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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.