Supply Chain Quarterly | Trouble on the Tracks

09.07.16 | Larry Gross

Last year we predicted a difficult 2015 for the railroads followed by a somewhat easier 2016. While the first half of that prediction came true, we couldn't have been more wrong with regard to our expectations for 2016. Far from posting modest gains, traffic plunged during the first half of the year. Dramatic declines have occurred in the mainstay movements of coal, and crude oil shipped by rail, a previous growth superstar, has seen its luster dim under the pressure of declining oil prices and the tightening of the price differential between imported and domestic crude oil. Most other rail carload commodities have also suffered under the weight of weakness in the U.S. industrial sector, global overcapacity, and the strong dollar. Meanwhile, the railroads' competitive "ace in the hole," intermodal, has also encountered substantial headwinds thus far in 2016.

In short, the railroads are suffering from what might be considered a "perfect storm" of adverse conditions. The key question is, how much of the current difficulty is the result of transitory factors, and how much of the change is permanent? What does the future hold, and what must the industry do to meet those challenges?

Volumes decline across the board

Through the first half of 2016, North American rail carloads were down 11.5 percent year-on-year, a decline of over 1.1 million. Of the 20 rail carload commodity groups, eight recorded year-on-year gains, accounting for an increase of fewer than 100,000 cars. Most impressive of this group was motor vehicles and equipment, which increased 8.6 percent (39,500 carloads) over an already strong 2015 performance. Part of this increase was fueled by higher automotive sales, while a portion was due to consumer sentiment shifting toward larger sport utility vehicles (SUVs) and trucks, which must be carried in bi-level cars with two-thirds the unit capacity of the tri-level cars used for sedans and other conventional passenger vehicles.

The remaining 12 commodity categories fell short of the prior year by 1.2 million carloads. Coal accounted for over 800,000 of that shortfall (down 26.5 percent year-on-year), as low-priced natural gas aided by tightening environmental regulations continued to displace coal-fired electric power generation, and the strong U.S. dollar hindered coal exports. But volume has been improving, with the most recent four-week moving average (at the time of this writing) at 94,000 loads per week versus 68,000 at the trough.

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Larry Gross and other industry thought leaders, including Barbara Wilson, President of Wells Fargo Rail, will explore the rail situation in depth September 13-15th at the 12th annual FTR Transportation Conference. Learn more at: