Market Competition
When a National Bank invests in personal property, the Code of Federal Regulations, Title 12 Part 23, and the Office of the Comptroller of the Currency provides regulatory investment guidelines. Prior to the early 1990s, banks entered into personal property leases only when they were the functional equivalent of a loan (meaning leases had to be “net, full-payout leases”).
As bank regulations relaxed, banks began to enter the operating lease markets by creating operating subsidiaries that met regulatory investment requirements. With their low cost of capital, banks quickly became significant market competitors. Wells Fargo1, CIT, PNC, and Citigroup are examples. They own a significant portion of the national fleet of 1.6 Million units. But with 400,000 railcars in storage and 2019 lease rates down 10 to 20% from the prior year, it has become a challenge to remarket or sell off-lease “nonearning assets” given current market pricing.
Other than intermodal and autos, railcars carry grain, coal, crushed stone, sand, gravel, primary metal products, chemicals, iron and steel scrap, petroleum products, lumber, wood and paper products, and other high-volume, low-value commodities. Shippers want to manage their supply chains and inventory investment by controlling transport capacity and linking deliveries directly to production lines, customer factories, distribution centers, and ports of entry/export.
With several modes of transportation available (truck, rail, air, and river), shippers and railroads are aware of the value of consistent delivery, pricing, and volume; this is what is driving the Class One focus on ‘Precision Scheduled Railroading.’ But by reducing service in insufficiently profitable secondary lanes, the Class 1 railroads are deciding to grow margins and cede market share to alternative modes. The result is the Class One Railroads are using fewer railcars and locomotives.
Rail Traffic as of January 2020
Exacerbating the oversupply of equipment U.S. rail volumes fell (again) in January (their 12th straight decline). Excluding coal (which was down 13.8%) and grain (down 11.6%), U.S. carloads were down .6% in January. Carload gains included chemicals, grain mill products, and metallic ores (carloads of iron and steel scrap were up 5.2%). U.S. intermodal originations fell 5.4% and have now fallen for 12 consecutive months.
Job gains, the Institute for Supply Management’s (“ISM”), Manufacturing Purchasing Managers Index (“PMI”), the Non-Manufacturing Index (“NMI”), housing starts, and consumer spending were bright spots, all higher in January.
Positive trade developments (the new U.S.-Mexico-Canada Agreement – “USMCA,” and the China “Phase One” deal) are being offset by the unknown economic impact of the Chinese coronavirus outbreak. In January, coal carloads averaged 69,706 per week, the lowest January average since before 1988. In the first 10 months of 2019, coal accounted for less than 24% of U.S. electricity generation, down from 27% in 2018, and 50% in 20052. Moreover, weekly average grain carloads in January (19,635) were the lowest for January since 2013.
Investment Solutions
Railcar leasing can provide stable and predictable cash flows as freight volumes return, and the Class Ones show tangible benefits for shippers, such as consistent delivery and pricing that is market competitive. As markets adjust, how can investment results best be managed? For restructuring solutions, seek the advice of independent, unbiased, and experienced counsel. Call RESIDCO.
1Wells Fargo maintains they are the largest railcar lessor in North America, with more than 175,000 railcars.
2Ibid.
Labor and Equipment Demand
Eliminating hump yards and running fewer, longer, ‘scheduled’ trains, the Class One’s are continuing to implement Precision Scheduled Railroading (“PSR”). It’s transforming rail networks, reducing the need for labor and equipment.
The Union Pacific is planning to reduce its workforce by eliminating 3,000 workers this year (after reducing its staff by 11% in 2019). As train speeds increase, the need for rail equipment decreases. It’s estimated that for every one-mile increase in average freight train speed and additional 50,000, additional railcars will be moved to storage. Of a fleet of 1.6 Million railcars, 25% were in storage this January. And train speeds are increasing due to PSR, lingering trade tensions, and to lower freight volumes caused by our slowing manufacturing economy*. Going forward with larger capacity and new cars being delivered, fewer cars will be needed. Added to this, the Rails are losing market share as shippers move product to truck to meet just-in-time inventory requirements.
The Election Effect
Over the years, car ownership has changed dramatically. In 1962 the railroads owned 90% of the freight car fleet. Today, 75% is privately owned. The oversupply of railcars and locomotive power caused by PSR and lower freight volume is acting to reduce market values of existing equipment and lease rates at renewal. The current low-interest-rate environment is depressing lease rate factors available for new equipment. Uncertainty over the fall election and direction of international events (both in the Middle East and Asia) are working to hold the business investment flat. As a result, new railcar deliveries for 2020 are expected to trend down.
