U.S. railroads reported that carloads and intermodal originations reached 2.56 million during June, up 14.5% year-over-year, according to weekly data provided by the Association of American Railroads (AAR).
June carloads in the U.S. increased 19.1% year-over-year to 1.18 million with intermodal container and trailer volumes climbing 10.9% to 1.39 million.
The year-over-year comparisons continue to benefit from severe declines in shipments a year ago as a result of COVID-related lockdowns and protocols, which hampered the heavy industrial segments of the economy.
Nineteen of the 20 commodity categories tracked by the AAR showed year-over-year increases in June. Coal (+33.5%), chemicals (+16%) and metallic ores (+164.6%) were some of the highlights. Farm products, excluding grain, fell 10.6% year-over-year during the month.
Excluding coal, carloads increased 14.1% year-over-year during June. For years now, industry participants have viewed the data without coal, which remains in a longer-term secular decline due to prior changes in environmental regulations. The fossil fuel has seen a resurgence of late as renewable energy sources have been unable to keep up with surging demand amid economic expansion in many countries.
“U.S. rail volumes in the second quarter of 2021 reflect an economy that is in much better shape than it was but still has room to grow,” said John Gray, SVP at AAR. “In the second quarter, total U.S. carloads were the highest since the fourth quarter of 2019; carloads excluding coal were the highest since the third quarter of 2019; and intermodal and chemical volumes were both the highest for any quarter in history.”
For the second quarter, total U.S. rail traffic increased 23% year-over-year with total intermodal volumes up 22%. Inventory restocking continues to fuel intermodal shipments as retail stock levels struggle to keep pace with lingering high demand following record holiday buying last year. The latest retailers’ inventory-to-sales ratio fell to 1.07x in April, a new low and significantly below pre-pandemic levels of 1.45x.
Chart: (SONAR: ORAIL.USA)
Even with port congestion, container and chassis shortages, and labor issues with both drivers and facility dock workers, inbound ocean shipments remain robust. All of these issues again negatively impacted velocity (-13%) and dwell time (+8%) on the four large U.S. Class I railroads during the quarter. However, the service comps are to the second quarter of 2020 (velocity +15%, dwell -9%), which was volume-starved and during which freight moved on the rails with ease.
Total merchandise carloads were up 21% year-over-year in the quarter with motor vehicles (+90%) leading the way. The auto manufacturing industry felt the brunt of the pandemic in 2020 with widespread factory shutdowns during April and May.
Railroad earnings estimates tweaked slightly
Even with the big year-over-year jump in volumes during the quarter, carloads still came in slightly below the expectations of some.
Bascome Majors, equity analyst at Susquehanna Financial Group, reduced his second-quarter earnings estimates by low- to mid-single-digit percentages due to weaker-than-expected volumes, rising fuel costs and network congestion, which he said in an earnings preview to clients is “leading to decreased volumes and slightly weaker operating leverage.”
He raised his forecast for Union Pacific (NYSE: UNP) by 5% on better-than-expected volumes.
“The key to the rails’ show-me story remains volume growth, since revenues must carry the load as more than a decade of profit growth led by pricing and PSR reaches maturity,” Majors stated.
Majors maintained a “positive” rating on Norfolk Southern (NYSE: NSC), Union Pacific and CSX (NASDAQ: CSX) as much of the cargo the rails haul will benefit from inflation and as labor costs, which most industries are struggling to contain, are tamped down through previously negotiated multiyear labor contracts.
Majors said he’s “willing to capitalize extended valuations to gain exposure against an inflationary backdrop (rails move commodity/industrial products that benefit from inflation, but are protected on labor costs by union contracts).”
For the week ended last Saturday (week 26), total traffic on the U.S. railroads was up 17.1% year-over-year and 14.3% for all of North America at 685,398 units.
Through the first half of 2021, total U.S. carloads were up 9.4% year-over-year to 6 million. Total intermodal containers and trailers were 17.5% higher at 7.33 million units.