Railroads and the Economy North East Association of Rail Shippers April 27, 2016
Railroads Help Keep Coal- Based Electricity A cynic is a man who, when he smells flowers, looks around for a coffin. -H.L. Mencken SLIDE 2
Railroads Help Keep Coal- Based Electricity SLIDE 3
Coal: -697,019 (-12.0%) Railroads Help Grain: Keep 35,813 (3.4%) Coal- All other carloads: 34,703 (14.3%) Based Motor vehicles Electricity & parts: 25,844 (2.9%) Change in U.S. Rail Carloads: 2015 vs. 2014 Note: intermodal is not included in this chart. Intermodal was up 214,770 units (1.6%) in 2015 over 2014. Source: AAR Weekly Railroad Traffic database Nonmetallic minerals: -23,006 (-8.9%) Stone, clay & glass prod.: -23,949 (-5.7%) Iron & steel scrap: -40,227 (-18.2%) Metallic ores: -49,764 (-13.7%) Petrol. & petr. products: -77,632 (-9.7%) Primary metal products: -85,123 (-15.3%) Chemicals: 6,547 (0.4%) Grain mill products: 2,659 (0.5%) Coke: -231 (-0.1%) Farm products excl. grain: -816 (-1.7%) Waste & nonferrous scrap: -1,321 (-0.8%) Food products: -2,577 (-0.8%) Primary forest products: -5,740 (-7.0%) Pulp & paper products: -6,800 (-2.1%) Lumber & wood products: -7,056 (-3.9%) Crushed stone, gravel, sand: -9,446 (-0.8%) SLIDE 4
Railroads Help Keep Coal- All other carloads: 22,576 (31.7%) Motor veh. & parts: 20,620 (7.6%) Based Electricity Chemicals: 14,289 (2.9%) Change in Originated U.S. Rail Carloads: Weeks 1-16 2016 vs. Weeks 1-16 2015 Total YTD 2016: 3,844,016 Total YTD 2015: 4,486,248 ( 642,232, or 14.3%) Note: intermodal is not included in this chart. Intermodal was down 9,527 (-0.2%) YTD 2016 vs. YTD 2015. Waste & nonferrous scrap: 6,264 (12.9%) Coke: 5,777 (9.8%) Stone, clay & glass prod.: -161 (-0.1%) Food products: -1,430 (-1.4%) Farm products excl. grain: -1,620 (-11.0%) Nonmetallic minerals: -1,997 (-2.9%) Primary forest products: -2,076 (-8.8%) Iron & steel scrap: -3,905 (-6.7%) Lumber & wood products: -4,014 (-7.0%) Pulp & paper products: -4,765 (-5.0%) Grain mill products: -9,792 (-6.2%) Source: AAR Weekly Primary metal products: -10,124 (-6.8%) Railroad Traffic database Crushed stone, gravel, sand: -11,827 (-3.5%) Grain: -14,225 (-4.0%) Coal: -574,459 Metallic ores: -20,739 (-23.7%) (-33.9%) Petrol. & petr. products: -50,624 (-21.7%) SLIDE 5
340,000 Total U.S. Rail Carloads (average weekly originations) 320,000 300,000 280,000 260,000 240,000 220,000 200,000 SLIDE 6 08 09 10 11 12 13 14 15 16 Data are not seasonally adjusted, do not include intermodal, and do not include the U.S. operations of CN and CP. Source: AAR Weekly Railroad Traffic
20% 15% 10% 5% 0% -5% -10% -15% -20% -25% Total U.S. Rail Carloads (% change from same month previous year) 2009 2010 2011 2012 2013 2014 2015 2016 Data are based on originations, are not seasonally adjusted, do not include intermodal, and do not include the U.S. operations of CN and CP. Source: AAR SLIDE 7
290,000 270,000 250,000 230,000 210,000 190,000 170,000 U.S. Rail Intermodal Traffic (average weekly originations) 150,000 SLIDE 8 2008 2009 2010 2011 2012 2013 2014 2015 2016 Data are not seasonally adjusted, and do not include the U.S. operations of CN and CP. Source: AAR Weekly Railroad Traffic
U.S. Rail Intermodal Traffic (% change from same month previous year) 20% 15% 10% 5% 0% -5% -10% -15% -20% SLIDE 9 2009 2010 2011 2012 2013 2014 2015 2016 Data are based on originations, are not seasonally adjusted, and do not include the U.S. operations of CN and CP. Source: AAR
What s This? SLIDE 10
Record U.S. Natural Gas Production 34 32 30 28 26 24 22 20 18 (trillion cubic feet) U.S. natural gas production in 2015 was higher than ever before. 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Energy Information Administration SLIDE 11
$13 $12 $11 $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 Price of Natural Gas to Utilities (dollars per million BTU) 2008 2009 2010 2011 2012 2013 2014 2015 Source: Energy Information Administration SLIDE 12