Given the election year, Trump signed a “phase one” trade deal with China this January 15th. It provides a measure of relief for rail shippers. China agreed to make purchases of $200 billion worth of U.S. goods over a two-year period, doubling its agricultural purchases to $40 billion. Whether China will honor this agreement (which includes ending its practice of forcing foreign companies to transfer technology to Chinese companies as a condition for access to the Chinese market) is an open question.
The agreement won’t fix everything. There will be a continuing lack of cooperation over technology, national security, military, and political ideologies. These are significant and continuing issues. As the U.S. and China pursue their own national and economic interests, the conflict will continue. A degree of economic decoupling is likely and the future of freight traffic between the two countries remains unanswered. At stake are a stronger economy and global influence.
Globalism, which fostered complex supply chains spanning multiple borders, is retreating. The U.S. has become unilateralist and is rewriting trade rules to prioritize its interests while shunning trade blocs. Bilateral deals have been completed with Canada, Mexico, now China, and soon with Britain, as it has left the E.U. The economic impact of the coronavirus in China is unknown, but airlines are suspending flights and businesses are shutting down operations there.
Investment Risk Planning
As fiscal stimulus fades and global growth slows, U.S. GDP growth is expected to remain at 2%. Even though we’re in the longest bull market in history, overall uncertainty has not been reduced. Tariffs have led to a decline in business investment. While change is certain, how we react to events, preplan for them, and manage through them is within our control.
Struggling to price investment risk and looking for answers? Call RESIDCO.
*The U.S. manufacturing sector contracted for five straight months through December, the Institute for Supply Management.
The Foundation of Investment Decisions
Strategic decisions are never simple. Despite the significant resources investment managers devote to the decision process, they often make judgments that go wrong because of human shortcomings. Behavioral economics teaches that human biases, such as over-optimism about the likelihood of success, often affect the decision process, and employee incentives may be misaligned with long-term investment results.
Most investment managers know about these pitfalls. Yet cognitive bias distorts the way managers collect and process information, and judgment often is colored by self-interest. Overoptimism and loss aversion (the human tendency to experience loss more acutely than gain) are the causes. All investment decisions have two essential components: the likelihood of the expected outcome, and the value placed on it. When investment probabilities are based on repeated events optimism may be less of a factor.
The Impact of Loss Aversion
But loss aversion also influences investment decisions. Consider Boeing’s design and marketing decisions for the 737MAX. Did Boeing sacrifice safety and airframe design principles to meet competitive pressures from the Airbus A320neo? Boeing and Airbus operate a ‘duopoly’ in the market for single-aisle jets (valued at over $3.5 trillion over the next 20 years). Neither can afford to fall behind. Boeing had considered the single-aisle market large enough to launch a new aircraft design (New Midsize Airplane, “NMA”). But in 2011, when American Airlines announced a record order for 460 single-aisle planes from Airbus (260 A320, 130 of which were the A320neo) and 200 737s from Boeing, Airbus had managed to break the longstanding monopoly Boeing had with American.
The Airbus order, “loss aversion’ and market forces forced Boeing to commit to revamp its best-selling 737 with new engines rather than develop an all-new NMA. Analysts had said that developing an all-new replacement for the 737 would have cost Boeing as much as $12 Billion. But with the 737MAX grounded world-wide since March 2019, Boeing has now booked $9.2 billion in charges. In the rush to meet market competition Boeing opted not to develop the new jet. Now, Boeing may still be required by regulators to re-approve the plane as a separate aircraft type from the 737 family.
Mitigating Risk
As investment decisions are evaluated, a misalignment of time horizons frequently leads to the wrong decisions. Short term paybacks are favored over the impact decisions may have on longer investment horizons. Precision scheduled railroading (“PSR”) promises to improve operating ratios, train speeds, and yard through-put. But the Rail Industry is not addressing how to provide delivery precision to the final railway freight shippers’ docks. Boeing’s re-engined 737 and the Class One’s PSR implementation are examples of optimizing short-term performance at the expense of customer relationships and longer-term corporate health. Boeing feared the loss of market share and Class One’s fear of being left behind. This ‘loss aversion’ phenomenon can lead decision-makers astray.
Be reluctant to ‘bet the farm’ on these larger decisions. Minor decisions can be managed as part of a long-term diversified risk-mitigating strategy. The way to become better is by using tools and techniques that create a culture of constructive debate. Initial assessments should be supplemented with independent second opinions.
