Mixed Outlook for North American Rail Freight in 2024

Total containers moved by double-stack freight trains were down by 5.1% in the United States from January 1 up to the end of November 2023 compared with the same period in 2022.

Independent rail economist Jim Blaze shares another fearless forecast for North American rail freight, as originally reported in Railway Age's sister publication, International Railway Journal (IRJ).

Never forget that freight moved by any mode is a “derived market demand” signaling business change between shippers and receivers. The share that the railways earn is a function of their ability to deliver reliable service at a reasonable price, compared mostly with truck and river barge competition.

The good news in the United States is the growth prospects for the infrastructure and manufacturing sectors. Huge amounts of investment have been committed by both the private and the public sectors with funding for bridges and highways to buildings and manufacturing construction.

This is partly to support a “re-shoring” of manufacturing away from China to Mexico and various U.S. locations, representing a shift towards domestic production that is likely to take place over a decade.

Construction will lead to growth in rail-hauled commodities from aggregates to fabricated metals, such as steel. In 2023, metallic ores were up 10%, aggregates for construction increased by 5.3%, while iron and steel scrap volume by rail was up 3.3%. The resulting production will favor chemicals, supported by North America’s relatively low energy costs from coal and natural gas. For the year to date in 2023, U.S. rail chemical traffic volume is down marginally by about 1.8%, but increased on certain corridors. Petroleum and petrol products rose by just over 10%.

The expected grain import shortages from both Ukraine and Russia should support agriculture and the export of all types of grain and food products from both Canada and the United States. However, in the U.S. rail market, grain movements were down by 11.3% in 2023, while food products other than grain were up by 8.2%. A deeper look suggests that these grain and food products should become growth opportunities in 2024 and beyond.

It is difficult to predict the shipment by rail of finished cars and wood products. Both are subject to demand that is directly impacted by interest rates. As 2023 closes, there may be a surplus of cars on hand as potential buyers wait for loan interest rates to drop. Higher mortgage rates in the housing market may depress both lumber and new home appliance orders, both of which are transported by rail.

Intermodal rail traffic has two market segments, both with slightly different growth potential.

Meanwhile, orders for metals and steel are up, as are prices for both scrap and finished metals. This is an improvement over the depressed prices seen for these commodities during much of the last decade. With the demand for arms and ammunition from the military and federal infrastructure funding legislation, metals rail traffic should grow in 2024.

Intermodal rail traffic has two market segments, both with slightly different growth potential. Domestic intermodal largely comprises the movement of 53-foot high-ceiling containers on double-stack long-distance freight trains, which compete with highway semi-trailers. Rail intermodal competition occurs on about 12 or more strategic rail corridors that parallel interstate highways. In contrast, the carriage of road semi-trailers by rail continues to dwindle. This is because too much tare weight is being transported as the semi-trailers include their wheelsets.

The other half of the intermodal market consists of the continental long-distance distribution of international 40-foot maritime containers, which have a lower ceiling height than domestic containers. Few maritime containers move by rail these days as the cargo from them is transhipped at the ports into larger 40-foot to 53-foot containers when they are being transferred to rail as this is a better economic model for the railways, particularly when using double-stack trains.

Coal is an outlier since it has increased in recent years as the rising cost of natural gas on the global market, which has temporarily improved the price attractiveness of utility coal. However, growth is unlikely to continue as further coal-fired power station closures are planned. Indeed, rail utility coal traffic declined by 0.5% in 2023 compared with a 2.7% increase in metallic coal traffic for the steel industry.

While freight car traffic might grow overall during 2024, it is unlikely to grow by more than 2-3%. That is somewhat less than the expected US GDP and industrial production growth rates. A few of the larger railways have expressed ambitions to grow their traffic volume at up to twice the rates of GDP and industrial production. Based on my experience, that is a real stretch. Consider this an advisory warning. It will be a real challenge for rail to consistently grow freight car traffic at a high percentage rate over the next decade, but it may not be impossible.

