Consumer Recovery Aiding Freight Transport Sector
We forecast a year of strengthening recovery in the US freight transport sector in 2013 and through into 2014, broadly in line with the continued recovery in the economy as a whole. As a nation of consumers - private consumption makes up around 70% of GDP in the US - the vast country's freight transport sector is in large part reliant on its consumer strength. When this was struck as the global economic crisis began in the US in 2008, so volumes at US ports and on its road and rail networks were hit.
|Consumer Recovery Fuelling Freight Sector|
|US Private Final Consumption Growth, 2008-2017|
In 2013 and 2014 we forecast real GDP growth of 2.1% and 2.7% respectively in the US, and project that growth in private consumption will grow by 2.2% and 2.5% over the same period. This growth will see volumes continue to rise at the country's ports and on its road and rail networks, on its inland waterways and through its airports.
In 2013 BMI forecasts that US rail freight volumes will see growth of 5.8%. Coming on top of 2012's estimated volume figure of 2.05bn tonnes, this would see 2.17bn tonnes transported on US railroads by the end of the year. In terms of rail freight tonne-km we forecast a similar, though slightly more sedate, growth rate of 4.6% over the year. These forecasts are up slightly from our estimates for 2012 growth in volumes and freight tonne-km, which were 5.1% and 4.1% respectively, and this reflects a number of trends we are seeing in the US rail freight sector, which is recovering in line with the wider recovery ongoing in the world's largest economy.
It is worth noting that US rail freight accounts for a small proportion of the giant country's landside freight-transport volumes; according to our 2013 forecasts, of the freight volumes transported by rail and road this year only around 14% of these will be carried on the railroads. Nevertheless, the sector is vital to the US logistics network, enabling significant economies of scale to shippers looking to transport their goods over long distances.
As consumer sentiment is improving in the US, so we are seeing a rise in the intermodal rail freight transport of containers. To the beginning of March intermodal volumes in North America (including Canada and Mexico in addition to the US) were up by 7.2% year-on-year, and the bulk of this will have been transported within the US. This rise in intermodal volumes is being facilitated by greater investment by railroad companies in container-handling trains and terminals, and is in turn leading to further investment.
|Shale Crude Offsetting Lost Coal Volumes|
|US Rail Freight Tonnes, ('000), 2008-2017|
According to Edward R Hamberger, the president and CEO of the Association of American Railroads, railroad companies in the US intend to spend a record US$24.5bn in private funding on the country's rail network in 2013. The companies plan to invest the amount in new intermodal terminals, equipment and safety technology in a bid to meet the demands of the market. The railroads invested US$23bn in the country's rail network in 2012. The rise of double-stacking containers will also enable greater volumes to be shipped with ease. Further, the rise of the transport of agricultural produce - such as grain - by container will see box volumes on US trains rise still further.
Although intermodal volumes are rising, growth in tonnage is being challenged by the decline in the use of coal in US power stations. This is a result of both the environmental drive for using cleaner fuels, and the rise of the domestic shale fuel sources. Despite the fact that the US has been exporting more of its coal to China and other Asian markets as domestic demand falls, it has not been sufficient to offset rail freight volumes lost by the drop in demand at home. Leading US rail companies such as Norfolk Southern Corporation and CSX Corporation saw their net incomes fall in Q412, in part as a result of the dramatic decline in coal volumes - while Norfolk Southern's intermodal revenue jumped 5% y-o-y to US$584mn in Q412, revenue from coal declined 23% y-o-y to US$657mn.
Coal is not the only bulk good to be transported by rail in the US, however. The shale revolution in the US could be the saviour of the industry, at least over the medium term; BMI believes that there is huge potential for rail operators in North America to benefit from the explosion in domestic shale crude oil production. The growth of the industry has accelerated faster than pipelines have been built to transport the goods, meaning rail is being increasingly used to transport crude to refineries. The nascent industry will support the rail companies as the transport of coal for domestic use peters out, and offers upside risk to our rail freight forecasts.
The development of pipelines has not as yet managed to keep pace with the rapid growth of the shale oil industry in North America, and rail operators are benefitting as a result as tank cars are increasingly turned to, to transport crude from the shale fields - concentrated in North Dakota - to refineries on the coast. According to Canadian National Railway Company (CN) executive vice president and chief marketing officer Jean-Jacques Ruest, talking in Q412, transporting crude oil 'is one of CN's fastest-growing businesses. We expect to move in excess of 30,000 carloads in 2012, and we believe we have the scope to double this business next year'.
As long as arbitrage opportunities persist through transporting the light-sweet crude from the Bakken fields to the Gulf refineries, which would normally source this from overseas, we believe that volumes of crude oil transported by rail will continue to increase in the US, especially as shale oil volumes continue to grow; the North Dakota Pipeline Authority estimated that exit capacity from the Bakken via rail would hit 775,000 barrels per day (b/d) by the end of 2012, up from just 275,000b/d at the close of 2011.
This growth of the shale crude industry will support rail freight volumes over the medium term, compensating for the decline in coal volumes at least until new pipeline infrastructure is in place. Over the medium term, from 2013 to 2017, we project that annual growth will average 5.9% per annum, and this could be revised upwards as more upstream and downstream oil players look to rail for their transport solutions. For companies such as CN the coming years could come to be healthily profitable ones.