U.S. Electricity Generation by Fuel (million megawatthours, 2006-2015) 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Coal Natural Gas 2000 2005 2010 2015 Coal 52% 50% 45% 33% Natural Gas 16% 19% 24% 33% Nuclear 20% 19% 20% 20% Hydro 7% 7% 6% 6% Renewables 2% 2% 4% 7% Other 3% 4% 1% 1% Nuclear Hydro Renewables Source: Energy Information Administration SLIDE 13
Coal Stockpiles at Electric Utilities 110 100 90 80 70 60 50 40 30 20 10 0 (days of burn) Bituminous Sub-bituminous 2010 2011 2012 2013 2014 2015 2016 Source: Energy Information Administration SLIDE 14
Coal Environmental Issues Key question: when are marginal benefits worth the cost? SLIDE 15
160,000 150,000 140,000 130,000 120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 U.S. Rail Carloads of Coal 08 (average weekly originations) Oct. 2008 = 151,022 First 3 weeks April 2016 = 60,031 09 10 11 12 13 14 15 16 Data are average weekly originations for each month, are not seasonally adjusted, do not include intermodal, and do not include the U.S. operations of CN and CP. Source: AAR Weekly Railroad Traffic SLIDE 16
10% 5% 0% -5% -10% -15% -20% -25% -30% -35% -40% -45% U.S. Rail Carloads of Coal (% change from same month previous year) First 3 weeks April 2016 = 41% 2009 2010 2011 2012 2013 2014 2015 2016 Data are based on originations, are not seasonally adjusted, do not include intermodal, and do not include the U.S. operations of CN and CP. Source: AAR SLIDE 17
Coal as % of U.S. Railroad Tonnage 44% 44% 45% 47% 44% 43% 41% 39% 39% 37% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Data are based on originated tons for Class I railroads. Source: AAR (FCS) SLIDE 18
Coal as % of U.S. Railroad Revenue 21% 21% 23% 25% 24% 25% 22% 20% 19% 17% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Data are based on gross revenue. Source: AAR (FCS) SLIDE 19
Declared bankruptcy 3/13/2016. Declared bankruptcy 1/11/16. Declared bankruptcy 8/3/15. 8,400 employees in May 2015, 5,300 in March 2016. Declared bankruptcy 5/12/15. Declared bankruptcy 7/15/2015. What s This? TOP U.S. COAL PRODUCERS Production (mil. tons) Share of U.S. Total 1 Peabody Energy Corp 183.3 18.6% 2 Arch Coal Inc 130.2 13.2% 3 Cloud Peak Energy 85.7 8.7% 4 Alpha Natural Resources 84.9 8.6% 5 Rio Tinto Group 61.9 6.3% 6 Murray Energy Corp 58.5 5.9% 7 Westmoreland Coal Co 51.5 5.2% 8 Alliance Resource 38.1 3.9% 9 Energy Future Holdings 29.1 3.0% 10 NACCO Industries Inc 29.0 2.9% 11 CONSOL Energy Inc 28.0 2.8% 12 Patriot Coal Corp 20.8 2.1% 13 Peter Kiewit Sons Inc 19.9 2.0% 14 Walter Energy Inc 13.8 1.4% 15 Bowie Resource Holdings 9.7 1.0% SLIDE 20
Dow Jones U.S. Coal Index: Jan. '07 - Apr. '16 750 700 650 600 550 500 450 400 350 300 250 200 150 100 50 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Bloomberg Finance Peabody Energy stock price: July 1, 2008: $1,317.15 Mid-April 2016: ~$2.07 SLIDE 21
U.S. Rail Carloads Excluding Coal 200,000 190,000 180,000 170,000 160,000 150,000 140,000 130,000 120,000 110,000 100,000 2008 (average weekly originations) 2009 2010 2011 2012 2013 2014 2015 2016 Data are average weekly originations for each month, are not seasonally adjusted, do not include intermodal, and do not include the U.S. operations of CN and CP. Source: AAR Weekly Railroad Traffic SLIDE 22
U.S. Rail Carloads Excluding Coal 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% (% change from same month previous year) 2009 2010 2011 2012 2013 2014 2015 2016 Data are based on originations, are not seasonally adjusted, do not include intermodal, and do not include the U.S. operations of CN and CP. Source: AAR SLIDE 23
What Economies Do What Economies Do Where are we? Here? Here? Here? GDP Recession Expansion Time SLIDE 24
