The North American rail industry is dominated by seven railroads, including the two Canadian companies that generate about half their sales in the United States.Peter Power/The Globe and Mail
A plunge in the amount of freight moving on North American railways has spurred Moody's Investors Service to downgrade the outlook for the sector to negative.
An "unprecedented" 37-per-cent year-over-year drop in coal shipments in April will help drive overall freight volumes down by about 4 per cent this year and send revenues down by as much as 2 per cent for the major carriers, said Rene Lipsch, a Moody's analyst.
"North American railroads face deeper and longer-lasting declines in freight volumes than we had previously anticipated," Mr. Lipsch said in a note to clients on Monday.
Coal carloads, which account for almost 30 per cent of the rail traffic in North America, have fallen by 33 per cent this year, according to the Association of American Railroads. Power utilities are converting to cheap and and cleaner-burning natural gas pouring out of newly tapped shale fields in the Bakken region of North Dakota and the Canadian Prairies.
"Power generation from natural gas surpassed coal on a monthly basis for the first time in April, 2015, and forecasts from the U.S. Energy Information Administration show that the proportion generated from natural gas will exceed that of coal on annual basis in 2016," Mr. Lipsch said.
At the same time, thermal coal consumption is down after a mild winter, and steel makers have cut production and reduced purchases of metallurgical coal and ore. A handful of coal mines in Minnesota have closed, and last year Teck Resources Ltd. temporarily halted output at six metallurgical coal mines in Alberta and B.C., citing poor demand.
But the freight slump is not limited to coal. Mr. Lipsch is calling for declines in five of the eight categories of freight shipments, including grain, gravel, and petroleum products. Chemical carload growth will be flat while the intermodal container and automotive businesses will see low single-digit growth.
The North American rail industry is dominated by seven railroads, including the two Canadian companies that generate about half their sales in the United States.
Canadian Pacific Railway Ltd. and its larger rival, Canadian National Railway Co., have both seen revenue fall by about 4 per cent in the most recent quarter. CP's share price is down by 18 per cent in the past 12 months, while CN's has risen by 3 per cent. The broader S&P/TSX composite index has fallen by 8 per cent.
In the past few years, the expansion of shale gas and oil output in the Bakken region of the United States and Western Canada has been good news for the railways, driving up shipments of oil and the goods used to extract it – sand for hydraulic fracturing and steel used for drills rigs and pipes.
But Fadi Chamoun, a Bank of Montreal equities analyst, said the rise in new North American sources of energy has been an overall negative for railways, given it helped drive down demand for the biggest commodity, coal.
"Shale expansions have driven down the price of gas, which has been a significant contributor to the displacement of utility coal as a source of electricity generation from around 50-per-cent market share 10 years ago to as low as 30 per cent this past February," Mr. Chamoun said.
Moody's said the rail downgrade is a reflection of the challenges facing the sector over the next 12 to 18 months. But despite the declines in freight volumes, railways are expected to raise freight rates by about 3 per cent this year.
The same can't be said for the companies that carry many of the same commodities on the world's waterways.
Shipping companies that carry bulk commodities have endured record-low charter rates in the past few months, a slump that has been worsened by an expanding fleet. Britain-based Drewry Shipping Consultants Ltd. said 90 large commodity freighters were sailed to the scrapyard in the first three months of 2016, more than double the amount in the previous quarter, "which enabled overall vessel supply to contract, quarter-on-quarter, for the first time in 10 years."
Eric Atkins