“Covid-19 impacts have varied across the supply chain though rail service has been really strong in recent months. Shippers noted the ability to get better pricing if they deliver volumes for Class I carriers. Supply chain near-shoring continues to be an underappreciated story and could benefit KSU if supply chains relocate to Mexico.”
Those are the key takeaways from Cowen’s Rail Shipper Panel, which was moderated by Cowen analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer.
“COVID-19 impacts on the panelists varied greatly, with the panel’s paper shipper calling it the slowest demand environment of her career while the chemical shippers’ businesses have been relatively unaffected,” the analysts noted. “The paper shipper was primarily negatively affected by the shutdown of retail stores as these retailers didn’t want to pay for paper for advertisements as their stores were mostly closed. This paper shipper has only shipped 23 rail cars thus far in 2020 while in a typical year she ships roughly 750 cars for the entire year. While the shippers’ company’s paper segment has struggled, other segments in her company—such as the packaging or masks businesses—have seen tremendous strength. The panel’s two chemical shippers have not seen a significant impact from COVID-19. With their businesses deemed essential and transportation service—across all modes—performing well, the first half of the year sounded positive for their businesses.”
“While commentary on rail service during the pandemic was positive, panelists did raise a few issues regarding the rails,” the analysts said. “Railroads’ customer service has suffered, per our panelists, with the railroads having cut management in several non-unionized customer-facing roles including service design, customer service and accounting. A different shipper noted that rail customer service members reach out to her very infrequently, and her representative at the railroad is too inexperienced to be helpful.
“As rail volumes have begun to recover in recent weeks, there are signs of slippage in rail service according to one panelist. He likened it to 2008, where the railroads cut too far and struggled to get people back and handle the increase in traffic. Of course, in 2008, only CNI was doing PSR; this time it will be a true system-wide test of whether PSR can handle upturns in traffic as all of the Class I’s other than BNSF have implemented PSR. The aforementioned paper shipper whose volumes are down precipitously this year is worried about rail capacity in the fall if her volumes even recover to a few hundred carloads, still well below the typical year’s average of 750. Per some panelists, the railroads are looking to boost volumes, with one call participant noting that a week doesn’t go by where a railroad marketing person doesn’t call to see if they have more business for them. This has enabled at least one of the panelists to get better rates out of his rail partners.”
Lasting Effects of COVID-19 on Supply Chains
“COVID-19 specifically does not seem to be driving significant change in shippers’ supply chains,” the analysts said. “This was the result of some shippers conceding that their supply chains are likely as efficient as can be already, and others commenting that their supply chains were already being adapted prior to COVID-19. Other than the paper shipper whose business has struggled, shippers’ companies haven’t closed facilities or put plant expansions on hold. Regarding near-shoring, a theme we have mentioned in various notes over the last few years amid the trade war and tariffs in 2018-2019 and COVID-19 most recently, one shipper believes there will be a shift out of China to Southeast Asia or India. This could result in a shift from West Coast ports to East Coast or Gulf ports. We continue to view top rail pick KSU as best positioned to benefit from near-shoring as they can capture traffic increases to Gulf Ports and access new plants and facilities in Mexico.”
Technology Impact On Supply Chains And Rail
“In recent years, the railroads have joined other companies across various industries in touting their technology,” the analysts noted. “According to our panel, the self-service applications that the railroads have been pushing shippers to use are mixed. However, when something goes wrong and the shipper is trying to get in touch with someone at the railroad, it is even more difficult now to get someone knowledgeable and helpful on the phone.
“Interestingly, a shipper commented that it is actually the shippers’ technology that can make the difference. He noted that the more technology that the shipper can offer, the more the carrier wants to work with them. This is especially true with trucking where anything that can eliminate wait time or paperwork for drivers, is welcomed by the carriers.”
Shippers’ Views on Precision Scheduled Railroading (PSR)
“Shippers’ commended the railroads’ service in recent months, partially attributing this to the impact from PSR,” the analysts said. “Where PSR has really shined is on the long-haul freight moves; the first- and last-mile pieces of the supply chain remain slow and frustrating for shippers. Shippers highlighted the discrepancy between their unchanged transit times and the Class I’s touting their improved transit times, increased velocity and lower terminal dwell. An emphasis on trip plan compliance might allow for a better gauge of rail service, but shippers noted that even trip plan compliance can have its flaws too.”
Mixed To Slightly Positive July Outlook
“While nearly all the participants on our Private Trucking & Logistics Call last week believed that July would be better than June, shippers on this panel were mixed in their sequential predictions,” the analysts said. “Two shippers expect July to be flat year-over-year but lower sequentially as it is typically a slower month. Other predictions were slightly more optimistic regarding the fall, but answers were overall less positive than on last week’s call.”