9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% Railroads Help Keep Coal- Based Electricity Year-Over-Year U.S. GDP Growth trend line '51 '55 '59 '63 '67 '71 '75 '79 '83 '87 '91 '95 '99 '03 '07 '11 '15 Source: Bureau of Economic Analysis Average: 1950-1979: 4.0% 1980-2000: 3.2% 2000-2015: 2.0% SLIDE 25
Disappointing Post-Recession GDP Growth 2.7% 1.8% 2.5% 1.6% 2.2% 1.5% 2.4% 2.4% -0.3% -2.8% '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: Bureau of Economic Analysis SLIDE 26
$8 $7 $6 $5 $4 $3 $2 $1 $0 -$1 -$2 -$3 -$4 Goods Services C = personal consumption ~69% of GDP Railroads GDP = C + I Help + G + Keep (X-M) Coal- 2015 Based total = $16.3 Electricity trillion (2012 $) I = investment (machines, housing, locomotives, etc.) ~21% of GDP Fixed nonresid. Fixed residential Source: BEA Intel. property (software, R&D, etc.) Federal State & local G= govt.* ~17% of GDP X-M = exports minus imports Exports add to GDP; imports take away from GDP Exports Imports *Excludes interest & social service programs SLIDE 27
Tangible vs. Non-Tangible GDP 12% 8% 4% 0% -4% -8% -12% -16% (% change over previous year) Tangible GDP subsectors* Non-tangible GDP subsectors** '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 *Includes imports, exports, and personal consumption of goods; fixed nonresidential investment; business investment in equipment and structures; government gross investment; and change in inventories. **Includes imports, exports, and personal consumption of services; intellectual property; and government consumption expenditures. Source: BEA, AAR SLIDE 28
Non-tangible GDP vs. Rail Traffic** 16% 12% 8% 4% 0% -4% -8% -12% -16% -20% (% change over previous year) Non-tangible GDP subsectors* U.S. rail carloads excl. coal & grain + intermodal correlation = 26% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 ** Includes imports, exports, and personal consumption of services; intellectual property; and government consumption expenditures. **Carloads excluding coal and grain + intermodal units. Rail traffic does not include the U.S. operations of Canadian railroads. Source: BEA, AAR SLIDE 29
16% 12% 8% 4% 0% -4% -8% -12% -16% -20% Tangible GDP vs. Rail Traffic** (% change over previous year) Tangible GDP subsectors* U.S. rail carloads excl. coal & grain + intermodal correlation = 94% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 ** Includes imports, exports, and personal consumption of goods; fixed nonresidential investment; business investment in equipment and structures; and government gross investment. **Carloads excluding coal and grain + intermodal units. Rail traffic does not include the U.S. operations of Canadian railroads. Source: BEA, AAR SLIDE 30
$120 $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 Crude Oil Spot Prices: 2014-2016 Railroads Help Keep Coal- Based ($ per barrel) Electricity Brent Brent WTI June 19, 2014 $115.19 $107.08 Jan. 20, 2016 $26.01 $26.68-77% -75% WTI J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D 2014 2015 Source: EIA 2016 SLIDE 31
Railroads Help Keep Coal- Based Electricity SLIDE 32
Widespread Spillover Effects Huge spending cuts by energy companies affect huge swath of businesses Huge job losses Loan defaults leading to fear of contagion General uncertainty SLIDE 33
Overall Industrial Output Is Down 108 106 104 102 100 98 96 94 92 90 88 86 84 U.S. Industrial Output (2012 = 100) 2009 2010 2011 2012 2013 2014 2015 2016 Data are seasonally adjusted. Source: Federal Reserve SLIDE 34
Mainly Due To Resource Extraction 125 120 115 110 105 100 95 90 85 80 75 U.S. Mining, Oil, and Gas Output (2012 = 100) 2009 2010 2011 2012 2013 2014 2015 2016 Data are seasonally adjusted. Source: Federal Reserve SLIDE 35
106 104 102 100 98 96 94 92 90 88 86 84 82 Sluggish Manufacturing Output (2012 = 100) 2009 2010 2011 2012 2013 2014 2015 2016 Data are seasonally adjusted. Source: Federal Reserve SLIDE 36
