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By Desiree J. Hanford
Take a fluctuating dollar, add a U.S. economy that already may be in a recession, throw in slowing economies worldwide and add a dash of one rapidly growing Asian country. Then hit the “blend” key.
That’s the global concoction North American Class Is find themselves drinking these days, and it has a sweet yet bitter taste. Exports thrive when the dollar is weak and suffer when it’s strong. The United States continues to import a lot of goods made overseas, but the pace has slowed as the economy grinds to a halt. Because so many more items are imported than exported no matter the economic environment, railroads’ international intermodal (i.e., container) business is down.
A silver lining has been overseas demand for U.S. agricultural and other commodities, such as coal, which remains strong.
Regardless, rail execs aren’t panicking. They won’t be making any strategic shifts. They’re still bullish on the long-term health of global trade. They plan to ride out the economic storm and do what they can to buffer their businesses from it — however bumpy the ride gets.
“There are a lot of things happening all at once with the credit markets, falling housing prices and rising fuel prices,” says Steve Branscum, group vice president of consumer products for BNSF Railway Co. “All that together has really slowed down demand, and I don’t think the experts have a good feel for when it’s going to come back.”
How sluggish is the demand these days? At BNSF, import-export business is down between 9 percent and 10 percent in the past few months — “a pretty significant drop,” says Branscum. Exports are a bit stronger because of the value of the dollar, which has shown signs of strength in the past few months, and the movement of agricultural products in containers.
On the other side of the equation, imports are down about 12 percent to 13 percent, he says.
Similarly, Norfolk Southern Railway’s international container business is down year over year because imports are off from last year’s pace, says Jeff Heller, assistant vice president of international marketing, noting that there is a direct connection between the U.S. economy and changes in the strength of the U.S. dollar.
Slower global growth (if not outright global recession) certainly will lead to reduced demand for some U.S.-made goods, and that, too, could affect export flows, says Fitch Ratings analyst Steve Brown. Pinched consumers cut back on retail purchases, and that has had a domino effect throughout the supply chain.
“In the last several months, there appears to be a pretty steep decline in intermodal containers, particularly from the Pacific into West Coast ports, and that will have an effect on import trade flows in coming months,” Brown says.
At the Port of Los Angeles, it already has. Container counts as measured by 20-foot equivalent units (TEUs) were down 4.8 percent through September compared with volume from 2007’s first nine months. In September alone, loaded imported containers decreased 9 percent.
And although loaded exported containers increased 5.7 percent for the same period, total container counts were down 6.7 percent.
“October will be an interesting month because most of the Christmas stuff is coming in right now,” says Port of Los Angeles Marketing Manager Chris Chase. “What we’re worried about is that there won’t be a hot item or replacement orders. There really isn’t anything out there that says we’ll have a great Christmas season.”
Although incoming container volume has decreased, railroads still must continue making investments in infrastructure to take advantage of a turnaround, and therefore rising demand, when it does occur, Fitch’s Brown says. When the United States emerged from its last recession earlier in the decade, railroads were unprepared for the increased demand, which led to congestion problems systemwide.
“And in general, the long-term view is that we’ll see growth in demand on railroads, even if there’s a temporary reduction the next one to two years,” Brown says.
Indeed, bullishness abounds when it comes to global trade and transportation, and the long-term health of the global economy, and there are good reasons for that sentiment. The aforementioned weak dollar makes U.S. goods cheaper abroad, leading to an increase in U.S. exports. For railroads, that’s translated into robust international intermodal business.
The segment’s gotten a boost from what seems like never-ending insatiable consumer demand for items made in China and other parts of Asia. And China’s infrastructure and food demands are good news for agricultural products and commodities, such as grain and coal.
“Long term, we believe that the import growth will be back and continue on a strong trend,” says John Kaiser, vice president and general manager of intermodal for Union Pacific Railroad. “The cost to produce products in
lower-wage countries makes sense.”
Grain and coal exports have been particularly strong for railroads, but export strength doesn’t stop there. CSX Transportation’s export business has been helped by the lower value of the dollar and demand for metals and some forest products, in addition to grain and coal, says John Koch, managing director of international sales and marketing.
In particular, China needs raw materials to keep its economy growing — a demand that has “changed the global economy,” Koch says.
China’s not the only global game changer. Brazil, Russia and India —— known together with China as the BRIC countries, which some observers believe will be wealthier than most of the current economic powers by the middle of the century — now are key drivers in global trade, Koch says. Products transported to and from Brazil, Argentina and Chile flow in and out of East Coast and Gulf of Mexico ports, he says.
And the Indian market is becoming increasingly important because of its large consumption and production bases.
“Some of the richest people in the world are there, with a large middle class,” Koch adds.
