U.S. rail growth this year is expected to outpace overall economic expansion as manufacturing expands and the shifting energy landscape gives as well as takes.
Shippers will push more shipments from the road onto the rails with diesel prices topping $4 a gallon and increased federal regulation, along with tight fleet capacity, pushing truck rates up.
Bustling domestic natural gas production will fill railcars with sand and tankers with chemicals, helping to offset the decline in coal volume. Coal traffic, down 4.7 percent year-over-year in the first seven weeks of 2012, has dwindled because of utilities’ shift to natural gas power, warmer-than-usual weather and a respite in demand from China’s slowing economy.
Analysts expect low single-digit growth, 3 to 6 percent, in carload volume on the intermodal side. Carload traffic in the first seven weeks of the year grew 0.3 percent year-over-year, while intermodal volume rose 2.2 percent, according to the Association of American Railroads.
Intermodal containers and trailers carried by U.S. railroads last year increased 5.4 percent year-over-year to 11.3 million units, but traffic was still down 8.1 percent from the record reached in 2006, according to the AAR.
Intermodal traffic will likely increase in the coming months. Asian factory production slowed in late January because of Chinese New Year, which came earlier this year. Intermodal traffic tied to international trade, accounting for about 60 percent of intermodal rail traffic, is forecast to expand in the low single-digits as the slowing global economy tempers port traffic growth, experts said.
The real driver for intermodal growth in 2012 will come from more domestic shipments shifting from truck to rail, said Tom Finkbiner, senior chairman for the Intermodal Transportation Institute at the University of Denver. With the average truck fuel surcharge per mile at about 59 cents a gallon compared with 35 cents for intermodal rail, shippers can’t afford not to take another look at intermodal rail transport or shore up their existing share, he said.
“I don’t know anyone in the industry that doesn’t expect $6-a-gallon fuel in the next five years,” Finkbiner said.
Diesel prices topped $4 a gallon in the week ending Feb. 27, jumping 9.1 cents to a nearly 10-month high. Oil prices have risen steadily over the past few weeks, hovering above $100 a barrel throughout last month.
Tony Hatch, an independent rail analyst in New York, expects intermodal rail pricing this year to rise more than 5 percent year-over-year. Average revenue per load for intermodal marketing companies grew at least 7.1 percent year-over-year in every month of 2011, according to the Intermodal Association of North America.
Although they wield strong pricing power, West Coast railroads such as UP and BNSF Railway must stay competitive with each other with long hauls, and East Coast railroads must keep a wide pricing gap between themselves and truck carriers, said Larry Gross, a senior consultant with FTR Associates.
Many of those shipments are tied to manufacturing, as the sector has expanded for 30 straight months through January, according to the Institute for Supply Management’s manufacturing index. This steady expansion is clear in the first seven weeks of 2012, with metal shipments rising 10.4 percent year-over-year and metallic ore volume up 28.9 percent.
Growing domestic consumer demand and a shift of automobile production back to the U.S. is attributed to the 20.8 percent jump in motor vehicles and equipment traffic. Even commodities tied to construction — lumber, wood products, stone, clay and glass — are up this year, as apartment building carries the housing industry through a long slog of a recovery.
Despite the healthy traffic seen this year and rosy forecasts for 2012, volumes of two of the largest carload commodities are expected to decline. Waning foreign demand for grain is forecast to keep carload traffic down this year, with volume down 11.8 percent through the first seven weeks in 2012.
Warmer-than-usual weather, utilities’ shift from natural gas to coal and slackening demand abroad have battered coal shipments; traffic is expected to be down for the rest of the year. Alpha Natural Resources’ announcement in early February that it would close four coal mines immediately and two more mines next year signals export coal shipments won’t be able to offset a decline in domestic demand.
The growth of volume related to natural gas production hasn’t made up for the decline in coal shipments, but analysts expect the fuel source darling to make up a larger share in coming years. In another sign of their near-monopolistic hold, railroads are poised to gain, regardless of the changing winds of energy production.