110 105 100 95 90 85 80 75 70 65 Manufacturing Output vs. Rail Carloads Excl. Coal & Grain Manuf. output (2012=100, left scale) Originated rail carloads excluding coal & grain (millions, right scale)* correlation = 91% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 *Carloads are for U.S. Class I railroads. Source: Federal Reserve, AAR (FCS) 24 23 22 21 20 19 18 17 16 15 SLIDE 37
Iron & Steel Output vs. Rail Carloads of Primary Metal Products 120 110 100 90 80 70 60 50 40 30 Rail carloads (right scale) correlation = 96% Iron & steel output* (left scale, 2012=100) 2009 2010 2011 2012 2013 2014 2015 2016 Data are seasonally adjusted. Source: Federal Reserve, AAR 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 SLIDE 38
120 115 110 105 100 Lumber Output vs. Rail Carloads of Lumber & Wood Products* 95 90 85 80 75 Rail carloads (right scale) correlation = 95% Lumber & wood output (left scale, 2012=100) 2009 2010 2011 2012 2013 2014 2015 2016 7,500 7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 *Carloads = U.S. and Canadian carloads of lumber and wood products and primary forest products combined. Data are seasonally adjusted. Source: Federal Reserve, AAR SLIDE 39
106 104 102 100 98 96 94 92 90 88 86 Paper Output vs. Rail Carloads of Pulp & Paper Products* correlation = 23% Rail carloads (right scale) Paper output (left scale, 2012=100) 2009 2010 2011 2012 2013 2014 2015 2016 10,200 10,000 9,800 9,600 9,400 9,200 9,000 8,800 8,600 8,400 8,200 *Carloads = U.S. and Canadian combined. Data are seasonally adjusted. Source: Federal Reserve, AAR SLIDE 40
108 106 104 102 100 98 96 94 92 90 Chemical Output vs. Rail Carloads of Chemicals correlation =1% Rail carloads (right scale) Chemical output (left scale, 2012=100) 2009 2010 2011 2012 2013 2014 2015 2016 Data are seasonally adjusted. Source: Federal Reserve, AAR 32,800 31,600 30,400 29,200 28,000 26,800 25,600 24,400 23,200 22,000 SLIDE 41
14 13 12 11 10 9 8 7 6 5 4 3 2 Motor Vehicle Assemblies vs. Rail Carloads of Motor Vehicles* Rail carloads (right scale) correlation = 97% Motor vehicle assemblies (left scale, 2012=100) 2009 2010 2011 2012 2013 2014 2015 2016 *Carloads = U.S. and Canadian combined; includes parts. Does not include intermodal. Data are seasonally adjusted. Source: Federal Reserve, AAR 30,000 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 SLIDE 42
160,000 140,000 120,000 100,000 80,000 60,000 40,000 Terminated Rail Carloads of Crude Oil by Quarter Annual Totals 2009 10,966 2010 29,673 2011 67,103 2012 236,556 2013 435,560 2014 540,383 2015* 482,525 20,000 0 2010 2011 2012 2013 2014 2015 *2015 is preliminary. Data are for Class I railroads. Source: AAR (Freight Commodity Statistics) SLIDE 43
160,000 Originated Rail Carloads of Industrial Sand by Quarter 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2010 2011 2012 2013 2014 2015 *2015 is preliminary. Data are for Class I railroads. Source: AAR (Freight Commodity Statistics) SLIDE 44
Lots of Mixed Messages in the Economy Right Now SLIDE 45
Trade Weighted U.S. $ Exchange Rate 96 94 92 90 88 86 84 82 80 78 76 74 72 70 68 66 (March 1973 = 100) U.S. dollar has weakened in past few months, but is still relatively high. 2010 2011 2012 2013 2014 2015 2016 Figures are the first of the month. Source: Federal Reserve Bank of St. Louis SLIDE 46
65 60 55 50 45 40 35 30 25 20 Purchasing Managers Index (PMI) > 50 = manuf. growing; < 50 manuf. shrinking 2009 2010 2011 2012 2013 2014 2015 2016 Source: Institute for Supply Management SLIDE 47
Non-Manufacturing Index (NMI) > 50 = services sector growing; < 50 services shrinking 65 60 55 50 45 40 35 30 25 20 2009 2010 2011 2012 2013 2014 2015 2016 Source: Institute for Supply Management SLIDE 48
1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 SLIDE 49 Housing Starts Holding On (seasonally-adjusted annual rate, 000s*) 2005 2,068 2009 554 2012 781 2013 925 2014 1,003 2015 1,111 Source: Census Bureau All Single family 2010 2011 2012 2013 2014 2015 2016
