The coronavirus outbreak, truck market competition and crude-by-rail in Canada were key topics for Class I rail executives at recent investor conferences. Here’s a roundup:
Uncertainty over impact of coronavirus outbreak
The Class I railroads, along with their customers, are taking a wait-and-see approach to how the coronavirus outbreak might affect the North American supply chain.
The timing of the outbreak was such that many workers in China received an extended holiday following the Lunar New Year, or they worked remotely. But factories still have to ramp up manufacturing, and it’s unclear when production will return to normal.
How a production lull in China will affect North American railroads remains to be seen, executives said.
“I would not be surprised if we see another two, three, four weeks of ramp up before we … get to the point where we were four months ago,” said Keith Reardon, senior vice president of the consumer product supply chain for Canadian National (NYSE: CNI).
Not only do Chinese manufacturers need to ramp up production, they also need to get the country’s supply chain from the plants to the ports back in order, Reardon said Thursday at a Barclays investor conference.
Canadian Pacific (NYSE: CP) also said it’s unclear what the coronavirus outbreak might mean for rail volumes, especially since the railway hasn’t yet seen any significant shifts in supply chain activity.
“I think our customers are probably as puzzled as we are. I don’t think there’s an accurate answer because we just don’t know yet,” CP CEO Keith Creel said last Wednesday at the Barclays conference. “We’re paying attention obviously to [the] intermodal space, international intermodal, but with that being said, our business, because of a contract win with Yang Ming [Marine Transport Corp.] coming online, is still up double digits. So we look at blank sailings; we only know of one so far, but do we expect that more may come? I think that’s a reasonable expectation.”
Kansas City Southern (NYSE: KSU) CEO Pat Ottensmeyer echoed Creel’s sentiments about not yet seeing significant changes in supply chain activity.
“I have not gotten any feedback from customers about plans to slow down. Obviously for us, I think the first place we would see it slow down is [at the Port of] Lázaro [Cárdenas in Mexico for] international intermodal [volumes] for auto [components] coming in, electronics, manufacturing,” Ottensmeyer said at the Citi investor conference last Wednesday.
“You look at our Lázaro numbers for the first six weeks of the year. They’re off the charts,” although some of that is due to uneven year-over-year comparisons resulting from service problems last year, Ottensmeyer said.
Union Pacific (NYSE: UNP) CFO Jennifer Hamann said one outcome from the coronavirus outbreak is that the second half of 2020 could still see “stronger” rail volumes, although there would be an extended period of slowness first followed by a spike in volumes.
“It may push things to the back half of the year more so than we thought,” Hamann said at the Barclays conference.
Should there be a spike in rail demand later this year, UP would handle it similarly to how it managed rail volumes following severe flooding in the Midwest last spring. That might mean focusing on running the manifest network and the terminals consistently over rushing to get rail operations back in order, according to Union Pacific (UP) CEO Lance Fritz.
“It’s a false choice to think you’ve got to sacrifice operational efficiencies and service products in times of change. When volumes spike or drop dramatically and radically, that puts all the more pressure on running the network consistently and reliably,” Fritz said at the Barclays conference.
He continued, “When things change directly and quickly, it is the hardest time to run the network. … But the answer is not to flood the network with equipment but to stay disciplined.”
Rail’s effort to gain market share from trucks
Although UP has been working to increase network reliability, the railroad is also seeking to tailor its network to allow for more truck conversion opportunities, such as by locating intermodal terminals near highways, helping customer find tracks that are shared by several industries and have warehousing capabilities, and finding potential sites to develop new facilities, according to UP’s Hamann.
UP is also watching whether e-commerce shippers opt for mega-size distribution centers or for smaller, regional distribution centers that can accommodate a faster turnaround, Hamann said at a Stifel conference on Feb. 11.
Meanwhile, Norfolk Southern (NYSE: NSC), which hasn’t attended the recent investor conferences, said recently that in 2019, the railroad invested nearly $2 billion across 16 states, working with 77 businesses to develop new or expanded rail facilities on Norfolk Southern’s lines.
