“A Fluid, Unknown Rail Freight Market”

This is not a forecast. It’s a prudent warning. The continuing COVID-19 pandemic and our social reaction so far are driving our business culture toward a high-risk economic impact. Stay-in-place warnings and increasingly mandated government requirements will drive down income and gross domestic product (GDP). Fundamentally, the American economy will likely face choosing survival spending tactics.

Cash will be preserved. A survival-kit approach to managing family budgets will focus upon water, food, shelter, heat and medicines. Budgets will be managed as if there is no discretionary income to be spent on non-essentials. How long will Internet and individual cell phone accounts be maintained? That’s an unbelievable question to even ask. Or is it?

Experts can’t agree on the level of economic impact. Recently, some suggested that the chance of a U.S. recession was about 50%. It was less than 30% not long before that. Nobody really knows. There are no previous experiences like this pandemic pattern upon which to build a reliable input/output GDP change model. We are all flying blind. 

With this as background, let’s briefly examine what the role of the rail freight sector is. How relevant is rail freight’s services during a stay-in place period? What are rail freight’s capabilities at serving the essential survival kit?

Let’s be simple about this. How much petroleum and motor vehicle flexibility do we need under such grim conditions? When the U.S. entered World War II in 1941, there was definitely an important role for railroad companies to move the nation’s freight and people. Railroads moved more than 60% of the nation’s freight volume back then. That included express parcel movement in carload units. 

In 2020, trucks are moving emergency supplies and food. Truck volume was up by more than 15% year-over-year last week. No database reports a similar surge in rail freight to help with the critical emergency stock replenishment. Perhaps we just don’t have the correct railway dataset to examine? For the moment, we can examine the recent AAR and rail industry freight market sectors. 

Here are a few trend points: 

The eight-week outlook and the railroad carrier profit margin assessments are mine. They are based on a review of multiple sources. It is a judgment call. The critical question: How do you or your alternative sources see the outlook, with market behavior and demand changing as we move toward the end of March. 

Most trucking-provided services use semi-trailer units. That’s a market that railroads have been largely exiting. Thus the negative outlook. The intermodal container market is driven more by international commerce than domestic commerce. Those supply chains must cover long distances and normally take weeks to deliver to U.S. ports. Goods now moving toward our ports by ship may now no longer be in high demand, given the expected shift in 2020 discretionary income. Much of the goods still to be delivered might well end up being warehoused. Many of the landed containers might not move inland via rail intermodal—at least not immediately. That assumption is part of this “fog of war” and therefore, my negative eight-week assessment.

Coal may suffer greater than expected market share losses because natural gas prices are now even lower than previously expected. Metallurgical coal exports may have to await orders as metals manufacturing decreases globally into the summer months. Only grain—a fundamental food stock and livestock feed—may increase via larger than expected post-trade-war agreements. However, that purchasing signal hasn’t yet been seen.

Meanwhile, there was this headline: “Consumers could spend $20 billion less for gasoline this April as futures prices collapse?” (March 23). Less motor vehicle travel reduces the crude oil market demand, as does the availability of cheaper imported fuel from overseas sources. It’s a very complex question. Under such market demand conditions, prices at the pump could fall 20%. In a related downstream demand report, some sources believe the U.S. refining industry will shut down about 30% of its capacity. 

My short-term conclusion is that even more railway tank cars will be stored. The financial outlook within railway headquarters may be gloomy. Realistically, there is no rapid turnaround expected in regard to railway traffic volume. 

Here are my late March conclusions:

The Class I’s will likely resort to proven historical management weapons of cutting variable costs and cutting capital expenditure projects during the remaining months of 2020. The bottom line? It’s a fluid and unknown rail freight market right now. Moreover, there is no similar downturn model with which to calibrate an upside market demand for rail freight. Therefore, rail industry experts will hedge their bets. This economist sees a negative rail carload business cycle lasting another seven to 10 weeks, based upon the current pattern of government social-distancing mandates.

Housing and non-housing construction has ceased in many of the hardest hit states, like Pennsylvania and New Jersey. The current federal initiatives targeting personal aid and corporate financial aid are not by themselves generating new business growth confidence. They will be “survival” payments. They are not creating “buyers.” Without buyers, market confidence and market demand will not translate into new orders. 

The length of this market lag time is the great unknown. Freight transportation is, after all, a derived demand function. And railroads are limited in their ability to positively increase derived demand. They could decrease their rates. But so far, no railroad appears to have significantly done that. At best, rail freight might be in a holding pattern.

Independent railway economist, Railway Age Contributing Editor and FreightWaves author Jim Blaze has been in the railroad industry for more than 40 years. Trained in logistics, he served seven years with the Illinois DOT as a Chicago long-range freight planner and almost two years with the USRA technical staff in Washington, D.C. Jim then spent 21 years with Conrail in cross-functional strategic roles from branch line economics to mergers, IT, logistics, and corporate change. He followed this with 20 years of international consulting at rail engineering firm Zeta-Tech Associated. Jim is a Magna cum Laude Graduate of St Anselm’s College with a master’s degree from the University of Chicago. Married with six children, he lives outside of Philadelphia. “This column reflects my continued passion for the future of railroading as a competitive industry,” says Jim. “Only by occasionally challenging our institutions can we probe for better quality and performance. My opinions are my own, independent of Railway Age and FreightWaves. As always, contrary business opinions are welcome.”