Cliffs Natural Resources, a major producer of iron ore pellets used in steel production, requires a continuous, uninterrupted flow of pellets to steel manufacturers because the pellets deteriorate when stored on the ground. “We can’t have a situation like we did in 2014 with pellets on the ground” due to rail delivery issues, President and CEO Laurenco Goncalves told a record crowd of 600-plus delegates.
In his keynote MARS address, Goncalves said, “We had a phenomenal reaction from BNSF and CN,” and that rail service has returned to normal levels. “I can’t thank BNSF and CN enough,” he said. “We really think this capacity thing is completely at rest.”
Tony Hatch, president, ABH Consulting, predicted continued service improvements on North American railroads, barring some unusual weather event. The result will be more traffic on railroads, and somewhat higher rates for shippers. Even at crude oil prices of $50 (or lower) per barrel, Hatch said, rail is competitive with a motor carrier industry that continues to face strong headwinds due to a lack of drivers and the inability of government to make significant infrastructure investments.
At the same time, Hatch predicts another year of capital investment by railroads that will be on the order of 10% above 2014, which was a year of record railroad capital spending. Railroads have what Hatch described as a “grand bargain” with shipper customers that balances continued improvements against rate increases, which he expects to come in at “mid-single digits” in 2015.
First Union Rail President Barbara Wilson said that, as an equipment supplier tracking how the railroads are doing, “Life is good. Demand is strong across the board for railcars.” She reported that there are very few idle assets, including locomotives, with the current backlog of railcars larger than any since 1979, “when a lot of doctors and dentists were ordering railcars” because of tax write-off provisions. She noted that conditions are different today, with strong market forces driving railcar demand.
Wilson noted some concerns over the fact that the largest backlogs are in cars related to oil production for hauling crude (52,582 tank car backlog) and sand (34,334 hopper car backlog). She noted that anticipated retirements in the tank car fleet, when new regulations are complete, would likely allow the industry to absorb any excess tank car capacity. Also, crude oil and sand shipments account for just about 4% of total rail volume, and demand is strong across the large majority of rail shipment categories. Wilson cited intermodal growth as a particularly “exciting” area for the industry going forward. Falling oil prices are expected to fuel consumer demand, which would lead to continued strong intermodal growth.
CN President and CEO Claude Mongeau said CN’s substantial investments in its U.S. Midwest operations, particularly the former Elgin, Joliet and Eastern Railway (EJ&E), are keeping its network fluid, helping the railroad accommodate increased demand for its freight services, and freeing up rail capacity inside Chicago for other railroads.
Mongeau said CN’s substantial presence in the U.S. Midwest is the product of a series of rail acquisitions and investments that have extended its network reach south, north, and west of Chicago, as well as around the city. In the past five years, CN has invested well over $1 billion in its Midwest operations. CN today has 5,400 employees in the Midwest, roughly 1,400 of whom live and work in the Chicago region. With roughly 25% of its freight traffic touching the city, CN’s Chicago focus is on “network efficiencies, close collaboration with other freight and passenger carriers, and delivering solid customer service.”
Mongeau said the acquisition of the EJ&E in 2009 “has transformed our operations in North America’s business rail hub. The EJ&E solution allows us to seamlessly connect our five rail lines entering Chicago and to avoid congested inner city rail corridors. This is a clear gain for CN, but it also frees up capacity for other carriers on the Belt Railway of Chicago and Indiana Harbor Belt—a benefit for the entire greater Chicago rail network.” He said the “J” is helping CN accommodate rising traffic, which has been growing strongly across all business units for the past five years in both Canada and the U.S.
“Almost 30% of CN’s revenue ton-miles are in the U.S., so the U.S. is clearly an important market for CN,” said Mongeau. “Transborder U.S.-Canada traffic is also a major market for CN. Our northbound traffic has grown faster than southbound freight over the past five years. As such, we play an important role in moving U.S. exports to both Canada and offshore destinations. Our business agenda is shaped by what CN stands for, by what we do best, and by the way we see our role as a true backbone of the economy. At the core of our agenda is CN's commitment to Operational and Service Excellence whose purpose is to help our customers compete better in their end markets.”