Posts Tagged ‘CSX’

A Review of my EQ Based Global Macro Trading Ideas

December 22nd, 2009 Michael McDonough Comments off

Today I wanted to quickly highlight the performance of my equity based trading strategies around my global macro economic investment thesis.

Emerging markets: I continue to believe that emerging-market growth and equity performance — especially in countries with a strong consumer base — will continue to outpace developed nations in 2010. Therefore, you should still consider long positions in iShares Brazil (EWZ) and iShares FTSE/Xinhua China 25 (FXI).

Risks in Brazil include an eventual uptick in the central bank’s Selic rate, which could stymie the country’s growth. In China, early inflationary warnings could eventually lead to tightening actions by the government that could hamper growth. Still, I believe upside potential outweighs the risks over the short term. For more details on this trade idea, please see my piece published on Oct. 9 titled “Easy Money is a Big Driver.”

Steel: The continuing global economic recovery combined with relatively conservative steel demand estimates for 2010 should help propel steel prices in the year ahead. In addition, the potential consolidation of inefficient Chinese steel mills may lead to reduced output, placing excess demand in a favorable pricing environment on South Korea’s Posco (PKX ) and Japan’s JFE Holdings. Strong demand in other emerging markets should help to support Gerdau (GGB). Risks to these investments include a weaker-than-anticipated global recovery or an oversupply of steel weighing on prices. See my column from Oct 16, “Coal Seeing Recovery in Foreign Demand,” for more thoughts on this theme.

Japan: Not much has changed on my bearish view toward the yen since I published a piece called simply, “How to Play Japan” back on Nov. 13. In fact, I would argue that support for any further yen appreciation has dissolved, creating a good entry point for a short position via puts on ProShares Ultra Yen (YCL) or a straight long position in ProShares UltraShort Yen (YCS). This trade depends heavily on timing, and I anticipate that the yen should move back above 100 per U.S. dollar over the coming months.Japan’s woes have recently been noticed by Moody’s, where a senior vice president was recently quoted by Bloomberg as saying, “Things we are most concerned about are the lack of well-articulated long-term fiscal consolidation and a debt reduction plan.”

Rail: Warren Buffett’s purchase of Burlington Northern Santa Fe (BNI) provided a strong boost for railroads and provided Buffett with a bet not only on long-term U.S. recovery, but also on coal. I recommended CSX (CSX), Union Pacific (UNP) and Norfolk Southern (NSC) based on what I assumed to be Buffett’s investment thesis. These positions may not have the same short-term upside potential as some of my other ideas, but they should provide some longer-term value in your portfolio. My piece from Nov. 13, “Coal in Your Stocking: Hypocrisy, Senility or Common Sense?” has more information about this trading idea.

Agriculture: Ag products will see more demand as developing nations begin to eat more like developed countries. Ag stocks also provide investors with a good real-time hedge against inflation and thus far have lagged pricing increments seen in other commodities. I maintain my constructive long-term view on wheat, corn, sugar, soybean, cocoa and hogs. One way you might play these positions is through exchange-traded fund PowerShares DB Agriculture (DBA), which is unique in that it invests in actual commodities futures vs. agricultural companies. For more information on trades in the ag sector, please see my piece published on Nov. 20 called, “Talking Turkey on Agriculture Trends.”

China energy: Very little has changed since I first published my thesis on Chinese energy companies last week, “Three Ways to Play China Oil & Gas for 2010.” I still believe that PetroChina (PTR), Sinopec (SNP), and CNOOC (CEO) are all well positioned to take advantage of China’s growing energy and natural gas market in the year ahead.

