Canada's two major railways are seeing the plunge in prices and demand for industrial commodities firsthand.
The number of carloads hauled by Canadian Pacific Railway Ltd. and Canadian National Railway Co. has fallen more than 9 per cent this year, excluding container traffic.
The decline is led by a 29-per-cent drop in carloads of metallic ores and metals, and a 15-per-cent slump in coal, according to the Association of American Railroads (AAR), which includes U.S. operations of CN and CP. Carloads of oil and other petroleum products are down by 12 per cent.
Despite the declines in traffic, both carriers are expected to post higher profits this month, thanks to tight controls over costs, staffing levels and pricing power.
Slowing economic growth in China has hammered demand for iron ore and metallurgical coal. Thermal coal, used to generate electricity, has seen demand plunge as power plants around the world turn to natural gas, which is cheap and favoured by emissions regulators.
North American steel production fell 9 per cent in 2015, but mills in the United States boosted output 3 per cent, the World Steel Association said.
"Elevated steel activity could be a near-term bright spot for the rail sector. We suspect there could also be a positive mix shift for the rails as growth in [U.S.] production should support demand for higher-margin coal and iron ore transportation," said Fadi Chamoun, a Bank of Montreal analyst. "U.S. steel is a key market for the rails as production requires transportation of not only steel and its scrap products, but also the iron ore and coal required for processing."
U.S. carriers' traffic, excluding containers, is down 14 per cent this year. Coal loads have fallen 33 per cent while ores and metals are off 10 per cent.
"Railroads are still looking for the light at the end of the tunnel, and for some commodities, including coal and other energy-related products, it's just not there yet," said John Gray, the AAR's vice-president of policy and economics. "That said, most economists are calling for continued slow but steady economic growth for the U.S. in the months ahead."
Bright spots for the Canadian carriers are consumer-driven goods – automobiles and auto parts (up 20 per cent) and forest products (up 5 per cent). The number of ship-to-rail-to-truck containers hauled by Canadian carriers is unchanged.
The declines for CP and CN have eased, and analysts believe the first quarter was better than expected, or, as Citi Research's Christian Wetherbee puts it, "less bad."
"The drag on volumes came predominantly from BNSF and to a lesser degree [Kansas City Southern], which faced flooding along routes," said Walter Spracklin, an equities analyst with Royal Bank of Canada.
When CP reports first-quarter earnings on April 20, Mr. Wetherbee expects per-share profit of $2.44, more than the $2.40 consensus and higher than the $2.26 in the first quarter of 2015.
Mr. Wetherbee has raised his per-share profit estimate for CN, which reports on April 25, to 92 cents, 1 cent less than the consensus. The year-ago profit was 86 cents.