NORTH AMERICA: Modest intermodal rebound possible in 2020 05/02/20

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Source: https://www.joc.com/rail-intermodal/aro-2020-modest-intermodal-rebound-possible-2020_20191231.html

 

NORTH AMERICA: Modest intermodal rebound possible in 2020

 

After finishing 2019 on a weak note, US railroads are eager to turn the calendar with the hope 2020 will be a rebound year for intermodal.

Growing business in the first half of 2020 will be a tough task, according to industry analysts, although the forecast is more promising for the second half of the year. Low spot truckload rates will continue to ripple through the US rail sector, and shippers will easily find capacity at competitive rates in early 2020.

Forecasts call for a 1 to 3 percent increase in volume compared with 2019, according to industry analysts at the JOC Inland Distribution Conference in October.

 

Railroads and intermodal marketing companies (IMCs) will be relieved to see positive numbers after a dismal 2019. By mid-December, the fourth quarter was shaping up to be the weakest since 2016, with total intermodal volume — including domestic and international container traffic — was down 7.3 percent from the 2018 peak and 4.3 percent from 2017, according to figures from the Association of American Railroads (AAR).

Among the Class I railroads, BNSF Railway and CSX Transportation were set to end the year with volume at a three-year low, the AAR data showed. Union Pacific Railroad’s intermodal volume was down 6.8 percent from a year earlier and 0.4 percent compared with 2017, so it’s likely to join BNSF and CSX when the final Decembers are tallied. Assuming no major surges in volume, Kansas City Southern Railway will end 2018 with intermodal volume down about 5 percent versus 2018 and close to flat with 2017, and Norfolk Southern Railway will be the only US Class I railroad to end 2019 worse than last year but stronger than 2017.

IMCs, also known as “channel partners,” argue that railroads misjudged the market when quoting contract prices in January 2019. Railroads pushed high single-digit increases as truck rates were plummeting, a combination that led to IMCs losing business.

There are still too many trucks entering 2020, according to the largest truckload carriers, so IMCs have urged the Class I railroads not to make another miscalculation.

Railroads, though, are firm in their conviction not to cave on rates because of a weak truck market in 2020. “We are not trying to chase market share,” UP CEO Lance Fritz said on an Oct. 17 earnings call. “As the economy strengthens, which it will at some point, and as truck capacity tightens up, which it will at some point, we are in a great place to take advantage.”

“Union Pacific is still going to be pushing price from a precision-scheduled railroading (PSR) perspective. I don’t think it’ll be as aggressive as it was last year, with high single digits. It’s probably going to be low singles, barring any major event between now and March,” Adam Rodery, vice president of intermodal and rail with Mode Transportation, said at the JOC Inland Distribution Conference.

Mark McKendry, vice president of intermodal with NFI, reminds shippers not to forget 2018, and that conditions can and will flip. “Intermodal is a vital relief valve for the capacity you’re sourcing. And if you’re not thinking of it as part of your broader strategy, you could be in some serious trouble, not necessarily in the first half, or maybe not even in the back half of 2020, but eventually,” he said at the conference.

One glimmer of hope: 2020 is an election year in the US. “That’s a big, big gift starting out. We must also remember the fundamentals in the economy in this country are very, very strong. Everybody has a job today, everybody is spending money today. There are enough indicators to say that the pace could pick up again. So you don’t want to be so narrowly focused that you take intermodal out of your plans,” said Steve Golich, vice president of Alliance Shippers.

Trade impacts

Union Pacific and BNSF are particularly susceptible to shifts in US trade because they are the primary conduit to haul containers between Los Angeles-Long Beach and middle America. It’s a growing issue for NS and CSX as well, with more port volume shifting to the East Coast.

US GDP is expected to slow from 2.3 percent to 2.0 percent in 2020, according to IHS Markit, parent company of JOC.com. And global GDP is expected to slow from 2.6 percent to 2.5 percent.

“North American freight demand has slowed in 2019 and will slow into 2020, with little hope for a rebound to the strong pace of 2018,” said Paul Bingham, director of transportation consulting with IHS Markit.