Moreover, the United States has healthy trade business with Japan, Taiwan and South Korea, and there’s been discussion about developing relationships with Vietnam and Thailand, notes BNSF’s Branscum. There’s also a fair amount of trade between the U.S. and Europe, much of which flows through East Coast ports, he adds.
Likewise, Mexico and Canada will continue to be two of the United States’ largest trading partners, and North American railroads will continue to tap into that trade relationship. Kansas City Southern is registering volume growth of 40 percent year over year at the Port of Lázaro Cárdenas on Mexico’s West Coast, says Bill Galligan, vice president of investor relations.
The railroad’s aim is, in part, to meet the demands of Mexico’s growing middle class, which means getting products to retailers such as Home Depot and Lowe’s.
The naturally deepwater port, which is located near some of Mexico’s largest cities, is ideally situated to provide Asian trading partners with a competitive alternative to West Coast ports, especially when they’re congested, KCS execs believe. The port also has plenty of land around it for expansion, Galligan says.
“Commodities play less of a role at Lázaro, with container and consumer goods growing,” he adds.
Lázaro Cárdenas isn’t the only bustling port serving Asian markets. Although consumers have cooled their spending habits, the Port of L.A.’s Chase notes that the flat-screen television market seems impervious to the soft retail market. Many of those TVs are making their way to the port in containers, and then moving to cities such as Chicago, Memphis and Dallas, Chase says.
Meanwhile, UP and BNSF are seeking to expand their presence at the port. UP plans to double its footprint at the port and BNSF wants an equivalent-sized yard, Chase said. BNSF will operate a dock rail facility the port is developing. The facility is expected to be completed next year.
Bottom line: Every North American Class I continues to take steps to capitalize on an increasingly global marketplace.
Canadian National Railway Co., which declined to provide comments for this article, is banking on the Port of Prince Rupert, an international container terminal and transload center in British Columbia that opened in October 2007, to help smooth the flow of imports and exports.
Prince Rupert is more than a day’s sailing time closer to Asia than Vancouver and Seattle, and nearly three days closer than L.A./Long Beach, according to CN. The terminal eventually will be expanded to handle 2 million TEUs.
CN’s also gearing up for booming business from the Indian subcontinent, which the Class I serves via the Port of Halifax, Nova Scotia.
Last year, the Halifax Port Authority and Suez Canal Authority entered into a memorandum of understanding aimed at promoting an all-water route between Asia and the Indian Subcontinent by moving cargo through the port via the canal.
Meanwhile, UP has been double tracking its 760-mile Sunset Route intermodal corridor between L.A. and El Paso, Texas, with 60 percent of the work expected to be done by the end of this year, UP’s Kaiser says. The railroad also built new terminals along the route, including one in Dallas, and has expanded others in Memphis, Chicago and L.A.
“The severity of the economy isn’t something anyone foresaw, but we’re still bullish for the long term,” Kaiser says.
And then there’s KCS and NS, which are jointly expanding the Meridian Speedway, a 320-mile line between Meridian, Miss., and Shreveport, La.
NS is spending $300 million to increase capacity and improve transit times. The railroad also began work in October 2007 on raising vertical clearances in 28 tunnels on the Heartland Corridor, a new intermodal route between Hampton Roads, Va., and Chicago. The railroad needs to increase its intermodal capacity by double-stacking containers, so the additional clearances are necessary, NS’s Heller says.
In addition, the Class I in March opened a new intermodal terminal on the Heartland Corridor in Columbus, Ohio. The railroad is waiting for Surface Transportation Board approval to begin upgrading the Patriot Corridor between Albany, N.Y., and Boston.
“We’ll continue to consume goods made elsewhere,” Heller says. “That may soften a bit but it will continue, and we’ll continue to export more and that’s picked up because of the dollar. But we still import much more than we export, and we need to invest in our network to take advantage of that.”
CSXT also is seeking to leverage its East Coast position. With operations in the eastern half of the United States, the Class I is in an ideal position to take advantage of the changes in the Panama Canal, Koch says.
A third set of locks on the canal is expected to be finished in 2014, allowing larger ships to pass through. That means more volume will be handled by ports on the Atlantic and Gulf of Mexico, where CSXT has a presence, Koch says.
Meanwhile, BNSF is building large, industrial logistics parks in Memphis and Kansas City, Mo., and determining whether to construct one in Atlanta, Branscum says.
“We really haven’t moved away from our long-term strategy for serving consumer markets,” he says. “When there’s a business cycle downturn like the one we’ve had for the last 18 months, and which could continue for the same amount of time, we’re cautious and prudent.”
Clearly, Class Is are cautious about the near term, and rightfully so. But they remain upbeat and optimistic about the longer-term health of not only the U.S. economy, but the global economy, as well.
Desiree J. Hanford — who worked for Dow Jones & Co. the past 10 years covering the equities market, including transportation — is a Chicago-based free-lance writer.