Notes from the North American Association of Rail Shippers' annual meeting - by Tony Hatch

A variety of freight carriers, third-party players and, of course, shippers were in attendance at the North American Association of Rail Shippers' (NARS) 2010 Annual Meeting, held May 26-28 in Washington, D.C. For the fifth-straight year, I presented at this event, where a variety of concerns were raised regarding the issues that matter most to the shipper-carrier set.

Increasingly, a major marketplace concern is available capacity. During the summit, there were many questions raised regarding whether railroads would have enough rail cars during the recovery phase (and why so many were still stored). Attendees also expressed concern (fear?) about trucking industry shortages (drivers and equipment), which, if warranted, would bode well for analysts' expectations of rail pricing continuing to beat inflation. Also: For the most part, shippers have been unwilling to offer the rails second-half volume predictions, thus frustrating railroads' planning efforts.

That said: Rail service has been very, very good, as even those who push "re-reg" (in the form of S. 2889) concede. That in itself bodes well for my theory on rail productivity, operating leverage (beyond the short-term obsession with train starts), marketshare gains and share outperformance through the cycle: If the rails can regain the volume lost and beyond at these levels of service and velocity, then a virtuous circle will be created for all stakeholders. Additionally, Eric Starks, president of forecasting firm FTR Associates, reported on the economy, offering a bullish talk led by what he considers to be inventory under-replenishment. But even he saw few rail marketshare gains and didn't detect a deterioration in rail service that usually comes with increased volumes.

Legislative Lull?

Meanwhile, there was plenty to talk (and think) about on the legislative front. As of press time, the hope was that June (as opposed to my own expectations that May) would be the month of activity in D.C. — both with respect to the Section 45G infrastructure tax credit for short lines and S. 2889. Regarding the latter: Proponents of re-reg still believe they'll get their law. The rails could see enough compromise to support the bill; if not, I continue to believe it won't pass. Meanwhile, we still hadn't seen the much-anticipated antitrust component as of late June.

Other NARS notes:

• Representatives from more than 60 shippers attended this year's event, including Target Corp. There were (sort of) hopeful questions on the possibility of rate wars in intermodal after the share shift in the west (Hub and Pacer to Union Pacific) and east (Hyundai to CSX), although rate-war rumors seemed premature. APL Ltd.'s contract is up in October 2011, so the question is: Will BNSF try to "get back" at UP and go after APL?
• Speaking of BNSF: The Class I won a third place "Win-Win" award for creating a binding arbitration system for Montana wheat shipper disputes — a hugely symbolic story in light of the threat of government intervention (re-reg) and given that Montana wheat shippers are the Granger heart of the re-reg (really, reg) populist movement starting in the 19th century! CSX finished 2nd in the "Win-Win" race and the winner was the privately held Watco Cos. Inc., which is telling more of its feel-good story to the public these days.
• The kinder, gentler efforts of CN were noted. The merchandise railroad is buying box cars again, which is worth noting: Box car turns industry-wide remain stuck at one per month. There is a lot of opportunity there, beyond unitizing an increasing amount — not that there's anything wrong with that!
• The ethanol story is building. There could be an increase from 270,000 carloads in 2009 to 300,000 this year, increasingly in unit trains. For ethanol to make its long-term, government-set targets, non-coal sourcing must be used. Cellulosic ethanol uses an exponentially larger feedstock volume than corn; a counter to that was the recent announcement of the first ethanol-only pipeline, although moving from "announcement" to "approval" is no mean feat.