Global Macro Trading IdeasSource: Bloomberg


Dahlman Rose & Co. Global Transportation Conference 2009 (Day 1: Railroads)

September 9th, 2009 Michael McDonough Comments off

*Real Time Notes Updated Frequently

BNSF: Thomas Hund, Executive VP & CFO

I am currently attending this conference and will be doing some random live updates throughout the day.  I am currently listening to a presentation by BNSF’s Thomas N. Hund, Executive Vice President & Chief Financial Officer.  He is presently discussing the important of coal in US power production, and the drop in the overall volumes in railroad activity this year.  He is now discussing how economic slowdowns do not typically effect coal shipments to this extent.  The primary cause for this year’s drop in coal shipments is the fact that temperatures have been well below their 5-year averages.  This has led to an increase in stock piles, reducing coal demand.  He said they are starting to see overall volumes stabilize and increase not due to coal but due to increased shipments in consumer products.

He mentioned ag exports will be a growth spot for the company as diets around the world begin to change.  Most of these shipments leave from the Pacific Northwest.  In industrial products their greatest opportunity is to increase efficiency of the business.

As for their biggest sector, consumer products, especially domestic and international inter-modal transport.  They do not have a large exposure to the automotive sector.  China is a major driver of business.  They don’t anticipate getting back to 2006 international inter-modal levels until 2012 or 2013. Much of the Trade form LA that moves onto the Midwest goes on BNSF or Union Pacific. The port of LA has the largest intermodal capacity in the US by far, second is NY/NJ.

Business plan for the economic downturn: 1) Maintain strong network, 2) Emphasis on cost control, & 3) Maintain financial flexibility.  Most of the company is on a profit sharing plan, so in bad times they are able to pay out less.  Many of the costs they took out will not come back, so they feel positive about that.  Example of cost savings: Fuel, ramp activities, equipment ownership, crews, property and taxes, workforce, and depreciation.

Q&A Highlights: Will coal demand be effected by natural gas? They do not believe a lot of coal demand will switch to natural gas, but it will depend on how far natural gas falls.  Right now they think amount of coal at risk is modest.

Do you think you will gain more auto exposure? “As automotive business comes up in the West we will be interested in competing for that business, if we can get prices and rates that would justify the investment and consumption of resources that it takes to handle that business”

How much of your IT budget have you spent so far? They have spent roughly 75% of IT budget year to date.

How are current pricing trends? If volumes recover can prices? As we go forward we are looking at inflation + pricing, we probably wont be as robust as we have been over the past 5 years but we should still be north of where we have been historically and are expecting 3% to 4% this year, which is probably a good range for the future.  As volumes continue dropping off we could see some further pricing pressure this year though.

Union Pacific (UNP): Robert Knight, Executive VP & CFO

Volumes are still declining in every category, but some categories are starting to show a little rebound, cash for clunkers helped. 3Q domestic intermodel volumes also look slightly better, but international still looks weak. Ag and energy also remain weak.   Customers have continued to keep inventories at low levels.  He is now discussing improving economic indicators in the US, which is hopeful.  He also believes the US harvest should lead to an increase in grain shipments.  Steel production has begun to pickup slightly with some mills re-starting production. He has also seen an increase in paper production.  These tend to be positive forward looking indicators for the economy.

Nevertheless, Intermodal volumes remain well below last year’s levels as activity at LA’s ports remains mute.  Uncertainty remains in the market.  Total volumes still around 18% below last year’s levels, but 15% above this year’s lows.  Believe it could be some time before economy fully recovers, but they will be well positioned to take advantage of this.  They can’t control economy but they can control how they manage their company. The company has worked hard to cut costs while increasing safety.

Company has consolidated intermodal an auto business to increase efficiency.  They have also increased efficiencies in the coal loading process.  They have a 2-month fuel cost lag.  During the first half of the year, fuel costs helped the company, but the effect will likely be opposite in the second half given rising prices.  They are also attempting to reduce fuel consumption to help reduce cost, currently getting diesel for roughly US$1.91/gallon.  But, prices have been volatile and have recently exceeded US$2.00/gallon.

