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Robust Growth Drives Traffic – Belies Trade Tensions

Transportation plays a fundamental role in global market integration. The traffic flows of trading nations affect the structure and location of manufacturing facilities, the frequency of trips, distances travelled, transport modes, and equipment selected.

Aviation Traffic

Global air cargo traffic is up. The heads of air cargo surveyed by IATA remain positive in their outlook for air freight and expect continued growth in volume. They are especially bullish on the outlook for cargo yields. Despite increasing trade tensions, global trade is expected to accelerate in the third quarter of 2018. The DHL Global Trade Barometer, a new and unique indicator, confirms this robustness. Growth dynamics are primarily coming from global air.

Airbus and Boeing support these growth conclusions, each having released their 20-year market forecasts at the Farnborough Air Show on July 17th. The demand numbers for single aisles, widebodies, and freighters are all up, based on passenger traffic growth and driven by expected aircraft retirements. The industry’s demand cycle shows no sign of slowing.

Rail Traffic

Rail traffic is up. Traffic on U.S. Class One carriers for the week ended July 7th totaled 485,193 carloads and intermodal units, up 8.6% from the same week in 2017. Carloads were up 5.4% while intermodal volume was up 12%. Nine of the ten carload commodity groups posted year over year increases, led by petroleum (21.4%), grain (17.7%), and nonmetallic minerals, including frac sand (up 7.1%).

Global Trade

Global trade remains potent even in the face of rising interest rates, oil prices, and potential tariff disruption. Second-quarter GDP increased 4.1% boosted by consumer spending and business investment. Investors and Nations pursue their own best interest and prosperity. Recent U.S. steel tariffs are an example[2]. Steel plays a critical role in building infrastructure and in national defense.

Chinese state-owned enterprises have willingly paid the price of economic inefficiency to accomplish political goals. In free market economies, private industry needs long-term confidence to invest. China’s government subsidies have led to global excess steel capacity, increased exports, depressed world prices and hollowed out other countries’ steel producing industrial bases. As long as it continues China is happy. When America no longer has the productive capacity, China will have won the war without firing a shot.

Some Americans are shocked the U.S. is moving to protect American productive capacity (or that the Administration does not believe in infinite American power). European leaders are shocked their free ride might come to an end. And China is shocked that the apparent self-liquidating superpower of the West might not be so self-liquidating after all.

The advantage lies with knowledgeable players who probe for opportunities, build on successful forays, and have an ability to shift flexibly as circumstances dictate. Success comes with leverage, market position, resources, and understanding. Traffic is robust. Contact RESIDCO today.

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Top Categories Drive Rail Investment Opportunities

Rail freight transportation has grown over time with the expansion of the population and economic activity in the U.S. The markets are dynamic. Freight demand is driven primarily by the geographic distribution of the population and the level of economic activity (consumer spending and online ordering have made UPS the largest single rail customer). The U.S. freight rail system owns and operates more than 138,000 track miles and is the dominant mode by tons and ton-miles for shipments moved between 750 to 2,000 miles. Major categories of rail freight flow include:

Intermodal

Rail intermodal volume in 2017 was a record 13.7 million containers and trailers, accounting for 24% of total revenue for major U.S. railroads (and up 7% in the second quarter of this year compared to the same period last year). Intermodal has become the largest single source of U.S. freight rail revenue. Exports and imports count for about half of the U.S. intermodal traffic. Chicago and Los Angeles/Long Beach are the top U.S. metropolitan areas for intermodal volume. In these long-haul markets, double-stack trains are more cost-efficient and environmentally friendly than transportation by truck.

Coal

Coal volume has declined in recent years, but coal remains a crucial commodity for U.S. energy production (and for the railroads). In 2017 coal accounted for 32.2% of originated tonnage for the Class Ones, far more than any other commodity; 522.5 million tons of coal were loaded, up from 491.7 million tons in 2016 (coal shipments accounted for 14.8% of rail revenues in 2017, behind only intermodal).

Most coal is consumed at power plants with 70% delivered by rail. Different fuels dominate electric generation in different states; for example, in Indiana coal accounts for 72% of electrical power generation, while in California coal accounts for virtually none. The key to coal’s future lies in the demand for electricity. If natural gas exports result in an increase in gas prices, expect coal-based generation to be more competitive.

Crude Oil

Historically, pipelines transported the most crude oil. But crude oil production outpaced growth in pipeline capacity and railroads filled the gap. As crude oil output surged, so did crude oil carloads on U.S. railroads. Rail can serve nearly every refinery in the U.S. giving market participants the flexibility to shift product to different places in response to market needs and pricing opportunities. And, rail infrastructure can be expanded more quickly than pipelines.

Grain

The U.S. is the world’s largest grain producer (an average of 569 million tons per year from 2008 to 2017). As of the end of 2017, the North American grain car fleet consisted of nearly 283,000 railcars. Class One’s originated 1.46 million carloads (5.1% of all carloads, 144.1 million tons, or 8.9% of tonnage). The grain markets are complex and are influenced by weather, soil, consumer demand (both in the U.S. and for export), crop yields, competing grain exporting countries, exchange rates, government policy (think ethanol) and ocean freight rates.

Chemicals

Rail originated 2.1 million carloads of chemicals (7.4% of total carloads, third behind coal and intermodal). The vast majority of chemical traffic includes industrial chemicals, plastics, fertilizers, and other agricultural chemicals. The highest volume chemical carried by U.S. railroads is ethanol. Historically only coal and intermodal have provided more revenue to railroads than chemicals.

Investment in transportation equipment is made when earnings are robust enough to attract the capital needed to pay for it. With multiple opportunities available, you need to be alert to the risks and rewards of your decisions. To do that you’ll need the experience to evaluate current transportation facts.

Identifying alternatives, coping with uncertainty. For Rail Investment Opportunities Call RESIDCO.

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