Rail traffic is a good economic indicator as it's such a major part of how raw materials and finished goods move around the country. Curiously, though, data can be good for the economy but not necessarily so good for the rail industry, and January was one of those months. That said investors should not yet be in any hurry to worry about the health of the rails in 2012.
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Rail Growth Depends Where You Look
On an overall reported basis, U.S. rail traffic wasn't so special for the month of January. Carloads were up just barely on an annual basis, while traffic declined nearly 2% from December. Of the major reporting categories, only 11 were up in January (down from 15 categories a year ago and 16 in December).
These numbers should not be read as a sign of a decelerating economy. Exclude coal shipments (which fell over 2%) and traffic growth was better than 2%. Exclude coal and grain (grain was down more than 15%) and traffic was up 5.5%. Although chemical shipments was down more than 2% (and this is an economically-sensitive category), most other categories were solid (and car shipments were up more than 18%).
This is good news/bad news for the rails. Western railroads like Union Pacific (NYSE:UNP) and Berkshire Hathaway's (NYSE:BRK.A) Burlington Northern do rely on shipments of coal and grain for a lot of their volume, and lower traffic is not a good development. On the other hand, these Western rails are picking up more petroleum traffic from the Bakken region. (For related reading, see A Primer On The Railroad Sector.)
Canada a Different Story
In Canada, rail traffic rose nearly 4% from last year, but did fall 2% on a sequential basis. Unlike U.S. carriers, Canadian National (NYSE:CNI) and Canadian Pacific (NYSE:CP) do not depend so much on coal, though coal shipments were 30% higher than last year. Numerous categories were down on the monthly sequential comparison, but chemicals and pulp/paper were the only major categories down on a year over year basis.
How Will the East Fare in 2012?
Investors in CSX (NYSE:CSX) and Norfolk Southern (NYSE:NSC) have a couple of issues to think about as 2012 develops. Utility demand for coal is not too likely to spike up any time soon, so the question remains whether export demand for coal will be able to prop up the traffic numbers. It's also worth wondering whether chemical companies can take advantage of low natural gas prices to produce meaningful volume increases.
Last and not least is Europe. Will there be enough demand in Europe for U.S. exports to keep traffic moving to and through the coastal intermodal hubs, and to keep U.S. manufacturers growing in 2012? So far, the reports from industrial companies in the fourth quarter have been cautiously optimistic - there are definite weak spots, but demand seems to be holding up better than expected.
The Bottom Line
All in all, this was not a bad start to the year. Continued weakness in grain or coal would be troublesome for the industry, but overall economic activity still seems healthy. What's more, the industry as a whole has been seeing solid improvements in price realizations as well as improving operating performance. At this point, then, there's no reason to think that the run of the rails will end right now.
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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.