Download Predicting railroad industry requiremnts in the fog of economic

Predicting railroad industry requirements in the fog of economic stagnation
Sept 12, 2016 final
Metals Service Center Institute
Economic Summit Forecast 2017
Jim Blaze
Rail Economist
[email protected]
Mobile: 856 230-8248
 Forecasting railroad sector demand for products that use metals as the basis for their
function services
 The sectors we want to forecast
• Railway freight cars
• Railway locomotives
• Railway Tracks
Railroads in mid-year 2016 are
trying to get re-energized on
serving more markets
 Pushing themselves to be faster in train speeds and loading cycles
 -- with lower operating costs
 -- & better on time service delivery
This is not a financial stock assessment of railroad SWOT
Today’s slides are a market based attempt to discuss economic outlook…
 For a mature industry
 That is still chasing the highly competitive trucking and waterborne
commerce market share positions
 And pipeline emerging added network competition for shale based
oil/gas
This is not a financial stock assessment of railroad SWOT
How is this future economic different?
 It starts from an intense review of global supply/demand & growth
 How is the market demand for movement of goods changing ( + or - )?
 Where around the globe are the changes being “driven”?
 How does that tie into the US / North American market?
 What’s the consensus outlook by global versus domestic economists for GDP changes?
 How does the rail competition (trucking) see the market?
 How do RR executives likely see the market
 Who is in the best position to sell their transportation in “tight markets?
at are RR executives corporate “DNA” patterns in capital decisions
 How do RR investors financially see the RR markets and “expected” use of cash?
 How do I, convert this complexity to “choices” that represent reasonable:
 High rail traffic and investment pattern market outcomes… … or
 Low outcomes…
This is not a financial stock assessment of railroad SWOT
How is this future economic different?
 It starts from an intense review of global supply/demand & growth
 How is the market demand for movement of goods changing ( + or - )?
 Where around the globe are the changes being “driven”?
 How does that tie into the US / North American market?
 What’s the consensus outlook by global versus domestic economists for GDP changes?
 How does the rail competition (trucking) see the market?
 How do RR executives likely see the market
 Who is in the best position to sell their transportation in “tight markets?
 What are RR executives corporate “DNA” patterns in capital decisions
 How do RR investors financially see the RR markets and “expected” use of cash?
 How do I, convert this complexity to “choices” that represent reasonable:
 High rail traffic and investment pattern market outcomes… … or
 Low outcomes…
This is not a financial stock assessment of railroad SWOT
How is this future economic different?
 It starts from an intense review of global supply/demand & growth
 How is the market demand for movement of goods changing ( + or - )?
 Where around the globe are the changes being “driven”?
 How does that tie into the US / North American market?
 What’s the consensus outlook by global versus domestic economists for GDP changes?
 How does the rail competition (trucking) see the market?
 How do RR executives likely see the market
 Who is in the best position to sell their transportation in “tight markets?
 What are RR executives corporate “DNA” patterns in capital decisions
 How do RR investors financially see the RR markets and “expected” use of cash?
 How do I, convert this complexity to “choices” that represent reasonable:
 High rail traffic and investment pattern market outcomes… … or
 Low outcomes…
Like in the fog of war… …the Renaissance of rail freight is hard to see…
• Railroad freight is a derived demand industry
They don’t build track and then hope for more freight traffic
Not any more
A trend line decision pattern after about 1917-1930
 They are a risk adverse industry
 They are a mature industry
Growth of railway traffic has at best stalled
Why?
How long?
Best bet recovery outlook?
Market Traffic Changes in US rail freight business
Rail traffic slide continues in North America
• Progressive Railroading Sept 2, 2016
• U.S. railroad carloads, down 7.3 percent compared with the same
week in 2015.
• Intermodal volume was down 5.1 percent.
Only 4 of the 10 commodity groups tracked by AAR reflected
increases during the week
• Grain, up 18.8 percent
• Motor vehicles and parts, up 6 percent & non-food & non-grain farm products & food, up
2.1 percent
All of North America
Energy downturn impact
 Oversupply
 Dropping prices/unit
All of North America
RR analysts and company
managers have their growth
expectations set on intermodal…
…down ~ 4% so far this year
Freight Car Consequences
 Large number of stored coal gons and coal hoppers
 More re-sale than new build in 2016-2019 period
 Far too many tank cars stored in terms of past 4 years production
 Unlikely to return to new car orders for tankers in next half decade
 Ore and metals will await Asian global changes…
 Only then react. Gons and ore hoppers excessive supply over next three years
OUTLOOK 16 Years ago
1.8
OUTLOOK as of 2016 towards
Years 2019 to 2025?
