Demand for future rail capacity appears to be as clear as mud. As railroads try to calculate how much equipment and staff they’ll need for the recovery, some shippers are hesitant to line up additional equipment idled by the Great Recession.
“Our visibility into the second half of 2010 and in 2011 can best be described as cloudy,” said James A. Buzzard, president of packaging giant MeadWestvaco.
|Year-to-date freight traffic is improving across all transportation modes, and other economic indicators — from retail sales to manufacturing activity and consumer confidence — point to a healthy rebound. Yet Buzzard isn’t convinced the recovery will be very strong.|
“We at MeadWestvaco are still planning and preparing for prolonged economic softness, including low levels of consumer spending and business investment,” Buzzard told the National Association of Rail Shippers annual conference on May 27.
Many companies, buffeted by the economic turmoil of the past two years, share that caution. Rail officials, however, are increasingly convinced the recovery is solid. Industry experts tell shippers they soon could face a shortage of equipment in place to haul their goods if they don’t give railroads enough warning to prepare for increased shipments.
Richmond, Va.-based MeadWestvaco serves a broad array of paper and packaging markets across North America. It also gets half of its $6 billion-plus in revenue from overseas buyers, ranks 18th on The Journal of Commerce’s list ot Top 100 Exporters (http://www.joc.com/top100_2010) and is benefiting from this year’s export boom as well as a domestic rebound.
Yet the packaging company had to slash costs and restructure operations over the past year, and will continue to play it safe until its own customers see more strength.
“Our customers have restocked their inventories, and they’ve prepared for new launches and new promotions,” Buzzard said. “But there is nothing to suggest that they’ll be building additional inventory or making further investments ahead of a still wary and an alarmingly jobless consuming public.”
Buzzard offered his remarks in a keynote address at the NARS event. Shippers also heard from the other side — rail executives, industry consultants and Wall Street stock analysts — saying customers need to tell carriers what they will need in the coming months to avoid a crunch in their freight-hauling networks.
“If all of a sudden the floodgates open, please understand,” said John Lanigan, chief marketing officer for BNSF Railway. Railroads have been redeploying locomotives and railcars since the middle of last year, and recently began activating laid-off train crews. But hundreds of thousands of railcars remain parked, and must go through inspections and sometimes repairs before they can be loaded.
Shippers face a classic Catch-22: If they don’t order equipment ahead of time, they could wait for weeks for enough capacity if their shipments suddenly spike. But they don’t want to line up equipment unless they are sure they will have revenue-generating freight to pay for it.
Also nudging the shippers was Eric Starks, president of consulting firm FTR Associates, who said he was sometimes dubbed “Dr. Doom” for his pessimistic warnings as the recession worsened. He told NARS he is now more optimistic than most forecasters.
A very low level of inventory to sales, Starks said, “suggests that inventories have not been replenished yet.” In other words, FTR does not see a near-term end to restocking but the start of a long-term replenishment phase that will drive manufacturing demand.
That, in turn, means shippers need to shore up their transport needs now, he suggested, to get ahead of demand. But Starks told the shippers, “I don’t think a lot of you are prepared.”
Analyst Anthony Hatch of ABH Consulting said shippers could still catch a break if railroads raise average train velocity this year. Velocity, a key performance metric that measures speed to market, withered in the recession as carriers ran longer trains less often, leaving some shippers complaining about slower overall service.
“If it comes back, you will have the capacity you need,” because trains will cycle cars around more quickly, he said. For now, Hatch said, “you’re not telling them (the railroads) what the second half looks like, so they are not telling us.”
So buoyant carriers want rail shippers to look beyond their order books and anticipate a spreading economic upturn. But many shippers are hesitant to order railcars or boxes they may not need.
“Our customers are still telling us that they don’t know what will happen in their businesses through the end of this year,” Buzzard said, “and many are waiting to see what consumers will do over the next several months.”
Contact John D. Boyd at email@example.com.