Analysts predict higher volumes and rates, but offsetting coal traffic decline will be a heavy lift
Each double-stack intermodal train can take 280 trucks off the highways, resulting in lower emissions and fuel consumption. A BNSF train can haul one ton of freight 500 miles on one gallon of diesel fuel.
Source: BNSF Railway
Growth in rail intermodal traffic pretty much “ground to a halt” in 2016, says Larry Gross, a partner and senior consultant at FTR, a freight transportation research company.
Addressing the annual meeting of the Intermodal Association of America (IANA) in September, Gross said intermodal’s advantage over trucking as measured by an FTR index that takes into account many different factors—loads, rates, speeds, truck utilization, fuel price, and expectations—was minor, but that 2017 probably will look better for the intermodal industry, with both rates and volumes rising steadily.
According to Gross, slowly tightening truck capacity should begin to work in intermodal’s favor next year. He believes fuel prices are likely to remain relatively stable or even rise, and port routings are likely to stabilize in 2017.
Last year, intermodal traffic grew 3.4 percent compared with 2014, but Gross is predicting a 2.4 percent year-over-year decline in 2016 and an increase of 2.7 percent in 2017.
But the story is very different for international intermodal, cargo moving in standard ISO containers that can be loaded onto containerships, and domestic intermodal cargo that moves in containers that are 53 feet long and wider than ocean containers or in various size trailers attached to rail cars.
Gross forecasts international intermodal will fall 3.2 percent this year, then rebound 1.8 percent next year. By comparison, he projects domestic intermodal will fall 3.2 percent this year and rebound 3.6 percent in 2017.
This year’s peak season for container imports, while not terribly strong, looked relatively normal, said Gross, but the movement of ocean-going containers to inland destinations “has somehow become uncoupled from what is going on with the import segment.”
He said that while imported container volumes in 2016 were up 1.6 percent through the end of July compared to the same period last year, international intermodal revenue moves were down 4.5 percent.
“That’s quite a divergence,” he said, noting a variety of factors that may be responsible for the difference. They include cargo being delivered to ports closer to points of consumption—e.g. carriers carrying cargo directly to Gulf Coast ports rather than having containers discharged on the West Coast and railed to Houston—as well as increased transloading of cargo arriving in international containers into domestic containers or truck trailers.
Brandon Oglenski, an analyst at Barclay’s, told attendees of the IANA conference he also thinks the outlook for domestic and international intermodal are very different.
He believes there is strong opportunity for converting domestic cargo from truck to intermodal rail. But he said, “I’m not holding my breath any time soon that we are going to get significant expansion of global trade.”
Heavy Lifting. Railroads may become more dependent on intermodal revenue in the future as coal and crude-by-rail volumes fall.
Gross noted that in 2015, railroads reported 23 percent of their total revenue came from the 13.7 million containers and trailers they transported at an average price of $1,157 per unit. The other 77 percent of their revenue came from moving 14.3 million carloads of various cargo commodities, which they transported at average price of $3,724 per carload.
Year-to-date, railways have seen commodities shipments fall by 1.36 million carloads, which would generate over $5 billion in revenue, compared with the prior year.
If railroads want to plug that gap by carrying more intermodal cargo, they would need to carry an additional 4.38 million units at $1,157 per unit, Gross estimated, albeit using what he admitted were “back of the envelope” calculations. At current prices, it takes more than three intermodal units on average to make up for each lost carload of other cargo.
“Intermodal has a tall task ahead of it, and I don’t think it is realistic to expect intermodal is going to make up for all the lost volume in carload,” said Gross.
Federal regulators should consider how the sharp decline in coal traffic is affecting the nation’s railroads, Matt Rose, the chief executive officer of BNSF Railway told IANA members.
Since IANA was formed in 1990, the U.S. population has grown 30 percent, and intermodal volumes have doubled in that time. Coal volumes, meanwhile, are plunging due to stricter Environmental Protection Agency rules regulating its use and falling prices for alternative energy sources like liquified natural gas.
According to the Association of American Railroads, intermodal has grown from 27.3 percent of all railcar loads in 1990 to 49 percent in 2015, while coal shipments have fallen from 29 percent of railcar loads in 1990 to 18.3 percent in 2015.
At BNSF, coal accounted for $1.4 billion in revenue and 763,000 railcars in the first six months of 2016, about 16 percent of overall revenue and traffic. This was down from $2.4 billion in revenue and 1.15 million railcars during the first half of 2015, or 23 percent of overall revenues and traffic.
Rose said the fact that coal is in a “structural decline” is important because revenues from all traffic over the years have provided stable returns that allow railroads to reinvest in and expand their networks to accommodate all growth, including intermodal traffic.
Taxes designed to reduce carbon dioxide emissions could be a benefit to the intermodal industry, but could also be the “death blow” to the business of transporting coal by rail, he said.
“A drop of the magnitude we have seen in coal has the potential to restrict reinvestment if not handled appropriately by our economic regulator,” said Rose.
The outlook for moving crude oil by railcar, which once looked like a big new business for the railroads, has also become cloudy of late amid a global oil glut that has caused per barrel prices to fall to near-historic lows.
