US Railroad Activity Not a Bright Spot for Shipping Rates

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.