Rail volumes run downhill; impact on rates unclear

By Dave Hannon -- Purchasing, 12/17/2008 12:36:00 PM

Rail Volumes

The decline in U.S. Class I railroad volumes has gotten steeper as the fourth quarter has progressed, and the outlook for the first quarter doesn’t show an uptick. But experts say it’s unclear if the 2009 demand slump will be enough to give shippers leverage on the usually very firm rail rates.

Market analysts at Stifel, Nicolaous and Co. say beyond the actual declines, what is most noticeable about railroad volumes is the acceleration of the rate of decline throughout the quarter. According to the Association of American Railroads, carload volumes declined 10% in November after a 2.8% decline in October and 4.6% decline in September. Early December volumes show significant declines as well.

For 2009, Stifel predicts declines averaging 4%, with volumes hitting bottom in the first quarter before trending back up in the second half of the year.

What impact the continuing declining volumes will have on rail freight rates is a topic of much debate, with supporters on both sides of the fence. As Purchasing.com reported in October, railroads tend to be able to keep rates higher longer than other modes when volumes decline. Stifel expects rail carriers to maintain pricing firmness in 2009 increasing rates 4-6%. And in a recent report, Fitch Ratings corporate finance director Stephen Brown said Fitch expects railroads generally to retain their pricing power in 2009, although “lower overall volumes could result in some deterioration in pricing later in the year.”

But Goldman Sachs analyst David Feinberg says railroads may have to concede some of their traditionally strong pricing power in 2009 as they resign contracts for next year amid continuing demand declines. Feinberg predicts that North American railroad volumes will fall by 6.3% next year, compared with a previous prediction for a 2.5% decline. The slump will be driven by lower demand for coal and declining intermodal shipments as U.S. imports slow.

And UBS analyst Rick Paterson is much more convinced rail volumes will push rates lower and, according to Reuters, said “we think that game is over” and 2009 will bring real rather than modest volume declines and an erosion of pricing power, necessitating rapid cost cutting. “Any rail suggesting 2009 volumes will be 'OK' or 'flat' is in fantasy land,” Paterson wrote. “All rails should be preparing for the worst. Get the knives out.”

As Paterson suggests, another potential impact of declining rail volumes is railroads scaling back capital spending, which could eventually affect service levels. While rail volumes are declining in the near-term, the long-term outlook calls for significant growth in the coming decades. In its most recent filing with the SEC, Kansas City Southern, for one, announced plans to reduce capital spending and other expenditures for the first half of 2009 and possibly cut spending even more in the second half of 2009 if the economy doesn't improve.

However, President-Elect Obama’s plan to increase government spending on infrastructure could potentially offset some of the decline in spending. While the details of that plan’s impact on the railroad industry are unclear, some market watchers hope that Obama’s plan to ride to his inauguration on a train is a good sign.

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RSI Logistics Home Page Industry Updates Rail volumes run downhill; impact on rates unclear Rail volumes run downhill; impact on rates unclear By Dave Hannon -- Purchasing, 12/17/2008 12:36:00 PM The decline in U.S. Class I railroad volumes has gotten steeper as the fourth quarter has progressed, and the outlook for the first quarter doesn’t show an uptick. But experts say it’s unclear if the 2009 demand slump will be enough to give shippers leverage on the usually very firm rail rates. Market analysts at Stifel, Nicolaous and Co. say beyond the actual declines, what is most noticeable about railroad volumes is the acceleration of the rate of decline throughout the quarter. According to the Association of American Railroads, carload volumes declined 10% in November after a 2.8% decline in October and 4.6% decline in September. Early December volumes show significant declines as well. For 2009, Stifel predicts declines averaging 4%, with volumes hitting bottom in the first quarter before trending back up in the second half of the year. What impact the continuing declining volumes will have on rail freight rates is a topic of much debate, with supporters on both sides of the fence. As Purchasing.com reported in October, railroads tend to be able to keep rates higher longer than other modes when volumes decline. Stifel expects rail carriers to maintain pricing firmness in 2009 increasing rates 4-6%. And in a recent report, Fitch Ratings corporate finance director Stephen Brown said Fitch expects railroads generally to retain their pricing power in 2009, although “lower overall volumes could result in some deterioration in pricing later in the year.” But Goldman Sachs analyst David Feinberg says railroads may have to concede some of their traditionally strong pricing power in 2009 as they resign contracts for next year amid continuing demand declines. Feinberg predicts that North American railroad volumes will fall by 6.3% next year, compared with a previous prediction for a 2.5% decline. The slump will be driven by lower demand for coal and declining intermodal shipments as U.S. imports slow. And UBS analyst Rick Paterson is much more convinced rail volumes will push rates lower and, according to Reuters, said “we think that game is over” and 2009 will bring real rather than modest volume declines and an erosion of pricing power, necessitating rapid cost cutting. “Any rail suggesting 2009 volumes will be 'OK' or 'flat' is in fantasy land,” Paterson wrote. “All rails should be preparing for the worst. Get the knives out.” As Paterson suggests, another potential impact of declining rail volumes is railroads scaling back capital spending, which could eventually affect service levels. While rail volumes are declining in the near-term, the long-term outlook calls for significant growth in the coming decades. In its most recent filing with the SEC, Kansas City Southern, for one, announced plans to reduce capital spending and other expenditures for the first half of 2009 and possibly cut spending even more in the second half of 2009 if the economy doesn't improve. However, President-Elect Obama’s plan to increase government spending on infrastructure could potentially offset some of the decline in spending. While the details of that plan’s impact on the railroad industry are unclear, some market watchers hope that Obama’s plan to ride to his inauguration on a train is a good sign.