More than floods in the Midwest are to blame for railroad traffic losses

Implications: The Association of American Railroads (AAR) reported that the Midwest Floods “continued to negatively impact rail freight traffic” during last week, a statement easily verified by a quick check of the weekly carloads of the UP RR which showed at 10% drop in carload for the week ending June 21. However, the Eastern railroads which have very few if any lines in the area suffering from swollen rivers, namely CSX and NS, reported carload losses of 8% and 5% respectively. More importantly, a continuing trend in decreasing carloads began in early May and has brought the year over year traffic gains of 1.1% posted on May 3rd down to only 0.3% on June 21st.

Analysis:

During the first half of 2007, both grain and coal traffic segments were down compared to same period in 2006, -6% and -2% respectively. Much of the gains reported for these two commodities in 2008 were just a continuance of the traffic gains recorded in the second half of last year. As the year progresses,  the year over year comparisons for these traffic segments will be less rosy and it is most likely that the overall carload traffic total for the year will be lower than that recorded last year when carload traffic decreased 1.6% from 2006.. The same might even be true for the ton mile count, which is currently up almost 2% over last year, which was down almost the same amount for the year from 2006.

 

Coal accounts for 41% of all railroad carloads, so even a small increase in this traffic will far outweigh major changes in other traffic segments. Coal traffic is up 3.2% nationally, but coal production is up only 0.9% through June 12st. The railroads handle most of the exported coal, which is expected to be up by 50% by volume over last year and account for 160% of the increase in overall coal production in 2008. In other words, without the huge increase in export traffic, coal production would have been down this year. Foreign demand for US coal may not continue. Notwithstanding the weakening US dollar, supply disruptions in Australia, South Africa, and China played a key role in boosting the international purchases of US coal. Foreign suppliers will eventually recover and it is unlikely that US exports will continue to surge or even maintain the sales volumes being recorded today.

 

Grain is the second largest traffic segment, accounting for 7.5% of all US carloads. The 2008 harvest will probably be less than 2007, and with elevator stocks at record low levels, grain traffic in the 2008/2009 grain year that starts in September will almost certainly be less than the current year. Grain traffic for calendar year 2008  should exceed the amount handled in 2007, but not nearly as much as the 18% gains posted for the year thus far.

 

Except for carloads related to metals (ore, products, and scrap), almost all other railroad traffic segments are seeing carloads well be 2007 levels. This situation will continue until economic growth returns.

 

The railroads have been able to offset traffic losses for the past two years with freight rate increases and there is no reason to suspect that they will not be able to continue this practice. Coal and grain prices are at all time record levels and any increases in freight rates for these two commodities would be small compared to the change in basic price increases going to the producers. Rail profits may even rise slightly if rate increases are enough to offset the traffic losses. Next year may be another matter however.