The economics of transportation equipment investment are complex. Take a fresh look and ensure the right questions are being asked and answered. When does it make sense to take risks? Call RESIDCO.
Value Forecasting
Residual value forecasting for transportation equipment often begins with an expected value curve that traces ‘value decay’ over an asset’s assumed useful life. Once the basic value curve is in place, value volatility must be considered and incorporated (value decay curves do not provide an accurate forecast since the value of transportation assets doesn’t always go down).
Overlaying volatility allows an estimate of the range of expected value at any point, given the impact of expected changes in market factors and customer needs on specific equipment types in the portfolio. The economics of an investment requires lessors initially measure their residual as the present value of the amount that they expect to derive from the underlying asset following the end of the lease term; This is a value that is not guaranteed by the lessee or any other third party unrelated to the lessor, discounted using the rate implicit in the lease. An investor’s individual risk tolerance affects residual values that eventually are incorporated in the economics of lease return calculations. At the same time, accounting recognizes book income during the life of a lease based on the assumption that residual values will be realized, unless ‘impaired.’
Aircraft values were impacted by the events of 9/11 and by the 2008 global financial crisis. Passenger and freight traffic tumbled, and airlines parked their jets by the hundreds and returned leased planes as lease contracts expired. Yet over the decade following 2008, the global airline industry logged ten consecutive years of profitability.
Effects of Equipment in Storage
Today, as CSX, Norfolk Southern, and the Union Pacific implemented Precision Scheduled Railroading, they are storing or returning locomotives and freight cars, idling yards, and laying off employees. On December 1, 396,200 railcars were in storage, almost 25% of the 1.7 Million car fleet (storage levels last peaked in 2016 at 425,000 cars). The future economics of these car types are complex. Of the railcars in storage, 35% are Covered Hoppers, 28% Tanks, and 12% Coal Gondolas.
Equipment in storage, whether a locomotive, railcar, or a 737MAX that is not flying, is worth less than if in service. Planes are built to fly. Once recertified, it will take 100 to 150 hours of additional work for each 737MAX to return to flight. Maintenance must spool the engines and boot up a flight computer and auxiliary power units every week. Exterior surfaces and cabin interiors must be protected. The longer in storage, the more maintenance needs to be done.
Are These Assets Impaired?
“Impairments” are recognized only if there is a “permanent” reduction in value (the amount of an impairment loss being the difference between an asset’s carrying amount and its current fair value). With a 30% decline in value, an investor who is leveraged 2:1 would experience a 60% decline in net worth if they were to take a write-down. Bank lessors, who are typically leveraged 10 to 1, will elect to store their equipment rather than sell into a down market. Next year’s equipment values will be impacted by the existing fleet, new equipment demand, the business cycle, and the always unpredictable ‘unexpected’ events. Strategic thinkers leverage experience, judgment, and proprietary data to manage residual risk and achieve investment goals. Call RESIDCO.
“Economic Nationalism”
The President’s September 24th address to the United Nations promoted ‘sovereignty’ above international relations. “The future belongs to sovereign and independent nations, who protect their citizens, respect their neighbors and honor the differences that make each country special and unique.”
His favorite themes? Unfair trade, imbalanced defense spending, illegal immigration, creeping socialism, and China’s “embracing an economic model dependent on massive market barriers, heavy state subsidies, currency manipulation, product dumping, forced technology transfers, and the theft of intellectual property and trade secrets on a grand scale”.
Many call this ‘economic nationalism’, an ideology that promotes domestic economic growth and opposes globalization, free trade, and immigration.
Impact on Air and Rail Freight
Since 2016 the retreat from Globalism has had a significant impact on levels of air and rail freight traffic. It has resulted in the Global economy growing at its slowest pace since the 2008 financial crisis (2.9% this year, the smallest annual rise since 2009) .
FedEx recently reduced its 2020 outlook pointing to trade tensions and the ‘weak’ global economy due to the absence of a trade deal with China. The Dow Transportation Average which tracks 20 of the nation’s largest airlines, railroads and truckers (including FedEx) is down 8.8% over the past year. The index of freight shipments maintained by Cass Information Systems Inc. has been falling every month this year with negative volume nine months in a row. The loss of traffic points to a growing downside risk to the economic outlook.
The Shifting Economy
The U.S. expansion has put people back to work. Economists agree the nation is at or close to full employment. But the economy is now dominated by high skill high wage jobs, and low skill low wage jobs. Middle wage jobs are gone. It’s this loss of ‘middle American’ manufacturing jobs that is driving our Nation’s political polarization.
