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Comeback Economy— Invest Productively

Dr. Anthony Fauci has predicted, “it will be open season for vaccinations in the U.S. by April”.  Supply boosts are expected to allow most people to get shots to protect against COVID-19 by then.  Herd immunity could be achieved by late summer.  With continuing low-interest rates and Fiscal stimulus provided by the CARES act (passed March 2020, authorizing $2.2 trillion), the 2020 COVID Economic Relief bill (signed December 2020, which authorized an additional $900 billion in spending), a possible third stimulus of $1.9 trillion, and a yet to be defined bipartisan ‘infrastructure’ spending package the economy is set for a comeback. As the vaccines roll out significant pent-up demand, caused by the pandemic lockdowns, will lead to a recovery in the second half of 2021.  

Rail traffic is often used as a measure of broad economic activity. This January ten out of twenty carload categories had higher volumes than in January 2020. Intermodal volume and carloads of chemicals (on a weekly average basis) were higher than ever before. Chemical carloads were up 4.4% year over year in January, their biggest percentage gain in 10 months.  Intermodal containers and trailers set new all-time records, up 12.1% over January 2020 (the fourth straight double-digit monthly percentage gain). Volumes are up at West Coast ports (Long Beach, Los Angeles, Oakland, and Seattle/Tacoma) and East Coast ports (Savannah, Virginia, and Charleston). Carloads of grain were higher than any month since October 2007 (the January year over year carload gain was 40%, the largest year over year monthly percentage gain for grain for U.S. railroads on record). And carloads of primary metal products, lumber, paper, and iron and steel scrap were higher than they’ve been since the pandemic began. The traffic category which most closely correlates with GDP is “industrial products” which is an aggregate of seven different carload categories representing a cross-section of U.S. industry1. Iron and steel scrap were up 5%, the most for any month since January 2015. U.S. plus Canadian carloads of lumber were up 8.9%, the most for any month since May 2019, and the fifth straight year-over-year monthly increase.  

Over 90% of U.S. coal consumption is for electricity generation, and coal’s share of electricity generation (at 19%) remains behind natural gas (41%) and nuclear (20%). Equipment oversupply continues in both the Rail (24% of the fleet in storage, 396,867 railcars) and Aviation markets (a significant fleet surplus is expected through late 2022). International passenger aviation will wait for travel restrictions to be lifted. Airfreight demand is so strong experts predict the market will be back to pre-pandemic levels by the end of March.  

With the highest probability scenarios priced in, knowledgeable investors anticipate unforeseen circumstances. As the economy recovers, fleet plans will change and aircraft that have been written down will again generate cash. Opportunities lie in those out of favor assets that offer strategic returns. A focused asset manager can identify secondary market transactions that combine current revenue generation with remarketing/resale opportunities. 

Invest productively.  Call RESIDCO.                   

Glenn P. Davis, 312-635-3161 

davis@residco.com

1  “Industrial Products” include chemicals, paper, metal products, autos & parts, crushed stone, sand & gravel, metallic ores and stone and glass products.

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Climate Isn’t The Only Thing Changing

Energy is a universal and necessary requirement for both rail and commercial aviation. Diesel-powered locomotives pull freight on all nonelectrified railways around the world. Gas-powered turbines made intercontinental passenger flight efficient and affordable.  Because many believe fossil-fuel energy unfavorably impacts the environment, there is a growing belief that climate risk must be considered in evaluating transportation portfolio investment opportunities.

On his first day in office, Biden signed an executive order revoking the Keystone XL pipeline permit, signaling climate as a priority. His order effectively shut down a 12-year cross border project that would have carried 830,000 barrels a day of Canadian heavy oil-sand crude to U.S. refiners on the Gulf Coast (U.S. refiners purchase 98% of Canada’s oil exports). According to the Canadian Government, Canada’s proven oil reserves are third in the world behind Venezuela and Saudi Arabia. Canadian producers have limited and costly options for getting their oil to buyers. It trades at a significant discount to the West Texas Intermediate benchmark to cover rail transportation costs. The cheaper Canadian crude makes it one of the most profitable for U.S. refiners. Without the Keystone pipeline, the Burlington Northern Railroad will continue to carry crude as it moves rail tank cars to the Gulf Coast. Railcars are recognized as a more ‘sustainable’ form of investment, whether in terms of CO2 emissions or energy consumption per load when compared to other forms of transport1.  

Aviation’s share of global carbon emissions is significantly below that of cars and trucks. But at high altitudes exhaust contrails form heat-trapping cirrus clouds.  Can carbon-neutral flight be achieved? Boeing committed on January 22nd to ensure all its new commercial aircraft are capable and certified to use 100% ‘sustainable2 aviation fuel’ by 2030 (existing regulations allow aircraft to use a blend of 50% sustainable and 50% conventional jet fuel). Airbus has announced plans to design aircraft that rely on a turbofan design that includes a modified gas-turbine engine running on hydrogen rather than jet fuel (the hydrogen would be stored in tanks located behind the plane’s rear pressure bulkhead). Rolls-Royce committed to using its technological capabilities to play a leading role in enabling aviation, rail, and power generation to reach net-zero carbon by 2050. GE is researching advanced electric propulsion and fuels to achieve carbon-neutral flight. Last December United Airlines pledged to go ‘100 percent carbon neutral’ by 2050 by using carbon removal ‘direct air-carbon-capture technology’ that would remove an equivalent amount of carbon produced by its aircraft and thus allow its planes to fly on fossil fuels forever. Boeing’s 787 and Airbus’s A350 already emit significantly less carbon than the older jets they are replacing by using lighter materials and more efficient engines. 

Climate isn’t the only thing changing.  General Motors announced on January 28th it will end the sale of ‘all’ gasoline and diesel-powered passenger cars and light sports utility vehicles and will only produce electric-powered cars and SUVs starting in 2035. Transitioning to carbon-free transportation will be difficult to accomplish, even if vigorously pursued. The risks include shifts in policy, technology, and existing equipment valuations.  For insight into opportunities that will be created during this challenge call RESIDCO.

Glenn Davis, 312-635-3161 davis@residco.com

1 “Railcars are a sustainable mode of transportation and play an important role in the industrial supply chain by transporting our country’s most important products across the North American continent in an environmentally-friendly manner.” Trinity Industries.

2 Sustainable aviation fuel reduces CO2 emissions up to 80%. 

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