Loose truck capacity, trade uncertainty and lower coal demand are among the headwinds that some Class I railroads are seeing for the remainder of 2019.
These expectations have led Union Pacific (NYSE: UNP) to lower its volume guidance for the second half of 2019. The railroad now expects rail volume in the second half of 2019 to be “down mid-single digits” compared with the second half of 2019, UP chief financial officer Rob Knight said at the Cowen & Company annual transportation conference Sept. 4.
Quarter-to-date volumes in the third quarter are down 7% from the same period in 2018, Knight said.
Trade uncertainty between the U.S. and China has resulted in lower grain volumes for UP, particularly for soybeans, as well as lower international intermodal volumes, said UP senior vice president for sales and marketing Kenny Rocker.
“We’re expecting a very compressed peak season, but we’re still expecting one and so we’ll see how that plays out,” Rocker said.
Despite the lower volume projections, UP still expects to meet its goal of a sub-61% operating ratio for 2019 because of cost-cutting measures that resulted from implementing precision scheduled railroading, an operating model that seeks to streamline operations and train schedules. A lower operating ratio implies greater company profitability.
Norfolk Southern (NYSE: NSC) also noted softer volumes in the third quarter, followed by flat volumes in the fourth quarter. While coal volumes could be lower in the fourth quarter because of softening demand for thermal and metallurgical coal, the peak season uplift and stable automotive volumes could result in flat year-over-year comparisons, according to NS chief marketing officer Alan Shaw.
The peak season for 2019 will be similar to the one for 2017 because some of the underlying macroeconomic factors related to labor and gross domestic product are still strong, Shaw said.
But even if trade uncertainty clears up and some markets bounce back quickly because of pent-up demand, there is still some market weakness in Europe that could dampen market expectations for the remainder of 2019, Shaw said.
Meanwhile, Canadian National (NYSE: CNI) also alluded to “short-term clouds,” such as slumping coal demand, that contributed to the company’s decision to start “rightsizing” its assets in the second quarter in order to better match rail capacity with demand.
For example, lumber production is facing a systemic decline in British Columbia, resulting in CN returning the 1,000 center-beam cars that it had leased, according to CN chief financial officer Ghsilain Houle.
“The place we have to be careful [in rightsizing] is for crews” because it can be hard to hire workers in some locations, Houle said, but CN can be more aggressive in cutting costs through using fewer railcars.
“We can cut costs, but we have to be careful and mindful that cycles come and go,” Houle said.
Meanwhile, the requirement that trucks employing electronic logging devices in Canada in 2020 should be good for rail intermodal because the ELD mandate puts pressure on trucking capacity, Houle said.
While trade uncertainty was a looming headwind for UP, NS and CN, Kansas City Southern (NYSE: KSU) said its cross-border franchise with Mexico has helped to reduce its exposure to strained U.S.-China trade relations.
The company actually seeks Mexico as a potential beneficiary of the ongoing trade dispute between the U.S. and China because companies are eyeing foreign investment opportunities in Mexico, according to KCS chief marketing officer Mike Naatz.
Naatz also was confident that the U.S., Mexico and Canada will produce a trade agreement soon to replace the North American Free Trade Agreement (NAFTA).
