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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