lament, "Wait till next year!" can be modified to "wait till next year, but really the year after that and the year after that!"
Tony Hatch is an independent transportation analyst and consultant, and a program consultant for Progressive Railroading's RailTrends® conference.