Republican districts hold a growing share of agriculture, mining and low-skill manufacturing jobs while Democratic districts dominate the most productive parts of the country. People have jobs, but they’re not good jobs. Even with our labor markets upended by global trade (and technology) our economic fundamentals remain nearly double that of other developed countries (Europe, Japan, or Britain).
Acting to support continued growth the Fed lowered interest rates by a quarter of a percentage point on September 18th, its second cut since late July, and suggested it was prepared to move aggressively if the economy showed signs of weakening. In Europe the ECB cut its key interest rate and put into place a package of monetary stimulus highlighted by bond purchases. Trade policy remains a question mark and freight traffic continues to be impacted by the lack of a trade deal with China. Energy prices remain volatile as Iranian threats to Saudi Arabia’s oil production continue and shale oil production slows.
Partisan politics may make headlines and political theatre, but our economy is built on principles that encourage enterprise, diversity, individual rights, and fair elections. For now, the economy remains resilient and confidence in the expansion continues. When thinking about transportation investment risk consider the range of possibilities. To be prepared, call RESIDCO.
Precision Scheduled Railroading’s Various Effects
The S&P 500 posted its best first half in 22 years. US Job openings outnumber the unemployed by widest gap ever. The U.S. economy continues to expand (2.1% in the Second Quarter). Yet U.S. Domestic rail freight volumes are down. Chinese challenges to the Western Global Trading System certainly are one reason. And, as Class Ones adopt Precision Scheduled Railroading (“PSR’), they are focused on point to point carload traffic to the exclusion of merchandise traffic; running longer trains with fewer locomotives, and lower employment. PSR is generating excess equipment. As these changes ripple through the system, Shippers, Equipment Lessors, and Railway Labor are dealing with the unexpected.
Shippers are concerned with first and last mile issues, a lack of short haul efficiency, and the demanding loading and unloading behaviors being enforced with rising demurrage charges, less free time, a lack of fault allocation and lack of reciprocity. Railway Labor is clearly against PSR implementation as a recent Capitol Hill hearing ‘The State of the Rail Workforce’ demonstrated. Chairman Peter DeFazio grilled Federal Railroad Administration administrator Ron Batory about PSR; in addition to job losses, Chairman DeFazio asked about increasing train sizes saying he has received reports of 15,000 foot freight trains passing through Oregon’s Willamette Valley.
Further effects on rail business
The impact on rail equipment values and lease rates? Locomotives are stored and cars online are down. The Class Ones are clearly managing for yield. With truckload pricing falling, intermodal rail is now more expensive than trucking in some secondary markets. Yet even in the face of flat to declining volumes and modal competition the Class Ones are reporting record operating results. “The company is handling the same volume as last year with fewer assets, fewer crew starts and less network congestion, improving customer service, operating metrics and cost.” Will lower rail cost lead to lower rail rates? Shippers are saying no, “Rates are up and service is down”.
What’s the purpose of the Rail freight business? Shareholders would say profits. Shippers would say competitively priced and frequent service. Labor would say jobs. Equipment investors would say positive after tax cash flow. Short term, Shippers are dealing with less flexible service caused by PSR and its changing metrics. Origin destination pairs are being cut and Shipper supply chains are being upset by both PSR and tariff and trade disagreements.
Railroads have a monopoly on heavy freight. It must move, and often only by rail. Businesses exist only because of their ability to generate positive cash flow. But positive cash flow and profits are the result of competitively delivered services and products. Free trade is important but not if National security is threatened. Investment requires confidence in the future. Will the Roads manage for both yield and growth? Regardless, future rail traffic will be constrained by capital spending, productivity, labor pricing, and our tariff and trade negotiations. What can we expect as Shippers react to PSR? For answers to that question call RESIDCO.
Total carloads were down 8.9% in March while carloads for the first quarter were down 3.1%. Year-to-date coal is down 8.1%, grain down 5.2%, chemicals down 1.2%, and intermodal down 1.8%. Excluding coal and grain U.S. carloads were down 2.8% in March 2019 (from March 2018). The U.S. Energy Information Administration (EIA) reported 12.9 gigawatts of coal-fired utility scale electricity generating capacity was retired in 2018 (Texas, Ohio, Florida, and Wisconsin). Grain traffic has softened, but China imported 180.8 million bushels of soybeans in March, up 10.5% from their February totals. Much of that grain was sourced from the U.S. and Brazil (China is the world’s No. 1 soybean importer).
