According to Cowen and Company’s Third-Quarter 2016 Rail Shipper Survey, shippers “are anticipating the lowest rate of price increases over the next 6-12 months that we’ve seen in our survey in nearly eight years,” says Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl.
“Respondents expect a 2.1% increase, down sequentially and well below the survey’s 3.8% average since 1Q09,” Seidl notes. However, shippers are more bullish on their own growth prospects. Overall, the survey is slightly negative to neutral for the rails, in our view.”
“Railroad shippers anticipate an average base rate increase of 2.1% over the next 6-12 months, which is down 80 bps (basis points) sequentially and 130bps below the prior year rate,” notes Seidl. “That’s the lowest rate increase we’ve seen in nearly 8 years. We think this is largely due to a soft freight market as total North American carloads are down 7% YTD. 3Q16 volumes were down nearly 6% y/y. And while fuel prices are off their recent lows, shippers continue to feel as though they have the upper hand in negotiations (or as much of an upper hand as you can have with the Class 1 rails). On the surface that bodes poorly for the railroads, but we think there’s reason to believe they could fare better than shippers expect in near term pricing negotiations.
“According to our recent Chainalytics-Cowen Freight Demand Indices (which can be downloaded from the link below), spot market dry-van trucking rates have risen sustainably 1-2% above new contract rates. Refrigerated spot rates may have bottomed as well relative to contracted rates. Key reasons for why we think shippers may be disappointed in their low pricing expectations include: Strong agriculture shipments (9% of industry volumes) are expected throughout the fall given the bountiful U.S. harvest; coal shipments (13% of industry volumes) have been revived slightly due to an 80% surge in natural gas prices since March; construction product shipments (~10-15% of industry volumes) could pick up over the next 6-12 months as the Federal Highway Bill’s funds, which were authorized and signed in December 2015, are deployed; and increased competitiveness of intermodal (44% of industry volumes) because of rising diesel fuel prices and the prospect for a tighter truckload capacity environment. We expect truckload capacity to tighten up and pricing to remain flat or move slightly higher in 2017, given the ELD (Electronic Logging Device) deadline at year end as well as the natural impact of fleet reductions and Class 8 (truck) new orders that are down 39% y/y.
“Business growth expectations have improved relative to our prior survey, which had been at its lowest level in nearly six years. Shippers expect their businesses to expand at a 2.1% pace over the next twelve months, up from 1.5% in the 2Q16 survey. Employment expectations and confidence have not changed much over the past quarter.
“Overall, we view the results of this survey as slightly negative to neutral for the railroads. Shippers expect price increases over the next 6-12 months to be the lowest in nearly eight years. That tells us that shippers continue to feel empowered by a soft freight market. However, business growth expectations have improved from our prior survey and we see reason for volumes to pick up over the next several months, assuming winter storms do not wreak havoc. Union Pacific and Norfolk Southern are our top picks in the rail space.”
Download attachments: Chainalytics-Cowen Freight Demand Indices