He forecasts intermodal volume to be positive in 2020 but only by approximately 1 percent. Larry Gross, president of Gross Transportation Consulting, offers a slightly higher forecast, but still in the low single digits.

Ports don’t expect 2020 to be a windfall year either. Gene Seroka, executive director at the Port of Los Angeles, has expressed little hope for a pre-Lunar New Year surge. A study completed in November concluded that $186 billion of economic activity in Los Angeles connects with China, so the trade situation will have a major impact on the ports of Los Angeles and Long Beach, as well as BNSF and UP.

Top East Coast ports — New York-New Jersey, Savannah, Virginia, and Charleston — forecast slower growth in 2020, between 2 percent and 4 percent. There will be additional opportunities for intermodal as the Mega Rail terminal opens in Savannah in 2020, and Virginia International Gateway’s renovated yard, which opened in mid-2019, gets flexed out for a full year. Both ports have said the new intermodal facilities will slash the time between when a container is discharged and when it’s on an outbound train.

Slim spread

The JOC Domestic Intermodal Savings Index (ISI) shows how narrow the margins are between rail and truck rates. The proprietary index measures spot intermodal rates against spot truckload and contract intermodal rates against contract truckload.

Through October, spot intermodal saved shippers 8.7 percent on average (108.7) for the year. Historical spot intermodal savings were between 16 percent and 20 percent (116 to 120) between 2014 and 2017, according to the JOC index.

But anything less than a 10 percent savings isn’t enough to make intermodal attractive to shippers, according to Phil Shook, vice president at C.H. Robinson. “If you get below that, you start looking at the inherent challenges of intermodal and the variable costs that are out there,” he said at the Inland Distribution Conference.

The variable costs include fees such as storage charges, or rail demurrage, which can be $150 per day. The penalties apply if the shipper doesn’t retrieve its domestic container within one day, or within two days for international containers. A flip fee can also apply if there is a bad chassis or the trucking company uses its own equipment.

Rick LaGore, CEO of InTek Freight and Logistics, said all this is a major shift in the way shippers are being told how to think of intermodal. “Railroads have told us that it’s going to be a high-quality service and we’re going to pay for the high-quality service,” he said. “We’re told to readjust everything that we’ve been taught for the last 20 years, which is you’re going to save 12 to 15 percent. It’s a challenge we’re still working through with PSR.”

The JOC Contract ISI shows an average savings of 19.3 percent nationally (119.3) in 2019. The rolling 12-month average of 21.8 percent (121.8) in October was the lowest since late 2016.

The savings are higher for contract rates because more than 90 percent of intermodal business is done via contract, according to IMCs; some estimate the share is closer to 95 percent. Railroads traditionally save their best rates for contract customers.

The right direction

Service is improving, with fewer containers on the move in 2019. Between Weeks 1 and 47, intermodal train speeds were up 4 percent compared with 2018. CSX and KCS led the pack, with double-digit increases in train speeds. UP and BNSF train speeds were slower than 2018, but each improved year over year in the second half after flooding in the Midwest paralyzed the rail networks in the spring.

Speed, though, only measures when the train is in motion. The metric doesn’t include how long the container sat in the terminal before being loaded onto a train or how long it took to be unloaded and made available for pickup at the destination. A more accurate measurement, IMCs believe, is the time between when a truck drops a container at the origin terminal and when a notification is sent that the box is available at the destination.

CSX has been moving toward such a model, and IMCs are hopeful that other precision-scheduled railroads will do so, too.

Another important question is whether service improvements are simply a byproduct of lower volumes or also upgrades to the rail network. In other words, will service deteriorate when volume rises again?

Shook said the network should be able to handle moderate volume growth, but anything greater than 5 percent can cause a supply chain disruption.

“That was part of … why PSR was such a great idea, because it would allow railroads to scale regardless of volume by having fewer touch points, fewer lanes, and focusing on high quality,” he said. “The jury is out, but I’m cautiously optimistic out of what we’ve seen from the Eastern railroads. The Western railroads are a little further behind in their journey.”

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