Q&A Highlights:

Aggressive effort under way to look at markets they have walked away from in years gone, and markets that have not traditionally been heavy rail users.  “There will probably be more bunts and singles than home-runs”.  Brought up example of used car market.  In the past this market has been fully trucked. They will only do it if they wont damage core network and the returns are justified.

Industry taking a cautiously optimistic view on the world, and dont see a big uptick in 2010, and haven’t made 2010 price forecasts yet.  They are hoping for a modest uptick, but would be able to handle lower volumes with current business plan.  Their customers are in a steady as she goes mode, and expect improvements, but not a big uptick.

Does the privatization of Queensland rail have any impact on you? Probably not.

Have you seen any Christmas re-stockings? Over the last several years they would peak in 3Q09, right now they aren’t seeing anything.  Christmas re-stocking is going to be at a much lower level this year. They are cautious.

15 Minute Coffee Break… Thus far my general thoughts on the presentations is that companies seem cautiously optimistic about the outlook for the sector, and don’t see what we would consider a full recovery until 2012/2013.  With that said, companies seem well positioned to maintain business until that point, but with limited upside.  I will admit I am rather new to this sector, but the outlook seems to parallel my views for the shipping sector, which seems natural given the sectors linkages.  All in all an uptick in rail would likely coincide with increase demand for shipping.

Norfolk Southern (NSC): Donald Seale, Executive VP & CMO

NSC is seeing declines across all business units.  They have begun to see a noticeable (not significant) increase in volumes with activity rising modestly in areas hard hit by the economy.  As with the other companies NSC has been reducing costs, including headcount.

Domestic intermodal will be a growth engine ahead.  Growth in utility and metallurgical coal will reitrn for both the domestic and international market.  The steel industry in this country will also continue to grow in this country.  They also see room for growth in manufacturing. 3/4 of country work, live, and consume withing their business territory.  They have noticed a significant number of truck routes at 500+ miles, which would be good targets for rail conversion. 27% of their budget is for growth and productivity investments.

Intermodal volumes are down 19% overall from Jan to August 2009.  However, they launched 14 new intermodal services since the beginning of this year including refrigerated service from LA to Atlanta and service from Chicago to Orlando.  Next year NSC will be opening the Heartland Corridor, which will be the fastest overnight service from the Atlantic.  They will also be opening the mid-Atlantic corridor form Chicago to the South-East.  The Crescent Corridor will also be opening in phases that will link Austin to Boston.  Many of these corridors have been partially financed using public funds.

As for coal, electricity demand is down due to weather and natural gas prices.  But, they do not expect natural gas to remain competitive over the longer-term.  Export activity for metallurgical coal is beginning to move in a positive manner.  They will soon begin shipping coal to be exported to China.

Weak manufacturing and automotive have significantly impacted the company, but anticipate this will improve and they are well positioned.  Ford motor company is their largest automotive account.  They service 11 international plants, some of which are being expanded.  They also see good potential in the ag sector.   Steel production as slowly begun to ramp up especially since Aug 1.  Capacity has gone from 44% to an expected 66% by year’s end; 14 facilities remain closed.

*Personal Note NSC thus far has given the most optimistic outlook, especially in terms of what they believe to be positive impact from the steel and automotive industry.

They do not expect a rapid ramp up in activity, but do see sustained activity.

Q&A Highlights:

Do you know the driver behind the demand for export coal growth? 1) Metallurgical coal production in Europe slowed down, and major steel companies began using existing inventories. 2) Australian ports and supply started to show high congestion to meet requirements of China ans Asia. & 3) World continues to look to US for highest quality coal.

Why don’t you think natural gas will remain a strong competitor to coal? Demand for energy has dropped, which led to an increase in natural gas inventories, but once demand comes back the overhang will be worked down and natural gas prices will once again rise.  Most projections tell them natural gas from the Shell deposits will be around US$6 to US$8.

