Cargo volume at California’s Port of Oakland reached an all-time high in the first quarter as a “nonstop trade surge” pushed both imports and exports into record territory, the port said today.
Containerized trade from January through March equaled 631,119 twenty foot equivalent units (TEUs), topping the port’s previous record of 612,151 set in the first quarter of 2019.
The surge comes from unprecedented activity levels in trade between the U.S. and Asia, with no sign that the activity will slow down, Port Maritime Director Bryan Brandes said in a release. “Based on the evidence, we expect the trend line to keep going up.”
The court’s booming business in boxes is driven by a jump in consumer spending as a coronavirus-weary public indulges in "retail therapy” spending to counter the frustration of lockdowns, the port said. To keep up with that demand, manufacturers and retailers are rushing to replenish warehouse inventories with goods sourced in Asia.
Looking further into the future, port leaders cited three variables that point to continued trade growth:
freight rates for ships in the trans-Pacific trade are near all-time highs, reflecting strong demand,
ships sailing between Asia and the U.S. West Coast are nearly full, and
vessels at West Coast ports sometimes wait days for crowded berth space.
As we approach the final stretch of 2024, the rail industry is at a critical juncture, facing a convergence of long-standing challenges and emerging opportunities.
In recent years, the rail industry's story has been one of persistent headwinds: financial pressures, labor shortages, and heightened safety concerns following the East Palestine, Ohio, derailment, to name just a few. The shadows cast by these difficulties continue to loom large. These challenges, however, are symptoms of deeper, structural issues that have plagued the industry for over a decade.
Since the late 2000s, aggregate rail volumes have remained stubbornly stagnant. The initial gains from Precision Scheduled Railroading (PSR), once hailed as a revolutionary approach to operational efficiency, have largely been exhausted. The industry now grapples with this model's limitations, searching for new avenues to drive growth and profitability.
This pivotal moment demands a nuanced understanding of the sector's current state and potential trajectories.
The weight of history
In many ways, the root of today’s rail industry dilemma lies with coal. Coal was first used to generate electricity in the United States in 1882, and coal production, power plants, and railroads all grew together. In the 1970s, the development of the vast coal deposits of the Powder River Basin in Montana and Wyoming and their proximity to major rail lines fueled a massive nationwide railroad infrastructure investment cycle that lasted a decade. It was truly a bonanza.
In the early 2000s, however, advancements in hydraulic fracking and horizontal drilling led to a surge in natural gas production. As its prices fell, natural gas grew to be a titan competitor of coal for electricity generation. The impact of inexpensive and abundant natural gas has led to huge declines in coal production and coal’s share of electricity generation. According to the Energy Information Administration (EIA), coal’s share of U.S. electricity generation averaged 52% in the 1990s and fell to 16% in 2023. The natural gas share rose from 16% to 43% during that same time.
The impact on coal production, transportation, and consumption has been massive. In 2023, U.S. coal production was 577.5 million tons, representing a 51% decrease from 2008 volumes of 1.13 billion tons. During that same time, originated carloads of coal by U.S. Class I railroads peaked at 7.71 million in 2008 and plummeted to 3.43 million in 2023.
The short-term outlook is just as gloomy. According to the Association of American Railroads (AAR), coal carloads were down 17.1% from last year, the lowest January to June volume since the AAR began keeping records in 1988. Natural gas prices remain extremely low, and the cost of generating electricity from wind and solar farms has plunged. Coal’s share of U.S. electricity generation is expected to continue to decline in 2025. As a result, a significant amount of historical rail traffic will not return.
All factors considered, in the first half of 2024, U.S. railroads originated 4.17 million carloads, excluding coal and intermodal. That volume hasn’t changed much over the last 10 years, meaning that U.S. Class I’s have been unable to replace the diminished coal traffic with other carload traffic.
Filling the carload breach
Currently there are three AAR commodity segments that ship in enough volume to potentially offset the contracted coal volumes—grain, chemicals, and petroleum products. Of the three, do any provide a platform for volume growth?
Grain does offer some of the unit train economics of coal and represents about 12% of the first half of 2024 volume for U.S. railroads. However, for railroads, the grain market is divided into two very distinct sectors—domestic and international. Domestic grain demand has been relatively flat for the last 10 years, offering little opportunity for significant volume growth. The international market is quite different. While the United States is the world's largest grain exporter, volumes can swing wildly from year to year. The unpredictability of grain exports makes the entire segment risky as a growth strategy for Class I railroads.
The chemicals industry consists of thousands of producers throughout the United States, representing a material growth opportunity for Class I’s. The American Chemistry Council (ACC) reported that in 2022, 1.02 billion tons of chemicals were shipped in the United States at a cost of $79.0 billion. As a commodity segment, chemicals are the largest carload revenue source for U.S. Class I railroads. According to the ACC, rail represents 18% of total chemical tonnage while trucks led with 58%.
Like the chemicals segment, petroleum products represent a wide range of categories, including crude oil and refined products, including liquefied petroleum gases (LPGs), fuel oil, lubricating oils, aviation fuels, and other fuels. Together, they represent approximately 5% of U.S. rail-originating carload shipments.
