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Freight-rail traffic volumes have been shockingly weak. Why? Six basic reasons:
1. The economy. It's still throwing off mixed signals — weakness in manufacturing (note autos, steel, housing, etc.), but we're seeing “good jobs numbers.” Most observers see a slowdown, but not as bad as the usually correlating rail loadings would suggest.
2. Trade. Yes, the recent threat to add tariffs to Mexican trade (in violation of NAFTA) was removed, for now, and there is a truce with China (note: that simply removed the immediate threat of additional tariffs). But China has yet to resume purchasing U.S. ag (soybean) products ... see below. If nothing else, trade-by-tweet has severely disrupted the market. The dollar, meanwhile, was up 6 percent in Q219, which used to be good for international intermodal, but ...
• China’s GDP growth for Q2 of 6.2 percent is both suspect and the lowest level in decades; U.S. imports from the PRC are down 12 percent YTD (May). There is a lot of speculation about re-engineered supply chains away from China, but the key issue is ... to where? The answer seems to be — elsewhere in Asia, and to Mexico! But not re-shored, notes The Economist: “There is little evidence of U.S. manufacturing bringing production from China (back) to the U.S.”
• Mexico — See the imbroglio surrounding the resignation of Andres Manuel Lopez Obrador's finance minister (see also BloombergBusinessWeek on AMLO's $8B (self-estimated) vanity project, the Mayan Train. Meanwhile, the economy may be tilting toward a recession [although the biggest YTD gain in exports to the United States was Mexico (+$10B), while China was -$25B].
• Trade overall continues to be worrisome for railroads (recall that well over half of the rail business is trade dependent or related). The OECD estimated global trade growth of 2.1 percent for this year; in 2017, it was almost 6 percent. McKinsey notes that 16 of its 17 “major industries” worldwide have contracted their supply chain. Protectionism is on the rise, of course, but the economy is slowing, threats (often IT-related) are increasing, ocean shipping getting more complicated (e.g., the International Maritime Organization global sulphur limit in 2020) and erratic (slow steaming).
3. Weather. It is the wettest year ever in the United States and the Midwest is still drying out (estimated economic losses: $12.5B, the worst of all-time) and the flooding disruptions still impacted Q219. In addition, the water-logged fields are leading to poor crop outlooks (the USDA reduced the corn production numbers by 8 percent — from May). Canadian Pacific noted in its Q2 call the unprecedentedly long duration of the flood problems.
4. PSR. The operating changes have two impacts on volumes, plus two stages:
a. The first impact is the hard-to-quantify volume share loss as (some) shippers try to avoid playing in the revolutionary stages of the precision scheduled railroading story; this may be less pronounced than it was in recent history since essentially everybody is doing it (as Matt Rose warned), but CSX is ahead of Norfolk Southern and BNSF isn’t playing (I can hear the chorus — “yet!!”). This share historically returns, in spades, as the metrics improve.
b. The second impact is planned volume loss (aka de-marketing). We haven’t heard much about this, partially given the heightened STB focus on the process (after CSX) — but we do know that CSX planned a second ~7 percent volume reduction this year in intermodal (roughly its current run rate, by the way — are they therefore running flat without the planned lane eliminations, etc.?)
c. The first stage of PSR is creative destruction: lane closures, using assessorial charges to “change customer behavior”, cuts in personnel, etc.
d. The second stage of PSR — "We the North!" — is (to quote CP) the “pivot to growth”!
5. Trucking competitiveness. After a year (2018) of extreme capacity shortage, the world has turned upside down — with one immediate effect of shrinking the historic gap between truck and rail/intermodal pricing. This will not last forever.
6. Tough comparisons. Mid-single digit growth in Q2 and Q32018, fueled of course and in part by ... the tax cut.
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