With softening traffic and with the Roads focused on improving network operations, equipment and locomotives are being taken out of service. Fewer, longer trains are running in scheduled service. Customer loads are spending less time in classification yards. Less congestion improves on-time delivery and less equipment improves operating ratios and shareholder value. If ‘economic uncertainties’ continue and if the Roads are successful in implementing ‘scheduled’ railroading, expect an overall reduced demand for equipment. Yet cars in storage have remained essentially unchanged from a year ago. There were 313,456 cars in storage this April 1 compared to 315,188 railcars in storage a year ago (approximately 19% of the total fleet).
Why? Shippers still demand equipment be available to respond to changing market conditions in their markets. In order to ensure equipment is available for loads when needed Shippers will adjust by increasing investment in railcars. Rail Portfolio Managers will assist by maintaining their focus on keeping existing fleets in service.
With the global economy weakening and the Trump Administration and China locked in trade negotiations many analysts were concerned growth was stalling. The Fed’s reaction was to leave interest rates alone as inflation is near their 2% goal. The Wall Street Journal forecasts the probability of a recession at 25% in the next 12 months, rising to 49% in 2020. But the purchasing manager index doesn’t indicate any current signs of contraction (having risen to 55.3 in March from 54.2 in February). Job growth rebounded last month after a February slowdown. Unemployment is historically low. While traffic has been affected by trade disputes, slower growth in Europe, and weaker consumer spending, most analysts predict continued moderate growth during 2019. Economic uncertainties?
A recession does not appear on the horizon and the U.S. economy remains resilient in its 10th year of expansion. Softening traffic, stored equipment, improving network operations, Shipper demands, and the need to keep equipment in service will change how the Industry manages investment. Returns accrue to those with experience, diligence and integrity.
Successful portfolio management is a difficult thing to imitate. For air and rail alternatives call RESIDCO.
Past Challenges
Before Hunter Harrison, the prevailing view was more locomotives, more railcars, and more crews allow for the movement of more volume. But because track and yard capacity is finite, adding more equipment creates congestion and slows the system. While it is counterintuitive, reducing fleet size enables a road to move more volume by running fewer (longer) trains, faster. ‘Scheduled’ service results in better asset utilization and higher profits.
For example, CSX’s ‘operating ratio’ (its operating cost as a share of revenue, the industry’s leading benchmark for efficient operations) dropped to 58.7%, a third-quarter record, while third-quarter profit increased 106%.
CSX’s Revolution
The results CSX is delivering are pushing the remaining U.S. Class Ones to consider adopting similar strategies as North American railroad executives face investor pressure. By rigorously scheduling service and eliminating bottlenecks, ‘Precision Scheduled Railroading (“PSR”)’ transports the same or more freight with less capital in the form of railcars, locomotives, and classification yards. Classification yards are choke points that slow traffic.
After dropping out of Memphis State to work as a dispatcher in a rail switch tower, he said: “It was then I learned that how you arrange schedules and manage assets are the key.” In his eight months at CSX, Hunter Harrison converted no fewer than 7 of CSX’s 12 hump yards into ‘flat-switching’ (by a locomotive on yard tracks) facilities resulting in faster deliveries from origin to destination.
Hunter Harrison’s legacy? Root out schedule inefficiencies, minimize asynchronous traffic flows, reduce cost, and create opportunities for timely ‘scheduled’ delivery. Focusing on efficient network operations results in maximum use of existing equipment and ultimately will change how the industry invests.
A Locomotive Industry Shift
Union Pacific is moving to follow the same playbook. It has idled 625 locomotives, with plans for idling another 150 by the end of this year while removing 6,000 cars from its network with plans to cut an additional 10,000 railcars over the near term. Compare PSR to airline network operations. Aircraft fly on schedules with minimum time on the ground. The efficient use of aircraft results in less investment and improved yields. ‘Scheduling’ operations allows matching of staffing, asset levels, and work sequences accurately. CSX results demonstrate this.
As Class Ones effectively implement PSR, network and terminal velocities will improve. Improving service will grow market share, take traffic from the highway, and deliver enhanced financial results for both the Class Ones and shippers, thus enticing new private investment in rail assets.
The Goal? Right-sizing capacity while implementing efficient asset management techniques. The results? Timely deliveries, improved returns on invested capital, and satisfied customers. Rail equipment knowledge creates opportunities that unlock portfolio values in this environment. Interested? Call RESIDCO.
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.
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.
RESIDCO’s size and wholesale capability is a competitive advantage. We respond quickly and creatively to ever-changing market conditions.
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