Tuesday, October 13, 2009

Dahlman Rose: Pricing, shipper optimism seen firming up

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New York-based Dahlman Rose & Co., in its third quarter Rail Shipper Survey, notes “railroad shippers anticipate an average base rate increase of 3.2% over the next 6-12 months. This is largely in line with the 3.3% increase expected in our 2Q09 Shipper Survey and below the 3.6% increase noted in our 1Q09 Shipper Survey.

“While some may view the downtick as an indication of pricing pressure, we believe it is indicative of an economic stabilization. As volumes start to come back, rail pricing should firm as well in our view,” the firm said.

Dalhman Rose’s survey also suggests shippers support rail legislation efforts on Capitol Hill only to a certain point, noting, “A vast majority of shippers seem to support some sort of action on Capital Hill while only 4% want the regulators to stay totally out of the railroad business. However, it is important to note that not all shippers who support government action want actions that are unfavorable to the railroads.” The survey finds “22% of respondents ... are in favor of a 25% rail investment tax credit, while 21% would support a short line tax credit. An improved rail costing model would win the support of 24% of our respondents, while DOJ [Department of Justice] oversight was selected by just 13% of respondents.”

In terms of rate case actions, Dahlman Rose’s survey found “98% of shippers indicated that they do not plan to file any rate action against a railroad over the next 12 months. This is an increase from 94% and 88% in our 2Q09 and 1Q09 surveys, respectively, suggesting that shippers feel pricing will come in on its own or that current pricing practices are not egregious.”

Dahlman Rose also found shipper optimism improving. “Shippers expect their respective businesses to grow approximately 5.9% for the next year, versus 2Q09 and 1Q09 survey responses of 4% and 1% respectively. We believe this optimism is largely driven by the modest improvement in theeconomy in the third quarter. Building products and chemicals showed the highest expected growth over 2Q09.”