The U.S. Energy Information Administration in August noted, “Movements of crude oil by rail within the United States averaged 443,000 barrels per day in the first five months of 2016, down 45 percent from the same period last year,” with fewer shipments of crude oil by rail from the Midwest to the East Coast accounting for about half of the decline.
“Crude oil shipments by rail have generally decreased since last summer for several reasons, including narrowing price differences between domestic and imported crude oil, the opening of new crude oil pipelines, and declining domestic production in the Midwest and Gulf Coast onshore regions,” EIA said.
Source: BNSF Railway
Borrowed Time. Rose expressed concern about what he said were “multiple, overlapping rulemakings” before the Surface Transportation Board that were introduced before the precipitous drop in coal.
He said those proposals could potentially change almost every element of the current economic regulations for the railroad industry, which allow railroads to respond to markets’ real revenues and reinvest.
“The board must take the current economic climate into consideration as it finalizes rules or the consequences to our industry will be sizable,” he said.
The greatest threats to intermodal growth are permitting delays and disapprovals for intermodal facilities, said Rose, noting BNSF is appealing a decision by a California court that blocked the company’s plan to build a new $500 million intermodal terminal about four miles from the ports of Los Angeles and Long Beach.
Southern California is the second largest market for intermodal traffic in the country, and Rose said there is a “clear need for more on-dock rail capacity with container volume expected to grow by 25 percent by 2020 at the ports of Los Angeles and Long Beach and double by 2035.”
After steadily gaining market share for the movement of domestic traffic traveling more than 550 miles, Gross said intermodal has seen its share of the market begin to trend downward recently. That is because increased movements of intermodal containers have not been able to offset a sharp decline in the movement of trailers. FTR is predicting domestic container traffic will increase 4 percent in 2016 and 5.2 percent in 2017, but that intermodal trailer traffic will fall very sharply—21.8 percent this year and 6.1 percent in 2017.
Much of the decline this year, Gross said, reflects Norfolk Southern’s decision to restructure its Triple Crown Services and discontinue use of RoadRailers—special 53-foot trailers that can be run on railroad tracks—on some routes in favor of containers.
Other headwinds faced by the domestic intermodal industry, said Gross, include ample trucking capacity, “tenacious truck competition, particularly at shorter lengths of haul,” and lower fuel prices.
Noel Perry, the managing director at FTR, said the intermodal industry is only going to get “a little bit of help from the economy, not a lot.”
Reviewing economic cycles since 1950, he noted the U.S. economy has been in a recovery since the great recession of December 2007-June 2009 that is probably reaching the end of its life.
“We are kind of on borrowed time,” he said. “There are three that have been longer than this one: the Reagan one, the Clinton one, and the Eisenhower one,” but most others have been shorter. And “as recoveries get older, transportation tends to weaken.”
He said the rail, intermodal and barge industries have all seen negative growth in the last four quarters, and that trucking growth has slowed. However, he added that intermodal was the only one of the four modes whose volumes have exceeded their peak in 2006.
According to IANA, intermodal volumes in second quarter 2016 were down 6.1 percent from the same period a year earlier, but Joni Casey, president and CEO of the group, said “year-end projections are still tracking for growth in both the domestic container and international volumes.”
Perry suggested intermodal executives should be wary that the economy might enter a recession or have a minimal growth year within the next three years. And he said if the economy does enter a recession, volumes will probably take some time to recover.
“I’m going to be very frank here—there is no need over the next five years to add capacity,” he added.
Silver Lining? One positive for intermodal is that the trucking industry is expected to face difficulties finding drivers due to regulations surrounding medical testing of drivers, more rigorous drug and alcohol testing, limits on hours of service, compliance safety and accountability, electronic logging devices, speed limiters, and training.
The truckload business hires about 270,000 workers each quarter, and Perry says about between 150,000 and 160,000 are newcomers “off the street.” That requirement, he said, is expected to increase by about 100,000 per quarter.
“No matter how good the recruiters are, they can’t do that,” he said.
Perry is predicting a capacity crunch in 2017 and 2018 that could cause contract rates to jump 6 to 7 percent from the same period the prior year. Spot rates in some quarters could see even more dramatic year-over-year increases of 10 to 20 percent.
However, new technology is making inroads in the trucking business with automatic breaking, adaptive cruise control that adjusts the spacing between vehicles, and automatic steering to keep trucks within their lane. And these technologies will make being a driver easier, noted Perry.
That new technology also presents opportunities for the intermodal industry since the first places automation is likely occur are closed areas such as intermodal ramps. “What that says is your business has the opportunity to get out ahead of the over-the-road trucker, because you can take your cost down now,” he said. But he also pointed out that the intermodal industry already has a very low overhead cost on its line haul with a two-man railroad crew moving hundreds of containers with each train.
So 15 years from now, if automation allows the trucking industry to eliminate drivers, the intermodal industry could face a vigorous over-the-road competitor capable of slashing its costs in half.
“My advice is you need to be looking at this stuff,” he said of autonomous driving technology. “I thought this was a 2035 kind of thing, but it is moving so fast, it’s likely to be sooner.”