What are you looking at for pricing in 2010? The pricing plan for 2010 will continue to look for value in the marketplace plus looking for a return over inflation.  We are happy with the prices that we have already realized for 2010 as they are above the rate of projected cost inflation for the year.

The company is seeing its highest growth rate today in the domestic intermodal market.

Canadian Pacific Railway (CP): Fred Green, President and CEO

As debt and deficits continue to grow funding for public projects will likely come under pressure, but see a favorable environment over the next 3 to 5 years, once the current situation has been overcome. CP’s priorities for the short-term are 1) Create and preserve options for growth, 2) sustain price increases, 3) drive productivity and reduce unit costs, 4) reduce structural costs, & 5) strengthen balance sheet.  45% of CP’s business is in the bulk business, with 45% of overall activity servicing ports. 30% of CP’s business is domestic transportation.  If the Asian economies come out faster than the rest they will be well positioned to take advantage of this growth.

They see potential growth in what could be a new industrial complex Northwest of Edmonton.  They have already sourced the land rights for the area once and if the complex is constructed.  The company sees growth potential in the ethanol sector.  However, they admit that where public policy and demand for the product goes remains to be seen. But, they think it is materializing in a beneficial way.

Car load volumes in April and May were down up to 30%, but have come up modestly in 3Q09, but still roughly 20% less than the same period last year.  For the remainder of the year they believe there will be a fall peak that will be far less significant than those experienced in years past.  Grains have been an area of strength for the company, and anticipate it will remain so given a good crop year in the US. They also expect the Canadian crop may come in slightly better than forecasted at around 42mn-44mn tons with good carry-over from last year.  The long-term average is around 47mn tons.  The Canadian coal sector  has been somewhat softer than anticipated, and the future is still uncertain.  The fertilizer sector has been very weak, and the outlook remains uncertain.  But, the capability is in place to take advantage of any uptick.

They presently see no signs of improvements in housing construction products (i.e. lumber).  CP is conservative on the intermodal market, and dont expect much upside in the near-term.  Overall, CP is targeting  4%+ price increments for customers, but certain exceptions might be made.

CP has begun to experiment reductions to long-term structural costs through faster car cycles, facility and yard redesign, and reduction in headcount.  They are trimming capex and plan to keep it down through next year, and have monetized some assets.

Q&A Highlights:

The recent acquisition of DM&E will benefit shareholders, and could allow them to develop in the PRB.  They haven’t done the ecological or all of the engineering work, but they are maintaining the right to develop the land in the future.  They have not yet pursued aggressively the condemnation rights in Wyoming, but they are still interested and will maintain the right to do so in the future when timing is correct.  Fred made it very clear it is important that the company maintain this right for eventual development.

Canadian National (CNI): Claude Mongeau, Executive VP Soon to be CEO

The environment over the past several months has been quite challenging.  Claude has never seen a decline anywhere near this magnitude.  April and May was a very scary time as they weren’t sure how long or deep this recession would go for, but since they have seen evidence of a floor with modest increments in volumes. They do not believe there will be a V shaped recovery, and a recovery make take up to several years. But, the good news is there is a floor and that floor is firm, and they see the makings of a gradual build up of volumes, which should help lead to solid performance. They believe they have shown solid results in a challenging environment.

Productivity has been up for the company on the back of fewer trains and other initiatives.  (This has been a trend across all the railway companies).  CN connects the Pacific, Atlantic, and Gulf of Mexico. 60% of business is merchandise, which is very competitive to the trucking industry and an area for growth.  Believe they could see gains from US housing market in the future.  24% of their business is based from off-shore business, mostly from the Port of Canada in Vancouver.

Future initiatives to gain market share include: Prince Rupert, which would land containers in Canada and ship into the US. A smaller distance from Asian to Rupert help shippers saves 48 hours in shipping turn-around time.  This port has been a growth point for the company during the 1H09, and is running at around 50% of capacity.  There is also a potential to develop a new potash terminal at the port to compliment Vancouver.  But, potash activity remains suppressed, so this likely would not be in the short-term.  However, when this changes they will be well position to take advantage of the growth. The company is also making headway on canola and ethanol in the US.

