US rail volumes still under pressure

A photograph of a hopper car parked in a rail yard.

U.S. weekly rail traffic is still facing double-digit percentage declines, with carloads once again down by over 20% since the same period in 2019.

U.S. rail volumes on a weekly basis totaled 449,092 carloads and intermodal units for the week ending July 11, according to the Association of American Railroads. This is a 14.9% decline compared with the same period in 2019.

Of that total, weekly U.S. carloads were down 22.7% to 201,703, while U.S. intermodal units totaled 247,389 containers and trailers, which is a 7.4% decline compared with a year ago.

On a year-to-date basis, U.S. rail traffic was off by 12.9%, at 12.6 million carloads and intermodal units. 

U.S. rail carloads (blue: RTOTC.USA), intermodal trailers (orange: RTOIT.CLASSI) and containers (green: RTOIC.CLASSI) over the past year. (FreightWaves SONAR)

Second verse, same as the first?

Earnings season for the Class I railroads kicks off on July 17, with Kansas City Southern (NYSE: KSU) reporting its second-quarter earnings results. Next week, all of the other publicly traded Class Is except Norfolk Southern (NYSE: NSC), as well as some rail equipment manufacturers, will be releasing their second-quarter results.

With North American rail volumes down by double-digit percentages in the second quarter because of the coronavirus pandemic, one of the main focuses of the earnings calls may be how the railroads managed to cut costs in the second quarter to manage the dips in revenue. 

But another question could be how the railroads view the second half of the year, especially as trade uncertainties with China continue to loom and the U.S. is still coping with COVID-19 outbreaks in certain regions.

“This is not a traditional recession. We cannot look at it that way. This is a pandemic where we had a shutdown, we then are in a quarantine phase and then we’ll be looking at the restart,” said Eric Starks, president and CEO of FTR Transportation Intelligence, a consulting firm,  Starks made those comments on a June 16 webinar that gave a quarterly outlook on the U.S. railcar sector. 

A number of factors weigh into railcar demand, including the rate of U.S. industrial production, which can be garnered through data from the Federal Reserve, and the seasonality of freight shipping, according to Starks.

But what can be gleaned from existing data is that it will take several quarters for U.S. railcar utilization to reach pre-pandemic levels. Carloads in April and May were so low because of the pandemic. Furthermore, some key sectors are still facing headwinds, which in turn leads to potentially less carload utilization. 

FTR estimated last month that railcar utilization was about 51.8% in the second quarter, which is significantly lower than past quarters, according to Starks.

“This is basically saying, for every car used, you have a car parked. That’s just tremendous,” Starks said last month.

Indeed, since the webinar’s airing last month, railcar utilization has weakened further to an all-time low of below 50%. The freight market for carloads is stabilizing, but is failing to show growth, Todd Tranausky, vice president of rail and intermodal for FTR, told Freightwaves.

What complicates the picture is that some sectors face more headwinds than others, which translates into some railcar markets being more under pressure than others. For instance, the market for small cube covered hoppers has been “decimated” amid low energy prices and falling demand for certain types of sand shipments, Tranausky said last month.

Earlier this week, FreightWaves reported that Hi-Crush filed for bankruptcy amid slumping energy prices. Hi-Crush is a supplier of frac sand. 

However, the extended closure of the Dakota Access Pipeline could help some incremental crude carloads move, although “it is unlikely to move the needle, especially at current crude prices,” Tranausky told FreightWaves on July 16.

Meanwhile, the market for medium-sized covered hoppers is facing trade-related uncertainties because a large portion of the U.S. grain market is export-bound. And the market for jumbo-covered hoppers and pellet cars is also vulnerable because anticipated Gulf Coast capacity expansions for plastics production in 2023-2025 are under threat from lower plastics demand globally, Tranausky said last month.

“The freight demand that we’ve seen come out of the market during the pandemic is going to be slow to come back into the market, and that means it’s going to reverberate through the rail equipment space for years to come,” Tranausky said in June. “This is not going to be a one quarter, two quarter, or even a one year phenomenon. You’re going to feel the effects of this for some time.” 

Click here for more FreightWaves articles by Joanna Marsh.

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