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Commentary: Rail chemicals’ 2021 rebound

But beware the pace by chemical sectors and geography

The outlook for rail-hauled chemical traffic in 2021 looks like a mixed weather forecast. (Photo: Jim Allen/FreightWaves)

The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.

Staring into the 2021 abyss, the outlook for rail-hauled chemical traffic looks like a mixed weather forecast.

“Early morning fog, changing to overcast skies, with a high-pressure system moving in later for sunny skies” sounds like the chemical forecast for 2021.

The fundamental assumption is that the COVID-19 pandemic will gradually abate as the immunization shots take hold.

Basic chemicals production appears to have dropped by about 1.3% during 2020.

However, the leading chemical associations saw a statistical recovery underway as 2020 entered the second half of the year.

The broad 2021 chemical outlook for the USA looks like this.

2021 chemical market volume change in 2021 versus 2020

  • Basic overall chemical production should rise by about 5%.
  • Some chemicals may increase at a lower 3.6% or so range.

Here is the railroad freight sector outlook for the chemical commodities as 2020 ends.

Railroad freight impacts

There are some positive railway equipment and logistics notes from 2020 chemical sector traffic.

For example, plastic resins movement was a growth chemical segment overall in 2020 due to the role it plays in producing COVID-19 protective materials.

Some chemical products that support automobile manufacturing are also recovering strongly. Plastics are a big input to automotive. From 2015 through 2019, automotive units averaged nearly 17 million per year. Sales during 2020 are expected to have come in at only 14.4 million units. The outlook for 2021? That is upbeat at perhaps 16 million units.

Here are a few of the strategic unknowns about the chemical railroad logistics sector as we enter 2021.

Here as a reference is the recent year’s trending of chemicals over several major railroad networks.

Chemical rail freight traffic year over year in recent periods

RailroadYear 2019YTD 2020Pastfour weeks2020 TDQ42020Q32020Q22020Q1
Compiled by SFG using AAR and other data sources

Level of confidence into 2021?

For those questions, let’s turn to consultants and rating agencies for their views.

Deloitte recently expressed its outlook for the chemical and related petroleum and gas industry. 

Deloitte believes there is a transition underway as to both supply and prices for oil and natural gas across both Canada and the United States.

Is the rich flow of natural gas going to be there as relatively inexpensive feedstock for the chemical industry, or not? 

While most seem to think it will, there is a level of uncertainty as 2021 rolls out toward a five-year or longer horizon.

There is also a competition issue from other providers like the Middle East. 

Might the recent surge in building new chemical facilities in the U.S. suggest a potential overbuilding of petrochemicals capacity?

A new U.S. political administration might simultaneously impact the outlook for chemicals and therefore the rail freight chemical outlook.   

On a positive note, Deloitte suggests a reshifting of the U.S. chemistry business model to a growth in rail-served recycled and renewable feedstock-based polymers. 

Various rating agencies also follow the chemical industry.

A November 2020 Fitch Ratings business review suggests there is some uncertainty.

Fitch does forecast overall growth prospects throughout broad chemical sectors.

However, there is some uncertainty because of the continued social distancing and virus issues as 2021 begins.

That seems reasonable. After all, wide general population distribution of the COVID-19 virus shots might not occur until the mid- to late second quarter. 

Optimistically, an increase in certain packaging and health care product uses may improve those chemical-related market sectors a bit faster.

If the chemical industry turns fiscally conservative and seeks to preserve corporate liquidity and strong free cash flows, that might lower volume recovery.

If the chemical market recovery pace slows, that could translate to a slow recovery in new tank car orders and also a more conservative addition to the covered hopper car fleet.

Fitch Ratings does not seem to be projecting a conservative approach by the chemical companies or their customers. It is simply stating an obvious open question.

Of course, there could be an upside if the chemical companies decide to strengthen their warehousing capabilities by increasing the rail fleet use as a mobile warehouse network. 

Here is this columnist’s rail market outlook.

  • Slow new tank car order recovery into the second half of 2021.
  • Increased pace of backlogged tank car deliveries into the second half.
  • Gradual increase in new orders for covered hopper cars for plastics.

Yes, the momentum for increasing railroad chemical traffic should continue in 2021.

As always, check other sources for their outlooks.

And contrary opinions are welcomed.

Recommended references

The American Chemical Council; Year-End 2020 Chemical Industry Situation and Outlook report.

Deloitte: 2021 Chemical Industry Outlook; Dec. 8, 2020.

“Rail Time Indicators” — Dec. 4, 2020; Published by the AAR; Washington, DC.

The Rail Report — Weekly; Susquehanna Financial Group LLLP; Bascome Majors, CFA.

Jim Blaze

Jim Blaze is a railroad career economist with an engineering background and a strategic analysis outlook. Jim’s career spans 21 years with Consolidated Rail Corporation (CONRAIL), 17 years with the rail engineering firm Zeta Tech Associates, 7 years with the State of Illinois Department of Transportation in Chicago urban goods movement research, and two years studying what to do with the seven bankrupt and unrecognizable Northeast railroads at the federal agency USRA. Now primarily a teacher and writer, Jim likes to focus on contrarian aspects of the railroad industry.