Q&A Highlights:

Will a weak US$ hurt business? It is tougher for Canadian producers but we are in the range of PPP with weaker suppliers already gone, while current suppliers have access to the US market on good terms. But, we can not see a sustained increase in the CAD if this is to continue. But, at the current levels things are good.

What will demand from China look like? We have a small franchise that is leveraged in China Japan and Korea, there is no question Asian steel production is increasing, and we are seeing some of that benefit suppliers we serve, but it has only been a gradual uptick.

Pricing in 2010: We tend to have shorter term contracts, so our business book rolls fast.  Presently, slightly more than half of our business has been priced into 2010, in the range of 4% to 5% increments.

In the next cycle do you think you will grow faster than your peers? There is no question we ar emore economically sensitive as a portfolio than most railroads.  We have less coal exposure and our ag business tends to be less than other railroads.  Steel and merchandise are a bigger part of our business, so once the economy finds its pace, and housing starts picks up, the business should improve.  Additionally, as steel blast furnaces come back on line there should be some meaningful upside, however, this won’t all happen within the next year. As for ag, grain looks like an offset to business given an anticipated below average Canadian crop in 2009.

Lunch Break: The mood continues to be that of cautious optimism, with companies hunkering down for what looks to be well below average activity over the next couple years.  But, company executives continue to indicate that they are well positioned to take advantage of any eventual upticks in demand, and are ready to delve into new areas of business presently under-utilized by the railroad sector, which includes areas like used car transportation.  NSC has made the most optimistic presentation regarding the outlook for the sector.

Dahlman Rose & CO. Analyst Panel:

Ground Transport: We are seeing a bottoming in the economy, and slight improvements in the overall economy with rail volumes showing some modest y/y improvements  from its April/May lows.  Trucking has faced a similar fate.  However,  a solid US crop combined with modest improvements in the economy could help the sectors in the later half of the year.

Coal: Thermal coal exports for power plants will continue to be adversely effected due to 30 year high stockpiles in US and Europe stemming from unseasonal weather and the global economic slowdown.  Estimated US cost of coal in Europe with transport would be around US$110/ton compared to the European domestic price of US$77.  But, once demand returns these prices should normalize, however this is unlikely over the next 1.5 years.

A global decline in demand for metallurgical coal has been offset by a massive increase of demand from China.  Only recently have we seen US coal shipments head toward China, however, this is quite expensive.  They believe that demand will depend heavily on China.

Coal vs Natural Gas:  Natural gas has become cheap enough to make it a viable alternative to coal energy production, which has shut-down some coal plants.  But, they anticipate gas prices will rise in the future increasing domestic coal demand.

Metals & Mining: After a widespread global shutdown in steel production, plants are slowly being brought back online as inventories reach record lows.  Presently, carbon flat-rolled steel inventories stand at 1.9 months of consumption, compared to over 3 months at the end of 2008.  But, whether or not the effects of inventory restocking will be sustained is yet to be seen.  On a personal note, this will depend heavily on a rebound in US consumer consumption, which will weigh heavily on the performance of the US labor market. They also believe that on the back of declining international steel prices domestic prices have likely peaked.  This price discrepancy could also lead to increase steel imports.

Marine Transport: Dry bulk has come off of its highs as China begins to ‘tighten the screws’ on the domestic market, which has been driving dry bulk rates.  This has led to a decline in Chinese steel prices, which raises the question “Is the steel market strong enough to go on its own or will effects of the stimulus disappear?”  With that said, steel continue to come under pressure, while dry bulk fixtures have declined significantly.

Q&A HighlightsHow much capacity has switched from coal to natural gas and what is the potential? 11BCF is the hypothetical max switching of that roughly half is realistic.  10mn tons a month of coal demand could be lost.  There is more potential damage that could be seen in the fall and winter.