Revised in 2016
The commodity drivers:
< COAL
< Ores & Metals
Slower growth wood/paper
Slower Intermodal growth
Example of 2011-2016 coal decline on CSX
file:///C:/Users/James/Downloads/CSX%20Corporation%20at%20Cowen%20Conference%20-%20FINAL.pdf
Geographic changes in rail freight traffic
Traffic lanes that already have seen significant
changes in tonnage or ton-mile train flows
These estimates are from a variety of sources – and
as a composite are not exact
• LA-Chicago
• A composite ~ change
in traffic volume in the
period 2004 to 2015
~ +18%
• E. Ky coal fields to coastal rail ports and
power stations
~ (35%)
• Memphis/New Orleans gateways ~ (15%)
The take away…
• Not all lanes or commodities
show negative trends
• The impact on selective junctions,
rail yards, rail crew change points,
and O/D patterns shows a WOW
negative traffic impact
Over the past decade… …some rail
experts expected huge track capacity
problems ahead
• That view is changing
• May have more capacity than
thought
CSX network
Losing business… …rail managers react…
• As coal drops, BNSF will add in Sept. 2016 an intermodal service
between Portland, Ore., or Seattle and Dallas/Fort Worth
• Actually cutting the train transit times by up to two days when
compared to rail transit time options currently in the marketplace…
• Made possible as coal volume drops between Powder River mines and TX
power stations
• The new service will be comparable in speed to single-driver, overthe-road options, they added.
http://www.progressiverailroading.com/bnsf_railway/news/BNSF-launches-faster-intermodal-service-betweenPacific-Northwest-Texas--49349?email=jimblaze@comcast.net&utm_medium=email&utm_source=prdailynews&utm_campaign=prdailynews09/2/2016
Structural changes in the US rail freight market
In the USA… …operations by the big 7
2016 2017 2018
In the USA… …operations by the big 7
My predictions… … as of summer 2016
2016 2017 2018
Unchanged @ 7
Down ~ 12%
Down ~ 10%
Up
~ 3%
Down ~ 18%
Down ~ 14%
Changing pattern 2015 to 2018
…Likely to Drop
This previous pattern pf Growth in added 2nd
main tracks will slow
Looking ahead the next two years
Can intermodal rail be the power market engine for the next decade or longer?
Changes I project as possible new pattern
2016
• Locomotives delivered
~
• Freight wagons delivered
450
2017
2018
+ 1.5%
+ ~ 2%
< 51,000
----
~ 34,000
• 2d main line track miles added
~ 130
~100
• Track up for sale/abandonment
~ 4,500 mi ~ 3,000
~
80
----
2025 vs. 2016
Changes I project as possible new pattern
2016
2018
2025 vs. 2016
+ 1.5%
+ ~ 2%
95 to 105
~ 34,000
85 to 100
2017
• Locomotives delivered
~
• Freight wagons delivered
< 51,000
----
• 2d main line track miles added
~ 130
~100
• Track up for sale/abandonment
~ 4,500 mi ~ 3,000
450
100 as 2016
INDEX
~
80
----
10 to 15
------------
A great deal of normalized track maintenance will continue…
• Rail will wear out…
• …or break…
• And ties and track surfacing will
continue
• But the pace may drop as rail gross
ton-miles drop… …a primary
factor in forecasting track repairs
These kinds of corridor capital projects may stop…
possible exception in NE
These and projects like
Houston and Chicago Create
are not being funded…
CSX
RR big 7 company earnings
• Management will reduce
expenses as revenue and
tonnage grow more slowly – or
decline
• Reduce capital expenditures
• Positive cash flow will likely
continue
• Positive “Earnings” will continue
• EPS growth will slow
• Balance Sheet value will drop
with sales
• Dividends paid out are likely to
continue
My forecast of railway industry steel (metals) outlook into 2017
REASONS
Possible growth in the overall US rail market
EXCEPTIONS for non-freight rail
• BART
• WMTA
• Other FTA oversight transit
agencies with “deferred”
systems maintenance
• Transits buying under “buy
America” transit vehicles
• Amtrak… Acella replacement
train sets
• All Aboard America and FEC
selected tracks
EXCEPTIONS into year 2017
• BART
+ Rail cars & track
• WMTA
Track & turnouts
• Other FTA oversight transit
agencies with “deferred”
systems maintenance
Track & turnouts
• Transits buying under “buy
America” transit vehicles
• Amtrak… Acella replacement
train sets
• All Aboard America and FEC
selected tracks + Rail cars & track
Strategic rail freight “Growth”
in period 2017 to 2025
 DIMENSIONAL TRAFFIC
GROWTH
 INTERMODAL 300 MILE TO
600 MILE GROWTH
+ shorter train sets
+ more train frequency/day
+ added passing sidings
+ 2 ft width
+ 1- 2 ft height
 CSX – DC TO BALTIMORE TO
PHL CORRIDOR
+ 1 to 2 ft selective height clearances
Intermodal engineering technology can still “power” selective
rail freight here in North America
Example of future intermodal growth based upon high density vertically
cleared routes… … & selected hub/spoke markets
Based on the evolving NW Ohio and the other CSX
Intermodal hubs like the Carolina Connector along I-95
+ Operational changes like:
much long 16,000 ft passing sidings to be built in existing
single track territory
The forecasts I have shared are based on my due diligence review of multiple
sources and my experience at strategic network research over the past forty years
 I assume an overall US GDP growth of:
I have no financial interest in any
of the big 7 rail companies
& no financial interest in any
suppliers and or manufacturers
~ 2% 2016
~ 2.5% to 3% in 2017
~ 3.5% in 2018… and then beyond @ 3% to 4% range
 My projections assume continued high dividend
out cash flow by rail directors
 …until they see hi-growth projects to finance
 & continued significant heavy haul commodity
freight demand/supply economic issues for the
next two to three years. More global than
domestic.