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By New_Deal_democrat May 6, 2015 9:51 am
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What ails rail?

For the last 2+ months, my Weekly Indicators column has noted that rail transport, to use the technical term, stinks.  This is a primary coincident indicator of the economy, and to see it suddenly fall into recessionary territory has piqued my interest, to say the least.

So what ails rail?  To put it in a nutshell, the strong $US, with the help of a weak international economy, is killing coal exports.  And coal exports, with a smaller contribution from industrial metals (e.g., steel, which has been down on average about -10% YoY for the last several months), are what is killing rail.

Here's a good bullet-point analysis, from an article discussing Union Pacific's profits:


:While domestic consumption of coal has dwindled as cleaner energy sources have come online, coal is very much in demand throughout the developing world, and even in some mature economies abroad.
"Thus, U.S. railroads still have considerable opportunity in, and exposure to, the global coal market. And as of late the strong U.S. dollar is turning domestic coal into an increasingly expensive option for nations fulfilling their energy needs. Perhaps "strong" is an understatement, however. Here's a chart of the AMEX U.S. Dollar Index, which tracks the performance of the greenback against a basket of major world currencies:

"In the slow-moving currency market, changes like the 22.5% rise in the dollar over the last 12 months often take years to play out. That's a swift and huge tax to pay for importers of U.S. coal. In addition to the currency-driven cost dynamic, Australia, Indonesia, Russia, and Canada have all recently ramped up their coal exports, inflating global supply."

Now let's turn to the recent rail data.  Weekly statistics from the AAR ( https://www.aar.org/data-center ) show an abrupt fall in rail traffic in late February.  Here's the breakout for the week ending February 14:

All looks well.  But here is the breakdown just one week later:

Everything has gone to hell.

Finally, here is the breakdown from the most recent week:

A settlement was reached in the West Coast Ports strike in late February.
According to one observer, "by the end of March, ... substantial progress should have been made in processing through the backlog of ships waiting to unload at West Coast ports."
Bill McBride a/k/a Calculated Risk believes this has in fact happened.  http://www.calculatedriskblog.com/2015/05/trade-deficit-increased-in-mar...

But while intermodal rail traffic (used for global shipping) has turned consistently positive since the beginning of March, carloads have remained almost entirely negative.

Consistent with the analysis of the port strike settlement above, carloads have generally been "less worse" in April, but in particular coal, and to a lesser extent, industrial metal shipments have languished.

Here is how the information breaks out by carloads, by carloads ex-coal, and by indsutrial metals this year compared with the equivalent period in 2014:

Date: 1/1-2/14   1/1-4/26  2/15 - 4/26
Carloads: +5.7%  -1.2%  -5.0%
Coal: +3.9% -4.8%  -9.4%
ex-coal: +6.9%  +1.0%  -2.3%
Metals: +5.5% -2.6%  -7.2%

Since mid-February, coal carloads are down by over -100,000.  Ex-coal, carloads are down by -40,300.  Of that shortfall, -16,500 is industrial metals.

In short, primarily it is coal exports that are killing rail, because the strong dollar is killing coal exports.  Since the strong dollar itself was a reflection of the relative strength of the US economy, it is reasonable to believe that the relative weakening of the US economy will lead to a weaker dollar, and the pendulum will swing back in the coming months, reviving rail.

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