CSX Corporation (CSX): Lester M. Passa, Vice President of Strategic Planning

CSX is well diversified with 35% of volumes coming from consumer products, 28% from coal, 14% from agricultural products, 12% from housing products, and 11% for the industrial segment.  All of these segments were down during 1H09, with third quarter to date declines showing some improvement.  Les highlighted the fact that coal is presently a tough spot in the business.

Like the other railroads CSX has been increasing productivity while decreasing costs.  Fixed costs are down by 10%, while ST and LT costs are down 43% and 14% y/y during the 1H09, respectively.  The company anticipates that the economy will remain weak through 2009, but are looking for an eventual sustainable recovery.

The company has a technology platform called ONE Plan, which services the scheduled train network.  CSX takes real-time demand for services and runs the information through ONE Plan, which can evaluate and optimize service in a much more responsive and efficient manner.  (i.e. reducing or increasing transit volume as needed in near real-time).  This allows for better use of capital and reduces operating expenses.

Once the company’s NW/OH gateway opens they will be able to  significantly increase capacity across the country.  It will allow for single-line reach into Florida, New England, and Illinois Basin.  The National Gateway will also help link ports to producers and consumers, and leverage public-private partnerships for future growth.  Les is now going over the benefits of rail over trucks.

Les believes there is a lot of headroom from where we are now to the amount of value we can provide into the marketplace, so they continue to re-invest into the company. They have been able to maintain stable margins despite volume decline, and are leveraging the current enviroment to strengthen network recovery.

Q&A Highlights: Where are we on ONE Plan? We have used it to optimize our assets and they believe it still has tremendous capability to reduce cycle times as they improve technology.

What are your future pricing plans? They have increased guidance to above 6% for 2009, and expect inflation + pricing for 2010, full plans will come later.

Is some of your cycle improvements due to less traffic or Capex? There are fewer trains on the railroads and the railroads are in better shape. The dispersion between the two is hard to measure.  These improvements create a great baseline for us to work with as we grow and have to place additional trains on our lines.

In the present form of the ONE Plan, when the economy gets better, how will the company deal with restrained capex spending in the future? The ONE Plan is a cultural epiphany for CSX.  On the issue of capex we will look at long-term capex toward the spring, but the base of capex goes into core infrastructure, and will make other investments as the economic recovery deems it appropriate.

Given the stability in margins during the downturn, the company believes once business comes back shareholders will be pleased.

*On a personal note comments I have heard form attendees include ‘The companies seem cautiously optimistic, but are having trouble showing any real proof as to why’

Genesee & Wyoming Inc. (GWR): John C. Hellmann, President & CEO

GWR is an owner and operator of world-wide short-line railroads, currently operating in nine regions.  GWR has made 34 acquisitions since 1985, with five taking place in 2008.  They are presently looking at opportunities in natural resources development.  Freight revenues make up roughly 62% of total revenues, with coal, coke, and ores making up 21% of that.  Intermodal revenues run through their port business, which are not counted in freight revenues.  During 1H09 steel and metals has been the hardest hit segment falling 38%, while GWR’s farm and food business has risen 22% during the same time period.  The company’s contract business has also increased by 11%, mostly due to a new contract in Australia for China bound goods.

As with the other companies, GWR has undergone cost cutting and taken steps to increase productivity.  They have also strengthened their balance sheet through and equity offering in June to explore some investment opportunities.   Non-freight revenues have been relatively stable, due to increased demand for storage and Australian ore imports, offsetting losses elsewhere.

Since October of 2008 carloads have dropped off substantially bottoming in May 2009, and have since begun to climb modestly with a small decline in August.  They see no specific evidence of carloads increasing, but conversations with shippers have seemed more positive now than they have in the past.

Q&A Highlights: Can you provide some examples have how conversation with shippers are turning more favorable? We have seen some steel customers shut for good, and we are seeing some industries consolidate to their most efficient plants, and steel is an example, and these plants are beginning to discuss future production.

Have you seen any declines in rail car storage? No real material changes.

Where can you spend money in North America right now? There are some opportunities with both regional and resource related assets, but I can’t be specific as there is some competition for these assets.    There is some pricing discovery to be done for some of these assets, before they can be properly valued.  But, few are capitalized enough to take advantage of these opportunities.

Kansas City Southern (KSU): Michael W. Upchurch, Executive VP & CFO

Presently, only rail carrier servicing the growing port of Lazaro in Mexico.  KSU also believes there is a lot of potential over the next few years from converting truckload/container volumes between US to Mexico.  They are also in the process of expanding their intermodal business, which they feel will benefit the company once the economy picks back up.  The economic slowdown was clearly the biggest factor impacting earnings, which they hope to improve going forward through cost cutting and various other measures.  The company does not foresee issuing an additional equity in the near future.  Looking ahead the company anticipates volume trends will continue to increase, as they have sen chemical shipments increase, which they believe could be a forward looking indicator for industrial production.  They have also been receiving feedback from customers that indicates 2H09 performance should be better.  The remain cautiously optimistic for 2H09, and expect that the company is poised for improvement, and has ample cushion with bank covenants.

Q&A Highlights: What impact are you expecting from incremental increase in volumes? A lot of this depends on where traffic is coming from and what type of increases.  It is cheaper to add a car or two (+85% to margin) than it is to add a train (+50% to margin).  Therefore, we expect it could be somewhere above 50% overall.

How much of the improvement has been from Mexico? It has been pretty split between US and Mexico.

Past 2011 what is your plan on debt? Assuming business didnt get any better we think we would have the cash flow to retire the revovler in April 2011, which pushes maturities out another year, which should allow business to improve.  We aren’t in the position to refinance this stuff today, but it is possible in the future.  We think we will be in a position to push out some of this debt, and if business gets better so will our position on this.

Which sectors has the improvements been in beside autos? Chemicals, automotive, and appliances have all been strong.

The Conference Has Concluded…


US Railroad Activity Not a Bright Spot for Shipping Rates

September 2nd, 2009 Michael McDonough Comments off

As seaborne shipping acts as the bridge for global trade, the US’s railroad and trucking systems are the backbone of domestic bulk transport. It goes without saying that at some point the majority of goods imported to or exported from the US likely find themselves traveling on a rail car or truck before reaching their final destination. Therefore, I wanted to analyze those sectors for any potential relationship to the BDI. Step one in this process, was finding an appropriate indicator to compare railroad activity against the BDI. This step was straight forward as the Association of American Railroads (AAR) publishes a weekly report measuring railroad freight volumes by company. In the chart below I graphed the BDI against the number of cars on line for CSX on a weekly basis.


Source: AAR & Bloomberg

As you can see from the chart above the correlation between rail car volume and the BDI over the past year has been very significant., and in some cases railroad activity actually led the BDI. One possible cause for this relationship is coal. Nearly one third of US railroad volumes are coal shipments, and in 2007 36mn tons of this coal was exported. Given the relationship between the BDI and railroad volumes, diminishing railroad activity in the US is yet another factor painting a macabre picture for the shipping industry. On a year to date basis coal and grain railroad shipments are down 9.3% and 22.4%, respectively. Metal and ores, which make-up only about 3% of US railroad volumes are down over 50% year to date.

But, in order to fully grasp the implications trucking and railroads may have on shipping it is critical to understand the supply and demand factors driving the sectors along with the outlook and physical linkages between the sectors. I could open a dialogue on this immediately, but will wait until after an upcoming industry conference I am attending where I should have the opportunity to speak with the management of some major US railroad and trucking companies. Expect an update on this come mid-month.

P.S.  I apologize for not having any real-time updates today, as I am in the process of relocating offices.