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A Transportation Renaissance is Underway in America

Summary: There’s a transportation boom going on in the United States, supported by a stronger economy, regulatory changes, and shifts in consumer shopping habits. This is lifting the trucking and railroad sectors, and even some domestic maritime freight companies.

After years of so-so growth, the US economic engine is accelerating to a point where second quarter 2018 GDP is expected to exceed 4%. Meanwhile, recent tax cuts and a robust job market have given consumers more confidence to spend. Indeed, U.S. retail sales just posted its biggest gain in six months. Consequently, trucking companies are racing to keep up with surging demand for freight services, as factories bulk up production and retailers build up stocks.Truckstop.com, which matches available freight loads to trucks in the sector’s spot market, is seeing 500,000 to 600,000 loads a day posted on its system these days. That’s more than double the 250,000 average daily loads the market usually carries.

This surge in demand is met with supply constraints. A federal law went into effect this Spring that effectively limits the number of hours and miles a driver can log behind the wheel each day. Truckers must now have electronic logbooks in their rigs to prove compliance, and because the technology is expensive to install, smaller independent truckers have been forced to exit the business.

The tightening capacity and a severe shortage of drivers is pushing freight rates higher. But, given the importance of last mile shipping in the ecommerce era, trucking companies may not have to suffer margin compression, as they are able to easily pass on these higher costs to their end users for now.

Meanwhile, the new GOP tax law gives them more cash for capital spending and to add capacity. This has allowed the market for new heavy-duty trucks to grow at a nearly unprecedented pace this year. Manufacturers already have an order backlog of more than 200,000 trucks, or 8.4 months of production, even though we’re still in the first half of 2018.

The trucking capacity crunch is benefiting the rail sector which has also received a huge boost from increased intermodal transportation — whereby two or more different modes of transportation, such as rail and truck, are used to convey goods. The intermodal process usually begins with a container being moved by a truck to a rail, and then back to a truck to complete the process. Oftentimes, but not always, the truck covers short haul and the rail covers long haul transportation.

Intermodal freight volumes have more than doubled since 2000, with about 25 million containers moved via intermodal shipping each year. Just this year, traffic is already up 7% year-to-date.

Factors contributing to this growth include the rise of e-commerce, increased congestion on U.S. highways, improved rail service, and higher fuel costs. The railway system requires less fuel than road transport, so intermodal ends up being 15-20% cheaper than trucking alone, and it is more environmentally friendly.

Other secular shifts — from the long-term decline of coal deliveries to competition from trucking — have forced railroads to undergo a cycle of corporate restructuring and strategic changes to improve efficiency. Furthermore, railroads have spent nearly $100 billion on rail infrastructure and equipment over the past several years, including on high-horsepower locomotives and upgraded tracks. North America’s comprehensive rail network now makes it possible to easily send shipments from the Atlantic to the Pacific, and everywhere in between, so railroads stand to gain more traffic that moves to online retailers’ distribution centers.

In the midst of this rosy outlook, there are some are headwinds to consider. More than 50% of commercial railroad business comes from trade, making the rail sector sensitive to trade wars. Given how tightly integrated global supply chains have become, a slowdown in trade due to new tariffs means there would be fewer finished and semi-finished goods to transport between manufacturers (domestic & overseas) and end users. Another headwind, albeit further in the future, is the rise of electric and autonomous trucks. Electric trucks will minimize the relative fuel efficiency advantage of railroads, while autonomous trucks will take care of the trucker driver shortage.

America’s transportation renaissance is benefiting companies such as J.B. Hunt Transport Services (JBHT), with its trailer fleet of more than 100,000, and XPO Logistics (XPO). On the rail side, beneficiaries include Union Pacific Corporation (UNP), which links Pacific Coast and Gulf Coast ports with the Midwest and Eastern United States gateways through its rail network, and CSX Corporation (CSX) which offers rail services in addition to transporting intermodal containers and trailers.

The shipping side of the transportation industry has a bleaker outlook than trucking and rails. Excess capacity has plagued the shipping sector for several years, so a trade war would be outright bad for them. Moreover, they will soon face higher costs due to new low-sulfur-emission regulations that will require retrofitting their ships or replacing them to become compliant. A few domestic-oriented companies may be able to profit from the stronger US economy. These include Matson, Inc. (MATX) which offers ocean freight transportation to non-contiguous U.S. states such as Hawaii & Alaska, and Kirby Corporation (KEX) which operates domestic tank barges in the United States.

Last November MRP wrote about the trucking industry’s inflection point, and indeed 2018 is proving to be a “trucker’s market”. Rail transport is also experiencing a moment of glory, with intermodal rail hitting new records each month. It is little wonder then that both sectors are outperforming the broad transporation index and the S&P 500, as reflected in the charts below.

