Third Quarter Carload Declines Worst Yet In 2019

Rail volumes continued their declines in the latest week according to the Association of American Railroads (AAR).

Week 39 of 2019 was no better than the ones that preceded it as a number of demand headwinds overhang the rail industry. Total U.S. carloads declined 7.4% year-over-year to 529,336 units in the week ended September 28, with metallic ores and metals (-17.9%), grain (-17.8%) and coal (-11.5%) posting double-digit declines. The 6.9% decline in U.S. intermodal shipments for the week was in-line with broader declines.

Third quarter 2019 carloads

For the third quarter of 2019, total carloads were down 5.6% year-over-year, worse than the declines seen in the first two quarters of 2019 – -4.2% in the second quarter and -1.8% in the first quarter.

A weaker industrial economy, loose truckload (TL) capacity and lower bulk loadings have been the primary culprits. The September Institute for Supply Management (ISM) report may sum up the general environment for carloads best.

The Purchasing Managers Index (PMI), a survey of manufacturing supply executives, shows a steady state of decline for the manufacturing sector. September's 47.8 reading was the second consecutive month the index was sub-50, which is considered contraction territory. The index breached this threshold for the first time in more than three years in August and now sits at a low not seen since 2009.

Purchasing Managers Index – SONAR: ISM.PMI

Excess truck capacity has been a headwind for rates in the TL spot market, making the mode more competitive on a pricing basis when compared to rail. U.S. intermodal carloads were down 5.8% year-over-year in the third quarter. Bulk carloads, down 9.1% in the quarter, have been led by lower export coal demand (total coal carloads down 9.5%), and a slow start to the corn harvest (grain carloads down 7.7%). Corn accounts for roughly half of most railroads' grain shipments. This year's late planting due to wet conditions has resulted in a late harvest, which is about half of what it would historically be at the end of September.

However, many analysts are saying that the delayed harvest will not likely result in lost grain carloads. "Looking forward, much of these volumes should be delayed rather than lost with a potential grain carloads snapback in the first half of 2020 as rails ship the delayed 2019 harvest out of storage," said Susquehanna Financial equity analyst Bascome Majors in a note out to clients today.

This year's bright spot for the railroads have been chemicals (down 0.4% in the quarter) and petroleum products (up 4.8%). While flooding in Houston has been a headwind, these shipments have remained relatively resilient.

Heading into the third quarter earnings season, the railroads clearly saw a revenue issue compared to the same period in 2018. The big question will be were cost control measures and precision scheduled railroading (PSR) initiatives enough to offset topline headwinds. The Class I railroads did see improved network fluidity in the quarter. Velocity has improved 5.9% on the U.S. railroads with dwell times improving 14.6% through week 38.

Total North American carloads declined 5.8% year-over-year in week 39 with Canadian carloads moving 3.3% lower. Year-to-date, North American carloads are down 2.8%.

"In 2019, railroads are facing multi-pronged challenges. Fundamental long-term structural changes – including the continued erosion of coal markets; growth in the domestic intermodal and chemical sectors; and the current disruptions to manufacturing, agricultural and international intermodal markets stemming from trade uncertainty and the evolution of consumer purchasing practices – have all required adaptation and renewed focus on basic railroad management and operational principles," said AAR Senior Vice President John T. Gray.

Total Carloads (USA) – SONAR: RTOTC.USA

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