The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.
This is a follow-up to an earlier commentary about railroads and chemical traffic – see Commentary: Future of U.S. railroads’ chemical transport looks strong.
Since railroad freight is often bulk or shipments of large goods, changes in the economy or in global trade can impact the flow of railroad traffic in large up and down movements. Translation – there will often be cyclicality.
The upside outlook and long-term pattern of market demand for chemicals is still strong. But 2019 proved that nothing is guaranteed.
Table 1 gives us a picture of the recent changes of chemical rail volumes versus several other commodities. There is variance both by time period and among the commodities. It reflects the complexity of the markets over time.
Table 1: North American rail volumes by selected markets – year-over-year % change for that quarter
|
|
1 Qtr17 | 4 Qtr17 | 1 Qtr18 | 4 Qtr 18 | 1 Qtr 19 | 4 Qtr 19 est |
| Chemicals | +0.6% | +2.3% | +1.7% | +4.3% | -0.3% | -4.6% |
| Coal | +14.3% | -3.9% | -2.4% | +2.0% | -6.4% | -13.4% |
| Petroleum | -7.7% | +8.2% | +6.4% | +29.0% | +18.8% | -0.2% |
| Intermodal | +2.6% | +6.6% | +5.5% | +3.6% | -1.3% | -6.5% |
Data source – AAR and ACT Research Co. LLC
While the prospects for more chemical business is still positive, the growth will not be the same across the North American market. There will be pockets of regional growth.
Figure 1 was discussed with groups of shippers and transport carriers at the 2019 FTR conference. FTR makes those exhibits available to FreightWaves participating journalists.
Figure 1: FTR pattern analysis identifies some of the cyclicality in chemical transport
Figure 1 identifies the strength of the chemical railroad volume across a wide geography. There is variance in the volume.
The chemical industry sector is, however, linked to selected high density traffic and energy supply regions. It is those regions that will provide ample supplies of petroleum and natural gas. Those are the essential feedstocks for the petro-chemical business.
The high growth regions will be near Texas and the western Pennsylvania/Ohio shale oil fields. That is where the large chemical plant processing will occur and where the railroads will get their opportunity to move the petroleum industry downstream products. It is likely that New Jersey will also benefit from the relatively nearby shale fields as feedstock for the Philadelphia region. These regions of the Unite States offer relatively cheap energy supply. That is indeed a strategic advantage.
There are possible exceptions. For political reasons, it appears that the state of New York has decided not to participate in the job creation/industrial development opportunities from its oil and gas fields.
Let’s now acknowledge the market risk side. There is a cyclical pattern to chemical movement as shown in Figure 2 by car type. Other graphs would show similar fleet size back-order variances for railcars like those used for frac sand.
Figure 2: Illustration of the variance across six North American railroad freight car types in the period 2013 to mid-year 2019
There is also an element of trade geo-political risk.
Then there are the peculiarities of railroad operations and rail freight car utilization. Chemicals often move differently than other rail shipments. Railcar utilization is often not at all the primary interest of the shippers leasing or owning those chemical and resin cars.
For example, plastic pellet cars (covered hopper type) might typically make only as few as four loaded railcar turns per year. Why so few? Because to the shippers, the railcar is more valuable as a forward logistics warehouse.
The manufacturer is interested in being able to quickly respond to a regional surge in market demand for specific commodities that are remote from the manufacturing plants.
Thus, a car loaded with plastics or other chemical products can sit in storage for three months or more. The storage locations are called SIT facilities. The term SIT stands for storage-in-transit railroad yards. It is a warehousing logistics practice.
There is quite a bit of SIT terminal use. Some railcar builders estimate that perhaps as many as 1,000 railcars are required to transport one billion pounds of plastic produced by the petro-chemical plants.
Perhaps some of this utilization will soon improve as the railroads using precision scheduled railroading (PSR) show evidence of much improved railcar cycle times for the chemical sector.
Before exploring the year ahead outlook, Table 2 provides information regarding what railcar types in the North American rail fleet are the most profitable investment in terms of estimated revenue (earnings). Plastics are big. But so is grain.
Table 2
Here is the tally of the largest car types in terms of railroad company gross revenue earnings:
|
RANK |
AAR Car Type | Car Use description | Cars |
| 1 | C114 | Covered Hopper – Grain | 151k |
| 2 | C214 | Plastics Covered Hopper | 127k |
| 3 | C112 | Covered Hopper – Sand/Cement | 118k |
| 4 | C113 | Covered Hopper Grain/Fertilizer | 116k |
| 5 | J311 | Coal Gondola | 96k |
| 6 | T106 | Non pressurized Tank (Gen service) | 69k |
| 7 | T389 | Pressurized Tank | 51k |
Table 3 shows the relative annual volume size of selected carload commodity markets as an easy reference about the total carload business. Chemicals as a sub-market is large at almost 13% of total carloads across the Canadian, Mexican and U.S. track network.