We’ve also summarized the following articles related to this topic…

 

Rail: Why Railroads Are Making Freight Trains Longer and Longer 

The freight train is now on track to stretch up to 3 miles long, with 200 cars or more. And it’s being powered, in part, by an unusual energy source: the activist investor.

Major railroads now report average train length with quarterly earnings. CSX Corp., for instance, in April said its average train length rose 5% in the first quarter from a year earlier, a signal to investors and analysts that the railroad is gaining efficiency. Long trains save on fuel and crews, reducing the cost of rail transportation. Longer trains also decrease the volume of trains through communities and improve productivity.

Some critics say the railroads are moving in the wrong direction, given the demand for faster, more frequent deliveries of smaller batches of raw materials and goods. Long trains take longer to assemble and disassemble in freight yards and can lead to delays on main lines.

As a business strategy, superlong trains are in for the long haul. Cameron Scott, Union Pacific’s chief operating officer, told investors late last month that the railroad is running 14,000- to 15,000-foot trains on a daily basis on a good portion of its double track railroad. At Berkshire Hathaway Inc.’s BNSF Railway, train length averages about 8,000 feet. BNSF spokeswoman Amy Casas said the railroad is testing cargo trains as long as 16,000 feet on its double track Southern Transcon route between southern California and Chicago. WSJ

 

Rail: New month, new intermodal rail record 

Rail freight continues to benefit from tight trucking capacity as spot market demand for highway haulage exploded this month. Traffic for U.S. Class I railroads totaled 561,061 carloads and intermodal units, up 4.2%, for the week ending June 9 from the same week a year ago, according to the Association of American Railroads. Total traffic was 271,641 carloads, up 2.8%, while intermodal volume was 289,420 containers and trailers, up 5.6%, and the second-highest intermodal week ever.

Weekly spot truck rates surged 27% from the previous week, and 105% in May from the same month in 2017.

For the first 23 weeks of 2018, U.S. railroads reported cumulative volume of 5,938,286 carloads, up 1.3%, and 6,283,004 intermodal units, up 5.9%. Combined traffic was 12,221,290 carloads and intermodal units, an increase of 3.6% from a year ago. Railway Age

 

Ships: Troubled waters: shipping feels the heat of geopolitical crises 

A much-welcomed shipping industry redress was observed in the second half of last year, after the Baltic Dry Index rose by 50% over the six-month period, and overall industry confidence hit a three-year high. But an array of geopolitical crises are now looming over the industry, threatening to impact trade flows and leaving shippers uncertain of their next move.

The ongoing tariff dispute between the US and China is threatening to approach a full-on trade war. However, while such tariffs would not influence the actual volume of goods being transported – as market demand isn’t necessarily affected by spur-of-the-moment political decisions – they could potentially change the direction in which goods travel. This is tricky in itself, as international trade already relies heavily on a handful of transit chokepoints that are already over capacity, and switching up these shipping lanes could cause further complications, lengthen transport times and burden shippers with additional costs.

The fraught relationship between the US and Iran is another source of worry for shipping insiders. Despite support from Europe for the Iran Nuclear Deal, US sanctions will have global reverberations, as Iran accounts for 5% of the global output of crude oil, the majority of which goes to China, Japan, India and South Korea.

Brexit, the South China Sea dispute and Yemen’s Houthi rebels in the Red Sea strait also could disrupt the global flow of trade in the coming months.  ST

 

Trucks: Truck Orders Soaring on Growing Freight Demand 

Trucking companies ordered 35,600 trucks in May, more than double the orders from the same month a year ago, according to preliminary figures by ACT Research. That leaves manufacturers with an order backlog of more than 200,000 trucks, or 8.4 months of production.

May orders of Class 8 trucks has reached 35,200 units. Truckers have averaged over 40,000 orders over the past six months, the strongest pace the group has seen. The orders come as trucking companies are seeing shipping demand grow at a rapid pace as factories bulk up production and retailers build up stocks, leaving capacity in freight networks extremely tight and freight rates rising.

Old Dominion Freight Line Inc., which says it handled 11% more shipments in May than it did a year ago, has opened three additional terminals in its less-than-truckload network this year and rival Saia Inc. has opened two since the start of the year. XPO Logistics Inc. recently said it was buying 770 new trucks for $90 million to upgrade its fleet of about 8,000 trucks. Navistar International Inc., one of the biggest makers of heavy-duty trucks, reported Tuesday that it swung to a $55 million net profit in the second quarter from an $80 million loss last year.

The only brake on the manufacturers’ momentum may be the ability to keep factory lines moving in line with the accelerating orders. WSJ

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