Moody's Views US Freight Rail As 'Stable' In 2021

Moody's Investor Services has upgraded its outlook for the North American rail industry from negative to stable amid expectations that rail volumes will continue to grow in 2021.

Moody's expects volumes for most types of freight to grow over the next 12 to 18 months, with intermodal shipments rising at "a mid-single-digit pace," the bond credit rating firm said Friday.

That intermodal growth will be driven by several factors, including Moody's expectations for consumer spending and currently low inventories, tempered by pre-COVID consumer levels, according to Rene Lipsch, Moody's vice president and lead author of the report.

But a high conversion rate from trucks to the rails is less likely in the immediate term, Lipsch told FreightWaves.

"Railroads will aim to convert more freight to rail, aided by much improved service levels, but the impact will be incremental and very gradual," Lipsch said. "Low diesel prices also help truck carriers to remain competitive, notwithstanding tightening truck capacity and driver shortages. Truck capacity probably needs to tighten further before more conversions occur."

Total freight volume could grow between 2.5% and 3.5% in the next 12 to 18 months, after falling 9.3% in the last 12 months, Moody's said. That volume growth could encourage pricing gains, which could lead to revenue growth of 4.25% to 6% for the railroads. That forecast excludes the effect of possible changes in fuel surcharges, Moody's said.

But Moody's stopped short of providing a positive outlook for the rail industry next year, noting that "the economic recovery is tenuous and remains closely tied to the containment of

the coronavirus," Moody's said. Rising infection rates, high unemployment levels and the lack of an economic stimulus are among the factors tempering Moody's view.  

Low inventory levels and an ongoing restocking of warehouses and distribution centers will help fuel intermodal volumes, with retail sales in 2021 expected to rise between 3% and 5%, according to Moody's. The firm also expects continued strong growth in containerized freight amid a surge in container import volumes. 

Indeed, intermodal shipments rose 1.8% in the last three months after falling 6.3% in the last 12 months, Moody's said.

Meanwhile, Moody's view on carloads is mixed. An anticipated increase in demand for electric power generation, as well as higher prices for competing generating fuel natural gas, could actually help U.S. coal production recover slightly, although coal overall still faces a secular decline. 

Other commodities such as grain, with shipments surging by about 10% in the last three months, could also raise carload volumes.

Grain shipments "are expected to grow at a high single-digit rate for the foreseeable future, taking into account good corn, wheat and soybean harvests after heavy rainfall adversely affected crops last year," Moody's said. "Additionally, export volumes of corn are rising amid competitive U.S. prices and reduced supplies in other countries, while soybean exports are buoyed by strong demand globally."

But carloads of petroleum products and "possibly crushed stone, sand and gravel" could be under pressure in 2021. "Persistently low oil prices in 2021" as well as the U.S. Energy Information Administration's forecasts for production next year are factors contributing to the outlook for lower petroleum product volumes. Meanwhile, the preference for locally sourced sand for oil fracking in the Permian Basin will dampen sand volumes, Moody's said. 

A year ago, Moody's lowered its outlook for the North American freight rail industry to negative from stable amid expectations that overall freight volumes could fall by 1.75% to 3% over the next 12 to 18 months.

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