Rail volumes could rebound in the second half of the year, but the pace of a rebound will depend largely on consumer confidence, executives from several Class I railroads cautioned at recent investor conferences.
There is still little visibility “in terms of how the consumer is going to reengage,” said Jennifer Hamann, Chief Financial Officer for Union Pacific (NYSE: UNP) at a conference sponsored by investment firm Deutsche Bank on Tuesday. Hamann also spoke at an investor conference sponsored by investment firm UBS on June 2.
Although international intermodal volumes have fallen by about 16% quarter-to-date amid canceled vessel sailings to U.S. West Coast ports, the railroad is “feeling just a tad more optimistic” amid expectations that volumes might have bottomed out in April and May, Hamann said on June 2.
However, “it’s hard to call the bottom” because it’s hard to gauge how U.S. consumers will respond to the easing of shelter-in-place mandates, and so “a lot of question marks out there still need to be answered,” she said at UBS.
Looking at the latest rail volume data from the Association of American Railroads, U.S. rail traffic has been trending upward in recent weeks, although it might still be too soon to call the increase a long-term trend. U.S. weekly rail volumes totaled 433,171 carloads and intermodal units for the week ending June 6. This is a 16.5% decrease from the same period in 2019 but 9.5% higher than the week ending May 30.
Commodity categories more exposed to consumer activity include motor vehicles and parts as well as lumber. If housing starts rise, then UP might see demand growth for centerbeam cars. Plastics and soda ash are other types of materials down the supply chain that might also see growth if the automotive and housing sectors see increased consumer activity.
“Certainly there’s a hesitancy … with making those big kinds of purchases,” Hamann said at the Deutsche Bank conference.
Canadian Pacific (NYSE: CP) Chief Financial Officer Nadeem Velani echoed Hamann’s sentiments at the UBS conference. It will be interesting to see what the economy is going to look like and how consumer confidence will take shape three to six months from now, Velani said. He estimates that June volumes will be “less bad” than May volumes and third-quarter volumes higher than second-quarter volumes, even though third-quarter volumes will still likely be lower than the same period in 2019.
CSX (NASDAQ: CSX) CEO Jim Foote thinks rail volumes are “inching up week after week” as May has moved into June, and even though the increases are slight, “the trend line is promising,” he said at the Deutsche Bank conference.
“I think overall, I’m comfortable, but you have to look at it from a realistic standpoint. In many of our markets … we’re seeing sequentially we see improvement. We still have business segments like auto that are down in the 80%-some range on a year-over-year basis,” Foote said. “So, we have a ways to go, but I’m more confident today clearly than I was a month ago.”
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