110 100 90 80 70 60 50 40 30 20 Shaky Consumer Confidence? Source: Conference Board (1985 = 100) 2010 2011 2012 2013 2014 2015 2016 SLIDE 50
Sluggish Retail Sales $460 $450 $440 $430 $420 $410 $400 $390 $380 $370 2011 2012 2013 2014 2015 2016 Intermodal is weekly average originations for the month. Data are seasonally adjusted and adjusted for inflation. Source: Census Bureau, AAR SLIDE 51
$460 $450 $440 $430 $420 $410 $400 $390 $380 $370 Strong Correlation Between Rail Intermodal and Retail Sales Rail intermodal (right scale) correlation = 92% Retail sales (left scale, $ billions) 2011 2012 2013 2014 2015 2016 Intermodal is weekly average originations for the month. Data are seasonally adjusted and adjusted for inflation. Source: Census Bureau, AAR 280,000 270,000 260,000 250,000 240,000 230,000 220,000 210,000 200,000 190,000 SLIDE 52
19 18 17 16 15 14 13 12 11 10 9 8 7 6 Strong Auto Sales, But. (seasonally adjusted annual rate, millions*) (millions) 2011 12.7 2012 14.4 2013 15.5 2014 16.4 2015 17.4 2010 2011 2012 2013 2014 2015 2016 *Passenger cars, SUVs, minivans, and pickups. Source: Bureau of Economic Analysis SLIDE 53
Good Job Growth 600 500 400 300 200 100-100 0-200 -300-400 -500-600 -700-800 -900 Net New Jobs Created (000s) Annual Totals (millions) 2008-3.6 2012 2.1 2009-5.1 2013 2.3 2010 1.1 2014 3.0 2011 2.1 2015 2.7 2009 2010 2011 2012 2013 2014 2015 2016 Source: Bureau of Labor Statistics SLIDE 54
11% Low Unemployment Rate 10% 9% 8% 7% 6% 5% 4% 3% 2009 2010 2011 2012 2013 2014 2015 2016 Source: Bureau of Labor Statistics SLIDE 55
And Labor Force Participation Rate is Finally Rising 66.0% 65.5% 65.0% 64.5% 64.0% 63.5% 63.0% 62.5% 62.0% 2009 2010 2011 2012 2013 2014 2015 2016 *The number of people considered part of the labor force divided by the working age population. Source: Bureau of Labor Statistics SLIDE 56
$1,600 $1,400 $1,200 $1,000 Corporate Profits Staying High $800 $600 $400 $200 ($ billions) All nonfinancial firms Manufacturing SLIDE 57 $0 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: Bureau of Economic Analysis
Reasons for Optimism? Trucks have their own problems Commodity cycles always turn eventually Healthy bank and household balance sheets Low inflation Resilience SLIDE 58
What Are Some Risks? Runs out of gas Problems abroad Financial disruptions Exchange rates Consumer retrenchment Elections Things can change quickly! SLIDE 59
What s This? SLIDE 60
Railroads Help Keep Coal- Based Electricity It says it doesn t have a clue what the economy will do. SLIDE 61
Class I Railroad Operating Revenue vs. Operating Expenses $80 $70 $60 $50 $40 $30 $20 $10 $0 ($ billions) Operating Revenue Operating Expense 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Data are not adjusted for inflation. Source: AAR SLIDE 62
Class I RR Diesel Fuel Expenditures ($ billions) $12.2 $11.4 $11.5 $11.6 $11.5 $8.1 $8.9 $7.9 $2.95 / gal $5.7 $6.7 $1.79 / gal 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: AAR SLIDE 63
Falling Class I RR Employment 176,000 172,000 168,000 164,000 160,000 156,000 152,000 148,000 144,000 140,000 SLIDE 64 Class I rail employment was 20,399 (11.7%) lower in March 2016 than in April 2015. 2010 2011 2012 2013 2014 2015 2016 Source: STB
8.8 8.6 8.4 8.2 8.0 7.8 7.6 7.4 7.2 7.0 6.8 6.6 U.S. Rail Traffic Units Per Class I Train & Engine Employee* 2009 2010 2011 2012 2013 2014 2015 2016 *Figures are 6-month moving averages. Traffic = total carloads + intermodal units. Traffic excludes the U.S. operations of CN and CP, but employment includes them. Data are not seasonally adjusted. Source: AAR, STB. SLIDE 65
Class I Railroad Net Income ($ billions) $13.4 $14.4 $14.5 $10.9 $11.9 $9.1 $8.1 $6.5 $6.8 $6.4 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: AAR SLIDE 66
Assn. of American Railroads www.aar.org SLIDE 67