China-US Imports Rise Yet Rail Freight Contracts

With economies ‘locked down’ and travel restricted, the pandemic has disrupted U.S. industrial production and impacted derived domestic rail freight traffic negatively.  The Federal Reserve reported manufacturing output fell by 13.7% in April, its largest monthly decline dating back to 1919.  Record declines in spending and employment are creating State budget disasters.  Furloughs caused by the lockdowns are creating current economic disasters for furloughed workers and their families.  The American Association of Railroad’s (“AAR”) April reports U.S. rail traffic falling 25.2% and intermodal falling 17.2%.  April’s originated carloads averaged 196,107 per week, the lowest weekly average for any month in more than three decades.  

All major car loading commodity groups fell including coal, autos, steel, lumber, chemicals, scrap, petroleum products, sand, and food products.  Autos and auto parts traffic disappeared in April because the auto industry shut down for the month.  Petroleum products and frac sand fell due to the price collapse in the crude oil markets.  

Earlier this year, China pledged to increase purchases of American farm, energy, and manufactured goods by at least $200 billion over two years ($12.5 billion over a 2017 base of $24 billion in 2020, and $19.5 billion above that base in 2021).  China’s farm imports from the U.S. of $5.05 billion in the first quarter were up 110% from last year (up 72% in January, down 27% in February, and up 37% in March).  Soybeans were up 210% from last year, pork up 640% from last year, and cotton up 43.5%. 

To hit trade-deal targets U.S. farm exports to China will need to double this year.  But China’s First Quarter GDP contracted 6.8%, its first drop in the twenty-eight years since Beijing began reporting quarterly gross domestic product in 1992, and a further contraction is expected in Q2.  China’s follow through on the trade deal may be challenged by a U.S./China strategic confrontation resulting from Beijing’s lack of transparency in its handling of the outbreak of the coronavirus. 

Regardless, China is the largest manufacturer in the world and the largest commodity consumer; 1.1 Billion more people live in China than in the U.S., and China’s working-age population is 900 million (geographically China is 98% the size of the U.S.).  The Eurozone economies (as a whole) contracted 14.2% in the first quarter (the U.S. 4.8%).  To match the U.S. population of 328 million requires combining the populations of Germany, France, the United Kingdom, Italy, Netherlands, Belgium, the Czech Republic, Austria, and Switzerland.  The world’s globally integrated manufacturing networks remain in disarray.  Most expect Q2 to be worse than Q1.  This is not a normal contraction. 

But with 25% of the 1.672 million North American Rail fleet in storage, the disruption creates the opportunity to deploy capital as the economy reopens.  Americans will return to work and rail transportation will remain economically compelling.  For careful, conservative, common sense, and competent solutions, call RESIDCO.