Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl reports on a recent dinner conversation with “a large private shipper” that focused on the proposed Canadian Pacific-Norfolk Southern merger, rail pricing, railcar sourcing, and the U.S. economy. Following are his observations:
“It appears that many shippers remain opposed to a CP/NS merger out of concern that it would drive up pricing without materially improving service. On the equipment front, we now have increased confidence in The Greenbrier Co.’s ability to grow its plastic pellet presence.
“Some shippers appear to believe that a merger is unnecessary in order to relieve the congestion in Chicago. The shipper notes that with ‘rail pricing out of hand’ and ‘too many layers of middle management,’ if CP and NS wanted to improve service fluidity they should focus on interchanging track, not a transaction that faces many large obstacles and uncertainties. Our view remains that while the downside to NS shareholders from embarking on a merger appears limited, the appeal of such a deal may still not be compelling enough for shareholders to jump right on board given that the anticipated premium will not be realized up front and is contingent on a number of variables. On Dec. 24, NS’s management and board unanimously rejected CP’s latest offer, prompting the Canadian carrier to respond by indicating it will now consider strategic alternatives, which we believe could include a proxy fight (click HERE for details)—which could in turn compel BNSF to throw its hat into the ring with an upfront cash premium.
“Some shippers may view certain railcars as commodities, which results in price being a top consideration in procurement decisions. With Greenbrier’s plastic pellet franchise still in its infancy, we believe the company is likely to offer more attractive pricing than others in order to establish a material presence in that market ahead of an anticipated demand increase. Low natural gas prices have led many plastic resin producers to shift manufacturing to the U.S. from more typical production regions, such as the Middle East. With an abundance of railcar manufacturing capacity during the ongoing industry down cycle, shippers may not feel the urgency to place equipment orders well in advance of their needs, something that leads us to believe that a good deal of orders for large-cube covered hoppers should emerge as projects are built.
“‘Just Ok’: That’s how our guest shipper described the state of the economy right now. While pricing to his customers is falling, he has been observing them slowly bringing manufacturing back to North America as the cost differential between “made in the USA” and producing an item in Asia and shipping it to North America narrows. This trend bodes well for freight carriers across modes in North America in the long term, in our opinion.”