With US rail freight accounting for around 14% of the total landside freight transport volumes, it is road haulage that carries the bulk of the remainder, accounting for roughly 83% of volumes according to our 2013 forecasts (inland waterways make up the remainder, around 3%). In line with the rest of our US freight transport forecasts we see road haulage enjoying robust growth in 2013, forecasting an expansion in volumes of 4.5%, following an estimated growth of 4.4% in 2012. If borne out this would see 12.67bn tonnes transported on the country's roads over the 12-month period.
|Growth Over Medium Term|
|US Road Freight Tonnes, ('000), 2008-2017|
As with rail freight, this will be driven largely by the improved consumer sentiment and the transport of consumer goods from ports and air freight terminals to local depots. Equally, the rise of US manufacturing following the recession will also feed growth, in particular in the automotives sector. Japanese automotive supplier Denso has announced investment of US$1bn over four years for its North American operations, as it looks to localise not only its output, but also the equipment used in production. This aligns with BMI's bullish view of US manufacturing, not only in the autos sector, but as a whole, which will boost road haulage volumes.
We note that road hauliers share our optimistic outlook for volume growth; February 2013 saw truck tonnage in the US grow by 4.2% y-o-y. The figure was compiled by American Trucking Associations (ATA), which set tonnage at a reading of 123.6 from the 100 baseline based on figures from the year 2000, in its monthly for-hire truck tonnage report. The figure represents a month-on-month increase of 0.6%.
Over our medium-term forecast period we project that the growth in volumes will continue in line with the economic recovery, with growth set to average 5.5% per annum.
In 2013 BMI forecasts that US air freight volumes will see growth of 3.8%, and that this will average 4.2% to 2017, the end of our forecast period. In terms of air freight tonne-km we project an average expansion rate of 4.4% over the same period. If borne out, our forecast would see 13.83mn tonnes of air freight transported in the US over the 12-month period. While this is not sufficient to see the 2001 record of 15.90mn tonnes bested, it does mark the ongoing recovery from the 2008/2009 crash, when US air freight volumes fell by 10.2% and 7.0% respectively.
Much of the US's air freight volumes are generated domestically, given the huge expanse over which the country is located. Another key generator of volumes is imported electronic goods from Asia-Pacific markets, and the recovery of the US consumer should see these volumes begin to rise once again - the region has been hit hard in recent years by muted demand from its key export markets in the west. However, it should be noted that increasing volumes are now transported by container ship as the shipping sector's reliability and timeliness has improved in recent years.
|US Air Freight Tonnes ('000), 2008-2017|
New connections with markets to the south of the US, in Latin America, could also boost air freight volumes in the coming years. For example, a new freighter service launched in August 2012 between the US airport of Dallas Fort Worth (DFW) and Sao Paulo, Brazil, will bring upside potential to DFW's annual cargo throughput total. Singapore Airlines Cargo (SIA Cargo) has launched a new flight connecting DFW with Sao Paulo. This is an extra leg in the service's round-the-world route which follows the rotation Singapore, Hong Kong, Anchorage, DFW, Sao Paulo, DFW again, Brussels, Sharjah, before returning to Singapore. Currently running weekly it will be expanded to twice-weekly before the autumn. The flight is DFW's first direct connection with South America.
Inland waterways - a large part of which are made up by the Mississippi River - account for 3% of the landside freight transport mix in the US. In 2013 we forecast that growth in this sector will be a sluggish 0.4%, following an even more sedate 0.3% estimated growth rate in 2012. Risks to even this expansion rate come from the risk that drought could make parts of the river un-navigable as happened in 2012, as low water levels made the chance of striking rocks too grave to risk.
If we treat the neighbouring southern California ports of LA and Long Beach as a single entity for the purposes of this piece, then it becomes the largest port in the US in terms of total tonnage throughput (and containers). In 2013 we forecast that it will handle 154.21mn tonnes, which would represent growth of 3.6% over that handled in 2012. The largest facility on the East Coast, the port of New York/New Jersey, we forecast to handle 143.29mn tonnes in 2013, growth of 2.1% on our estimated 2012 throughput of 140.31mn tonnes.
Despite being on opposite sides of the continent, both port bodies face similar issues. Both saw sharp declines in their throughputs when the recession struck, and have been struggling to recover lost volumes in the years since - we do not envisage this happening at either in 2013, though the growth we believe will take place will lay the foundations for 2014, when we believe pre-downturn volumes will finally be recouped. Equally, both have been faced with strikes or the threat of strikes in 2012 in California by the ILWU and in New York/New Jersey by the ILA. While both disputes appear to have been resolved now, the possibility of further disruptions lends risk to our projections.
|Recovering Lost Volumes|
|Port of New York/New Jersey Throughput, Tonnes ('000), 2008-2017|
Further, both will be affected by the 2015 completion of the Panama Canal expansion. This will enable ships of up to 12,500 twenty-foot equivalent unit (TEU) capacity to traverse the waterway, up from the current 4,400 TEUs. It will affect the two port complexes in different ways, however. While New York/New Jersey stands to benefit, as economies of scale will mean that vessels are more likely to sail round to the consumer markets of the East Coast, LA and Long Beach could lose out. The two ports have traditionally served as the entry point for containerised goods from Asia entering the US, and they could see this role diminish from 2015 onwards. One way by which we have noted the facilities have been trying to ensure that they remain relevant is through enabling themselves to handle mega-vessels that will still not be able to pass through the enlarged canal.