Market Overview

Fitch: Slow Start to 2012 Evident in January U.S. Rail Traffic

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CHICAGO--(BUSINESS WIRE)--

Fitch Ratings sees little evidence of a notable ramp up in U.S. economic activity in January freight volume trends, with shipments of major industrial commodities growing at a lackluster pace. Data provided by the Association of American Railroads (AAR) points to generally sluggish demand growth across most commodity groups through Jan. 21, with a few notable exceptions where early 2012 expansion may outstrip growth in the broader economy.

Management teams at the largest U.S. rail operators have painted a picture of relatively restrained volume growth for 2012, after rail carload growth slowed in the second half of 2011. Relatively strong operating fundamentals for Class I rail operators such as CSX Corp. and Union Pacific Corp. continue to be driven more by pricing than volume. Revenue per carload growth rates again outpaced volume growth in the fourth quarter, reflecting the strength of the rail pricing environment and higher fuel surcharges.

Early indicators of 2012 rail activity support the view that the U.S. economy continues to grow slowly, following a fourth quarter in which growth was heavily influenced by inventory restocking and a pick up in auto-related shipments.

Total carloads grew by only 1.1% year over year during the first three weeks of January, and robust growth is evident only in a few select commodity groups. Shipments of high-volume commodities such as coal and chemicals are flat or declining on a year-over-year basis.

We note that autos and energy-related freight volumes stand out on the positive side as areas of the economy that are growing briskly. All of the major railroads noted in their earnings calls that they expect volume growth in these sectors to deviate from the broader trend of sluggish expansion.

AAR data indicated that auto-related carlods were up 15.6% for the first three weeks of the year. This may partially reflect continued restocking after supply chain disruption in 2011, but auto sales also appear to be growing at a healthy pace in January. This is consistent with our view that U.S. light vehicle sales volume will likely top 13 million units in 2012.

Energy-related activity remains strong early in the year. Petroleum product rail shipments grew by 22.4% in the first three weeks of January as crude oil resources from emerging shale plays, such as Bakken in North Dakota and Eagle Ford in Texas, develop quickly. Energy sector inputs such as fracking sand and steel drilling pipe are driving growth in carload volumes.

Soft markets include grain (down 13.8%), chemicals (down 2.6%), and coal (down 0.6%). Weak coal shipments in particular may depress U.S. rail volumes this year, as utility coal demand continues to be soft as a result of low natural gas prices, high coal stocks, and mild winter weather across the country.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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