Intermodal

The growth outlook for intermodal rail looks better than for most freight car commodity groups, but with a few interesting footnotes. On the positive side, the competing American Trucking Association (ATA), which in part also represents rail intermodal trucking users, expects to see rail intermodal growth of 62% during the next 10 years, which is a compounded growth rate of more than 5%. Not a doubling of GDP or industrial production growth, but still notably higher than the freight car traffic growth rate.

However, when considering the business outlook projections of a variety of ocean container operators and ports served, the volume of international maritime containers to be moved by rail might not recover and prosper as much as ATA predicts for domestic intermodal traffic. At the end of 2023 soothsayers are suggesting a slowdown between January and June 2024 for maritime containers focused on the U.S.

Here are year-to-date average intermodal volume changes for the U.S. network at the end of November. Total intermodal units (both international and domestic containers) were down 6.2% compared with the same period in 2022, while trailer and semi-trailer truck intermodal was down by almost 24%. Containers moved largely by double-stack train were down by 5.1%. Throughout much of 2023, intermodal volumes had been down quite a bit more.

North American railways have not discovered a magic solution to provide a highly reliable first/last-mile service.

Longer-range global supply chain geo-politics and repositioning of manufacturing might affect intermodal volumes on several routes linking international ports with inland North American destinations. We might indeed see higher growth rates by intermodal rail along the Canadian and the Mexican/U.S. corridors involving Halifax, Laredo, Eagle Pass, and Savannah and the Port of New York and New Jersey. However, there might be slower growth and even some loss of volume on selected western U.S. lines. It is hard to predict this in early December 2023.

So far, North American railways have not discovered a magic solution to provide a highly reliable first/last-mile service. Freight cars are still often only about 85% within the scheduled delivery window of the day promised and often well below that rate. Intermodal delivery is better, often at 90% or above the promised day’s target time. But nowhere near truck delivery reliability of within an hour or two of schedule. So, it is hard to even suggest that rail will capture market share during 2024.
However, rail rates (per tonne-km) will still be significantly below truck rates. And rail freight’s environmental impact will remain considerably better than that of trucking for shippers concerned about their logistics carbon footprint.

Furthermore, the profitability of a rail freight enterprise will remain considerably higher throughout 2024 than that of the competing trucking carriers based on return on capital and profit margin. Truckers do not achieve the operating margins and returns on capital assets seen in the private railway business model.

While North American freight railways are not exiting the freight business, the long hoped-for pivot in market share remains elusive. A shift in objectives by railway executives could obviously change this picture. But that’s a harder crystal ball outcome to predict. We will all have to wait and see how these enterprise management re-engineering proposals play out.

Statistical analysis by the Susquehanna Financial Group led by Bascome Majors, and a separate analysis by Capital Loop led by Rick Paterson, both show that freight network performance and train velocity have been improving throughout 2023, as has terminal freight car dwell time in freight yards.

Among the six largest Class I railways, the performance of CSX under its new CEO seems to be leading its peers in the field of service improvements as of November 2023.

Overall, the U.S. rail freight network was showing an average velocity of about 40km/h. Intermodal trains of course traveled faster. And fewer trains were being held because of crew shortages than a year ago.

Private railway owned or leased freight cars were also moving much faster than a year ago. Overall, the Class I railways were reporting to the Surface Transportation Board (STB) that customer delivery was up from 2022’s approximate 75% on-time rate to more than 82% in 2023. Both metrics suggest that the railways should be able to handle traffic volume growth if demand surges entering 2024.

If the U.S. economy stays healthy and avoids a recession, then the rail freight sector should grow, and remain very profitable. Both the Canadian and the Mexican rail networks, which use the same operating procedures and market approaches as in the United States, should also see growth in volumes.

The two commodities most likely to be impacted by high interest rates are lumber for house construction and finished cars, SUVs, and pick-up trucks. Higher mortgage rates and higher automobile loan rates are stalling sales as 2023 ends. As a result, the 12.3% year-to-date growth in the transport of finished automobiles might drop towards zero or worse for a time into the first half of 2024. Lumber used in housing construction is already showing a year-to-date fall of 9.8%, with a 15.7% drop in Canada.