Rail industry sees ‘worrisome’ decline in cargo volumes

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A drop in the number of containers moving by rail has thrown into the question the resilience of consumer spending.

The number of intermodal cargo boxes hauled by the major railways in North America has fallen by about 7 per cent in the latest quarter, a bigger-than-expected decline that one railway executive called a "worrisome" signal about the state of the North American economy.

"Intermodal is probably the most diverse indicator of what the economy might be [doing]," said JJ Ruest, marketing chief of Canadian National Railway Co. "It's not a Canadian phenomenon, it's not a CN phenomenon, it's a North American phenomenon."

Analysts and rail executives said the drop in containers, which carry imported consumer goods, is due to rising inventories in stores and warehouses as growth in consumer spending slows. Low fuel prices have also let trucks compete fiercely for the business.

The business of hauling the containers, which generally arrive by ship from Asia and are carried cross-continent by train to a truck for the final leg of the journey to a warehouse, store or factory, has until recently been a growth area for railways.

Mr. Ruest called the decline in container volumes "somewhat worrisome or a puzzle," and noted that other consumer-focused cargo – automotive goods and lumber for housing – are strong.

The number of containers hauled by both major Canadian railways in Canada and the United States has fallen by 3 per cent this year, compared with the same period in 2015. In the week ended June, the drop reached more than 9 per cent.

"I think the severity of that trend today is catching a lot by surprise," Walter Spracklin, a Royal Bank of Canada analyst, said at a transportation conference in Toronto on Tuesday.

He said the drop came despite CN's industry-best access to container ports on B.C.'s coast as well as the U.S. East and Gulf coasts.

Mr. Spracklin said increased competition in some regions compounded the effect of "bloated" shipper inventories, but he cautioned that 2015 was a strong year for CN's container division, and comparisons are difficult.

Fadi Chamoun, a Bank of Montreal equities analyst, said the amount of goods in warehouses and on retail shelves has risen as growth in consumer spending has slowed. He said inventories might have been increased as a precautionary move in the wake of the winter transportation snarls and West Coast port labour disruptions.

"Year to date, U.S. retail sales have increased 4.8 per cent excluding food and gas and 3.3 per cent on an all-inclusive basis," he said in a note to clients. "It appears that as retail sales slowed from the middle of 2015, inventories continued to rise and are currently sitting just above the historical average."

Overall combined carloads at CN and Canadian Pacific Railway Ltd. have fallen by more than 7 per cent this year – in line with their U.S. counterparts – amid a plunge in shipments of metals, coal, oil and grain, according to the Association of American Railroads.

CN's Mr. Ruest said CN oil shipments by rail from the Bakken region of the U.S. Midwest and Saskatchewan have halted. "It's all Alberta crude, that's the one that still has financial viability, in some cases, moving by rail," he said.

However, he said oil volumes will not rebound until the price difference between western Canadian crude and Mexican or Brent widens, or the available pipeline capacity is taken up.

Speaking at the same conference, Keith Creel, CP's operating chief, said low fuel prices have given trucks a price advantage over trains, but recent increases in the cost of diesel bode well for the coming months. In addition, large crops expected in Canada and the United States, coupled with higher commodity prices and Canadian grain rates, offer some upside in the second half.