Saturday, January 16, 2016

Commodities slide triggers ‘freight recession’ on US rails

In the railways criss-crossing the western US farm belt, grain trains are so abundant you can’t give one away.
Big agricultural commodity traders have been offering as much as $200 per covered hopper car to anyone willing to sublet their 110-car shuttle trains. “You actually have to pay someone to take your cars,” says Dan Mack, vice-president of agricultural transportation and terminals at CHS, a large US grain merchant.
chart: US rail traffic
Spare capacity in the US freight rail system underlines the breadth of a commodities rout that just entered its sixth year. Grain trains are plentiful partly because of declines in US coal and oil production that have freed locomotives and crews hauling those commodities. The strengthening dollar has also whacked international demand for US coal and grain, curbing shipments for export. 

The “freight recession” — as Michael Ward, chief executive of the CSX railway, called it this week — is unsettling for investors. The Dow Jones Transportation Average has declined 10.5 per cent this year, worse than the already jarring retreat of the US stock market. People who view stocks of railways, trucking companies and airlines as a barometer for equities investment have taken notice.
“The transports are definitely flashing a big red warning sign,” says Nicholas Colas, chief market strategist at Convergex, a broker.
The soft rail freight market is a huge change from two years ago. Then, terrible winter weather and booming volumes of cargoes of shale oil and fracking sand contributed to delays. General Mills, the maker of Cheerios breakfast cereal, complained of congestion. Cargill, the world’s biggest agricultural trader, faced a rail car shortage.
“Now we’re facing the opposite,” says Mr Mack. “We’ve seen the decline in demand for multiple commodities. It has opened up a tremendous amount of transportation capacity. If you’re a shipper, you went from a famine to a feast.”
Individual commodity markets, often viewed in isolation, are connected through transportation economics. Shipments of US coal, the biggest commodity moved by rail, declined 12 per cent to 5.1m carloads in 2015, according to the Association of American Railroads.
The decline came as coal lost out to cheap natural gas as a source of fuel at power plants. Prices for US coal fell sharply last year and miner Arch Coal sought bankruptcy protection this week.
As a price slide worsens, oil output from most shale basins has gone in reverse and less crude is also rolling down the tracks. Some traders are storing excess crude in rail tank cars parked near trading hubs, a senior commodities executive says.
chart: transport stocks underperform
The tumult in fossil fuels has thus fed through to grain markets. With ample capacity on the rails, shipping costs have plummeted: the per-bushel cost to carry spring wheat from North Dakota to the Pacific coast has dropped by a third in the past two years, US Department of Agriculture data show.
The secondary market for shuttle trains on the Burlington North Santa Fe and Union Pacific railways, which dart between the western farm belt and grain customers, illustrates the situation.
The market allows big grain traders to reassign trains they had hired to others, for a negotiated price. In early 2014, grain companies with a train to spare could command $6,000 per car above the official railway tariff, traders say. Today, to avoid hefty contract cancellation fees, they are instead paying others to use their unwanted trains.
US commodities
“Basically, the grain industry oversupplied themselves with cars,” says John Crabb, a shuttle train broker at Trade West in Oregon state.
Falling coal and oil shipments are not the only reason for the grain train glut. US farmers have been storing billions of bushels of corn and soyabeans to avoid selling at low prices, keeping crops off the rails. The strong dollar has forced the US to cede some global grain market share to exporters such as Brazil and Ukraine, curbing trains to the coasts.
CSX earlier this week reported lower volumes and outlined a “challenging” environment in 2016. Mr Ward told analysts: “You have multiple aspects working against you. The low gas prices, the low commodity prices, the strength of the dollar. All three of those together are really pushing and, in some ways, I think you can almost think of it as a freight recession.”
In the year to date CSX shares are down 14 per cent, while Union Pacific has dropped 5.6 per cent.
“In some sense, the transport [stocks] have become part and parcel of the commodity price story,” says Jim Paulsen, chief investment strategist at Wells Capital Management.

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