Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl attended the National Association of Rail Shippers (NARS) 2016 Annual Meeting, and offers the following report:
The NARS Annual Meeting reinforced our belief that a near-term recovery does not appear to be in the cards and that the U.S. needs to make sure it remains open to global trade. While we see potential for improvement in 4Q 2016 and in 2017, rail stocks could remain range-bound for a quarter or two due to the lack of a clear catalyst.
Michael Ward (Chairman and CEO of CSX) and Lance Fritz (Chairman, President and CEO of the Union Pacific) were keynote speakers on both days. Ward noted that railroads faced a difficult environment for most of 2015 with a rise in the U.S. dollar impacting domestic manufacturing, commodity prices collapsing and the energy market severely contracting. However, he noted “2016 has gotten worse.” His view is that the outlook for coal has worsened and “the engine of intermodal is no longer helping” offset other weak areas due to low diesel prices and ample truck capacity pushing business back to the highways. He did not foresee any near-term help on the horizon. He also noted that the U.S. dollar would likely get stronger as the “U.S. is the tallest midget in the world economy” and should continue to attract attention from currency investors. With that backdrop, Ward stated that CSX will focus on what it can control: safety, service and productivity.
Lance Fritz warned about the U.S. potentially pulling back on global trade agreements and noted how well NAFTA (North American Free Trade Agreement) has worked for business. He highlighted that trade between the U.S. and Mexico has grown four to five times since inception. In fact, the shift of manufacturing to Mexico is real and continues to grow. While the Union Pacific still sees near-term volume challenges, there have been bright spots in construction materials (rock, cement and lumber).
Karyn Booth, partner at Thompson Hine, and Roger Nober, current EVP of Law and Corporate affairs at BNSF and former chairman of the Surface Transportation Board (STB), gave a legislative update. The recently passed STB Reauthorization Act allows for several important things to occur at the STB. The Act will bring the Board up to 5 members from 3, which will allow members to speak to each other without being in violation of the Sunshine Laws about open government. It increases the Board’s investigative powers and directs the STB to report on the status on pending cases. The recent proposal to exempt certain commodities (essentially allowing shippers to bring rate cases) was discussed, and it was noted that the STB is also willing to consider exempting other commodities. Comments are due to the STB in late July with replies expected a month later.
A final decision on competitive switching (open access), a 2011 National Industrial Transportation League proposal, is due by the end of June. This elicited some definitive opinions from railroads and shippers alike. If allowed, it would be the first time since 1985 that any competitive switching was granted in the U.S. Lance Fritz noted that if open access is granted, it would leave railroads with an "opaque look" at certain parts of their business and therefore limit spending in those areas due to the uncertainty of returns. While many captive shippers may favor open access, Ward Nye, Chairman, President and CEO of Martin Marietta, remarked that “government oversight is fine to a point but it can get to a stage that it impacts efficiency and investment.”
A chemical industry specialist highlighted the burgeoning chemical industry in Texas and Louisiana. He noted that several large cracking plants were close to being finished over the next few years including Dow, Chevron, Exxon, Formosa, Sasol, Shintech and Lotte, with others in various stages. With all of this pending production, the U.S. will likely become a major net exporter, and the Gulf Coast currently does not have the capacity to handle it all. Hence, some of the volume should be transported via rail and truck to other export locations. Lance Fritz echoed the positive longer-term outlook for chemicals, and noted that his railroad has already begun investing to handle the anticipated business.
So much of the conference takes place behind the scenes, and we attended two private dinners as well as both cocktail hours in an attempt to mine for even more data points. One large shipper told us that every railroad, save for Norfolk Southern, is willing to “work with them” on pricing. Another rail insider fretted that if things do not pick up over the next few years, we could see more regional price competition among the major carriers. A Gulf port executive told us that they have already picked up new Panama Canal business from the West Coast ports. On the railcar side, while one shipper noted they expect to order 2,000 more aggregate cars between now and 2018, a railcar lessor remarked “pricing was terrible" and “demand stunk.” Yet, all was not negative as one construction materials shipper cheerfully noted that “things are still getting built and storms are still happening.”