Still number one in carloads moved is coal. It has not disappeared.
Table 3
Simple comparison of chemical volumes 2018 and 2019 – for all North American railroad freight
(in millions of carloads moved)
Note that the loss of traffic versus 2018 was 748,800+ carloads
|
Commodity |
Yr to Dateend of2019 | 2018 | % Change | Share all freight commodity units in 2019 |
| Chemical | 2,333.7 | 2,369.9 | -1.5% | 12.8% |
| All Chemical & Petrol | 3,572.8 | 3,479.4 | +2.7% | 19.6% |
| Grain | 1,681.6 | 1,750.3 | -3.9% | 9.2% |
| All Ag with Grain | 2,976.1 | 3,074.8 | -3.2% | 16.3% |
| Coal | 4,402.4 | 4,816.6 | -8.6% | 24.1% |
| TOTAL Carloads | 18,241.1 | 18,989.9 | -3.9% | 100.0% |
Source – AAR data and other sources. EXCLUDES intermodal units
Into 2020
As we move into February 2020, what is the 12-month outlook for the chemical sector?
Trade headwinds that slowed chemical exports for U.S. companies during 2019 may now shift a bit. If China, for example, increases imports of both liquified natural gas and petro-chemicals from the United States, there should be year-over-year growth for U.S. railroads. That might appear in the monthly statistics by early April 2020.
There are very few published chemical logistics surveys yet, but it appears logical that a 3% to 5% year-over-year increase in rail-hauled chemicals could occur. That assumes that China does not face internal recession impacts.
The impact on domestic U.S. rail chemical traffic will likely be signaled by announced Chinese orders. How much China might purchase from U.S. sellers is not yet known from the Phase One agreement between the U.S. and China. Even Wall Street pundits seem to be speculating for the moment.
Remember that some of the U.S. exports to China will be subject to better pricing offered by other global sources. Currently, there is insufficient trade data to know.
The first solid signals of impact on the U.S. railroad sector will likely come from announced new railcar orders.
Two railcar types will support the chemical- and plastics-related upside – tank cars and covered hopper railcars.
Which shippers and petro-chemical receivers will start to purchase (or lease) more railcars? Remember that the seven largest North American railroad companies (the Class 1 sector) don’t own or lease these kinds of chemical industry cars.
Or is it possible that shippers might need to order fewer cars?
Is PSR working so well that car utilization has soared? Reviewing a variety of news sources suggests that there is no clear car cycle evidence yet. According to shippers, some certainly have adapted to PSR fixed schedules and occasional car delivery bunching. Some like the consistent reorganizing of railroad train moves into seven-day service operating plan rather than the older five-day service.
Yet others complain that their rail plant sidings simply cannot easily or cheaply adapt to the PSR service changes – not without shipper-borne capital expenditures. The jury seems to be still deliberating regarding customer PSR benefits.
The La Quinta Rail Equipment Finance conference in early March should give a solid lead as to the trending chemical rail sector for the next 24-month period.
As you read today’s commentary, someone somewhere is preparing that kind of specific outlook. They must do so, because so many financial houses show up that write the checks for this equipment. The new railcar buyers have about 30 days to get that message into their slides and then stand before an audience that builds and finances.
My experience says that those chemical sector decision-makers will reflect conservative outlooks. Few want to go first. For three days the participants will be “testing the water.” After all, every 1,000 new railcars represent a cost of over $120 million or more. Railcars last around 40 years. So, there is not a lot of room for error.
As always, contrary logic is welcomed.
Acknowledgements
These technical references below might not agree with my interpretation of the markets. They are nevertheless valuable to you the reader as alternative viewpoints and sources of evidence.
- David
Humphrey, PhD at Rail Lync; N. Am. RR Car Review; REF2019; March 4; - Dan
Penovich, President Mitsui Rail Capital, LLC - Jay
Carter, Strategic Market Manager, The Greenbrier Companies - David
Nahass, President Railroad Finance Corp.
Simple definitions of plastics and resins
Plastics: A group of processed materials, made up of polymers that can be shaped when soft and then hardened, as needed, to keep their shape. Plastic is produced by cracking crude oil and or natural gas as a feedstock.
Resins: Resins are different raw materials used to manufacture plastics. While there are some natural resins like amber, most modern resins
