Tuesday, April 10, 2012

Merchandise commodity trends not encouraging

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A question that’s been bugging me of late has to with what the short line scene will look like in 2016. I’m looking strictly at the commodities where most non-Class I carriers earn their bread and butter — the so-called merchandise sector, that is, everything but intermodal, coal, and automotive, from parts to finished vehicles. And the trends are not encouraging.

0412 commodity trends If you start with volumes as of Nov. 1, 2007, and run through March 31, 2012, every single one of the merchandise commodities has trended flat to down. The chemicals group, including crude oil and ethanol, was essentially unchanged. Food (mainly STCC 20) was down a little. But forest products (both paper-related and lumber/panels), aggregates, metals (mainly scrap materials and steel coils), and grain are well off their 2007 levels.

Coming closer in and starting Jan. 1, 2011, aggregates, metals, forest products, and chemicals are all up by single-digits, while foods are unchanged and grains are down. The reasons for these deltas are clear. The heightened levels of drilling for both natural gas and crude oil have bumped up rail volumes of frac sand (aggregates), piping (metals), and crude oil itself (chemicals). Paper (forest) is getting a push from packaging as mail-order shopping has grown — all those items from Amazon and Apple have to come in a box, and that takes paper.

How does one cope? By finding new customers. It is a truth universally acknowledged that any business will lose 10% of its customers every year and failure to replace those customers every year puts you out of business in ten years. By 2016 it’ll have been ten years since railroad traffic peaked in 2007. Today’s economic tea-leaves are not pointing to any significant recovery in rail traffic volumes between now and 2016, and one railroad planner is even talking about another downturn between now and then.

You can’t make this stuff up. The charts pictured here are courtesy of transmatch.com and are built on AAR weekly traffic data. First-quarter 2012 short line and regional railroad deltas in merchandise commodity carloads tracked their Class I counterparts very closely. Extending the trends does not portend any significant volume gains. This being the case, Mr. Short Line Owner, what will your railroad look like in 2016? More important, what can you do to be at least as well of then as you are now?

Roy Blanchard

Roy Blanchard is principal of The Blanchard Company and a Contributing Editor to Railway Age.