I’m a big fan of following macro rail trends around the world so I am fortunate to be in touch on occasion with Executives at CSX, one of the world’s largest rail firms. I reached out to Frank Lonegro, CFO at CSX to ask him about his opinion on the US and global economy. He was kind enough to let me publish his thoughts:
1) How does CSX see current trends in the US rail industry and are these trends consistent with a weakening overall economy or continued growth?
When we look across the markets we serve, we really have a mixed view. We still see a core economy that is growing in the two to three percent range overall. We’re seeing that growth come through in some of the markets that are indicative of the broader economy and consumer spending, such as the automotive and housing markets. For example, North American Light Vehicle Production (NALVP) is at its highest level since 2000, and is expected to grow three percent in 2016, to 17.9 million vehicles. And while housing starts remain below the historical norm of 1.5 million units annually, they’re growing. It’s predicted that there will be about 1.3 million starts in 2016. We’re also continuing to see the secular growth trend in intermodal, as population increases and the increasingly interconnected supply chain mean the value of rail transportation is more critical than ever. There are about 9 million truckloads in the East that we see as good candidates for conversion to intermodal, and we’re working with customers to help them take advantage of the efficiency and cost-effectiveness of rail.
That said, there are certainly plenty of temporal factors that are challenging that underlying economic growth. For CSX, one of the biggest headwinds is the impact of low natural gas prices on coal movements. Over the past four years, we’ve seen coal revenue decline more than $1 billion, including more than $450 million in 2015 alone. We see this transition in the energy markets continuing, and are making structural changes in our coal network to reallocate resources to growth markets and high-demand geographies. At the same time, the strong U.S. dollar is challenging our exports and encouraging the displacement of domestic production in favor of cheaper imports. This impact is most evident in our metals market, where foreign steel is displacing U.S. production and mill utilization is very low. We do think that over time, conditions will normalize and, with the exception of coal, domestic commodities and products will regain their strength.
2) Can you provide some perspective on the recent worries in global markets and specifically the commodity markets? There is a great deal of concern that emerging markets and China could be on the verge of an economic crisis. Do you see global rail trends as being consistent with this view and if so, how will this filter into the US economy?
Weakening demand from major global consumers, including China, is certainly creating a ripple effect through global markets and putting pressure on commodity prices. For example, in export coal, we continue to see significant headwinds given the global oversupply and subsequent low benchmark prices facing U.S. exporters. That said, we believe that we’re moving through the business cycle and that, in time, conditions will normalize as China and the emerging markets settle into a more sustainable growth rate.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.