Executives at CSX (NASDAQ: CSX) said its strategies to compete with the truck market include measures that don’t add more assets to CSX’s existing network. CSX is considering running longer trains, such as lengthening merchandise trains from about 100 cars to 150 and upping intermodal trains from 140 containers to about 300.
“It’s really [about] leveraging the costs base,” CSX CFO Kevin Boone said at the Barclays conference.
Improving service and efficiencies might also help CSX find short-haul opportunities at lengths as short as 350-400 miles versus a more traditional 500 miles.
“Our addressable market versus three years ago has expanded significantly from where we were,” Boone said.
Mark Wallace, CSX’s executive vice president of sales and marketing, said at the Citi conference Feb. 19 that CSX’s channel partners have told CSX there is highway traffic that would be better suited for intermodal, and so the marketplace still has additional opportunities for conversion from truck.
But in the near term, U.S. truck capacity is still loose, and so for rail volumes to grow in the second half of the year, macroeconomic conditions would have to encourage conversions to rail, Wallace said.
“There is an expectation that there’s a little more confidence that things will tighten up. For me, it’s wait and see. … Clearly the environment is sort of what it has been,” Wallace said.
Opportunities in Canada
For over two weeks starting Feb. 6, protesters have been creating rail blockades in support of a First Nations group’s objections to the proposed location of a fracked gas pipeline. A blockade in Mohawk territory near Belleville, Ontario, began in solidarity with efforts by the hereditary leaders of the Wet’suwet’en First Nation in British Columbia to fight the proposed route of the Coastal GasLink pipeline through their territory in British Columbia.
The blockades affected mainly Canadian National’s (CN) operations, although passenger rail service VIA Rail also canceled rail service for most routes for several days while one-day blockades also occurred on CP’s network. The blockade near Belleville caused CN to shut down its eastern operations and disrupted other supply chain partners.
Although Canada’s federal government on Tuesday negotiated with protesters to dismantle and remove the rail blockade near Belleville, CN is still ramping up operations. But last week, when the rail blockades were still in full effect, CN executives said the railway wasn’t “panicking,” in part because CN’s eastern network is “underutilized.”
CN also reportedly worked with CP and short lines to move some volumes through during the protests, according to local reports. Furthermore, the timing of the blockades missed the busier period between March and October, according to CN CFO Ghislain Houle.
“We’re moving through the backlog” that occurred as a result of rail blockades in Western Canada, Houle said at the Barclays conference. “… At this point, we’re not panicking. There’s business out there.”
For example, rail volumes per revenue ton mile are up 29% year-to-date as of last week at the Port of Prince Rupert even with the blockades that occurred on CN’s western network, Houle said.
Meanwhile, both CP and CN expect to move more crude oil volumes via rail, especially now that the Alberta government on Feb. 11 divested the province’s crude-by rail contracts to the private sector. As a result, an additional 120,000 barrels per day of takeaway capacity could come online, the government said. The 19 contracts, which include information on railcars, loading and unloading capacity, logistics, and other services, are being finalized by the Alberta Petroleum Marketing Commission.
CN has the capacity to move as much as 300,000 barrels annually, and the company sees crude-by-rail as a growth opportunity in 2020 and 2021. Although long-term prospects for crude-by-rail are uncertain, the privatization of the contracts could encourage producers to diversify their transportation options and consider capital projects that would allow for more crude products to ship via rail, executives said.
The heavy crude that can move by rail can come directly from the refinery and can result in a premium for the refiner, so some refiners will be deciding by year’s end whether they should consider crude-by-rail for the long term, said CN CEO JJ Ruest at the Citi investor conference.
CP calculates it has 140,000-150,000 barrels of annual capacity available for crude-by-rail. The railway plans to keep its capacity where it is so that it isn’t left with excess capacity once the pipelines are in place, executives said.
“I want to move your product, to move it safely, but I can’t let it outstrip our capacity,” CP’s Creel said at the Citi conference.
