In many respects, November's rail carload data (as reported by the Association of American Railroads (AAR) in its monthly Rail Time Indicators report) is more of the same, only more so. United States railroads continue to see an ongoing erosion of coal business, but underlying industrial demand continues to be relatively positive. Although a host of U.S. industrial companies continue to express caution about demand for the first half of 2013, carload traffic suggests that there may not be as much downside risk as feared.
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The Details for November
For the month of November, U.S. railroads saw a 4% year-on-year decline in total carload volume. Once again, though, steep declines in coal and grain fueled all of the decline and then some. Excluding coal, carload volumes were up more than 3%, and excluding coal and grain volume increased 5.5%. Looking at the AAR's own "industrial products" metric, carload volume grew 2.5% - the most in six months.
There was decent breadth to traffic as well. Of the 20 categories that the AAR reports, 13 were positive - the same as last year and up from nine in October.
Coal and Grain - the Song Remains the Same
There's still no joy in coal-ville for the railroads. Coal traffic declined by about 68,000 carloads from last year, or about 13%. As a reminder, coal is a major cargo category for most Class 1 railroads and, until recently, a pretty consistent one as well.
While Union Pacific (NYSE:UNP) is seeing less volume erosion due to the use of Powder River Basin coal, the volume issues for eastern railroads CSX (NYSE:CSX) and Norfolk Southern (NYSE:NSC) are worse. Eastern utilities have been more aggressive in switching to gas and Appalachian coal is increasingly problematic due to the pollutants it contains. Making matters worse, export demand is shrinking, particularly as European steelmakers are importing less met coal (creating something of a double-whammy for the eastern railroads).
On the grain side, traffic was down 11%. While the drought has definitely harmed grain traffic this year, there's a bit more volatility to grain traffic due to factors like weather and the timing of the harvest in various parts of the country.
Steel and Crude Going in Different Directions
Petroleum products were once again a major growth area for railroad traffic and the railroad sector as a whole, as carloads increased 57% this month. With ONEOK Partners (NYSE:OKS) recently shelving (or at least delaying) plans for a pipeline to carry oil from the Bakken, it would seem that railroads like Union Pacific can continue to look forward to healthy traffic volumes out of this region.
A little macro perspective might be in order though; the increase in petroleum tanker traffic (approximately 17,000 cars) is only about one-quarter of the decline in coal traffic. It's also worth noting that the Bakken traffic play is not just unidirectional; rails also carry in the sand that's needing in fracking operations.
In contrast to the overall strong performance in "industrial" categories, carloads of primary metals (which includes steel) were down 6% and have been down five of the last six months. Not only is this clearly unwelcome news for steelmakers like Nucor (NYSE:NUE) and Steel Dynamics (Nasdaq:STLD), it should also probably mitigate some of the enthusiasm over the otherwise strong numbers reported. I wouldn't go so far as to say that steel drives the U.S. economy, but it's a significant enough input that it should not be ignored.
The Bottom Line
By and large, the rails have largely gone nowhere fast over the past quarter. Eastern rails CSX and Norfolk Southern are both down for the period (by about 10 and 15%, respectively), while Union Pacific and Kansas City Southern (NYSE:KSU) are near breakeven. While the eastern rails are probably the better bargain today from a long-term perspective, it's hard to go against Union Pacific in the short-term with so many positive factors (good pricing, offsets to weaker coal volume, operating leverage) working in its favor.
At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.