A noteworthy structural opportunity that Class I’s can continue to nurture for growth in both the chemicals and petroleum products is south of the border. Today, Mexico’s ability to both produce and refine enough energy to meet its domestic needs is quite constrained, and that is reflected in the growth in imports from the United States. This export market represents a unique opportunity for Class I railroads.
Three things have driven this structural event. First, the Permian Basin in Texas and New Mexico creates a low-cost feedstock source for the world’s most sophisticated refining complex located in the U.S. Gulf Coast. Second, Mexico is a nearby market for both the feedstock and refining capacity. Finally, Mexico is facing a structural challenge in that its refining capacity has been operating below 50% for the last several years, and PEMEX, the Mexican state-owned petroleum company, is carrying massive debt. Railroads could serve as a vital link transporting feedstock.
The intermodal conundrum
Intermodal transport has long been considered the industry's golden ticket to growth, but in 2024, it presents a more complex picture. The segment saw a downturn in 2023, hitting its lowest volumes in three years. In June of this year, Class I railroads did report about an 8.7% volume growth in intermodal for the month over 2023. But even those numbers don't get them back to pre-pandemic levels.
However, we remain cautiously optimistic about intermodal’s long-term outlook. One way that Class I railroads could capture market share would be to target a significant volume of single-line traffic that travels between 700 and 1,500 miles and traverses only one railroad. That is a fairly sizable market for trucks right now, and if successfully converted to rail, it will add a significant amount of additional intermodal volume to the railroad’s portfolios.
To successfully compete, railroads will need to offer a compelling value proposition that can respond effectively to trucking’s current capacity surplus and low post-pandemic rates. This requires a delicate balance of pricing strategy, service reliability, and operational efficiency.
Path forward
Railroads have long faced criticism for their perceived inflexibility and reluctance to adapt to shipper needs. However, today's competitive landscape and changing customer expectations are driving rapid transformation in the industry. Class I railroads are actively working to enhance the customer experience, but they face significant challenges. To compete effectively with trucking, they must overcome deeply entrenched negative perceptions about rail shipping. This requires demonstrating unwavering commitment to their shippers and the markets they serve, as well as presenting comprehensive, forward-thinking strategies that showcase their long-term dedication to the industry.
For their part, shippers should reexamine the supply chain solutions they implemented to solve pandemic and post-pandemic challenges. They should take advantage of the current transportation market volatility to scrutinize the rates they currently pay and understand the trade-offs they can make in the marketplace to decrease overall transportation costs. Now's the time to start evaluating modal shifts. Railroads may be hungrier for traffic they didn't want to haul during the pandemic and post-pandemic years, and shippers can take advantage of a contracting truck market to inform their rail negotiations. In some cases, shippers may find that railroads have more appetite to commit to long-term contracts with fixed indices.
As we look to the future, railroads may never recover the bygone coal volumes, and their earnings profiles may be forever changed. Still, the industry's trajectory will be determined by its ability to address these interconnected challenges and opportunities brought about by the turbulence of being an integral part of the global economy. Success will require a multifaceted approach, and what worked for Class I’s in the past likely won’t help them be successful soon. All that said, it is a given that railroads will remain an integral part of North America’s industrial economy for a very long time.
Buoyed by a return to consistent decreases in fuel prices, business conditions in the trucking sector improved slightly in August but remain negative overall, according to a measure from transportation analysis group FTR.
FTR’s Trucking Conditions Index improved in August to -1.39 from the reading of -5.59 in July. The Bloomington, Indiana-based firm forecasts that its TCI readings will remain mostly negative-to-neutral through the beginning of 2025.
“Trucking is en route to more favorable conditions next year, but the road remains bumpy as both freight volume and capacity utilization are still soft, keeping rates weak. Our forecasts continue to show the truck freight market starting to favor carriers modestly before the second quarter of next year,” Avery Vise, FTR’s vice president of trucking, said in a release.
The TCI tracks the changes representing five major conditions in the U.S. truck market: freight volumes, freight rates, fleet capacity, fuel prices, and financing costs. Combined into a single index, a positive score represents good, optimistic conditions, and a negative score shows the opposite.
“ExxonMobil is uniquely placed to understand the biggest opportunities in improving energy supply chains, from more accurate sales and operations planning, increased agility in field operations, effective management of enormous transportation networks and adapting quickly to complex regulatory environments,” John Sicard, Kinaxis CEO, said in a release.
Specifically, Kinaxis and ExxonMobil said they will focus on a supply and demand planning solution for the complicated fuel commodities market which has no industry-wide standard and which relies heavily on spreadsheets and other manual methods. The solution will enable integrated refinery-to-customer planning with timely data for the most accurate supply/demand planning, balancing and signaling.
The benefits of that approach could include automated data visibility, improved inventory management and terminal replenishment, and enhanced supply scenario planning that are expected to enable arbitrage opportunities and decrease supply costs.
And in the chemicals and lubricants space, the companies are developing an advanced planning solution that provides manufacturing and logistics constraints management coupled with scenario modeling and evaluation.
“Last year, we brought together all ExxonMobil supply chain activities and expertise into one centralized organization, creating one of the largest supply chain operations in the world, and through this identified critical solution gaps to enable our businesses to capture additional value,” said Staale Gjervik, supply chain president, ExxonMobil Global Services Company. “Collaborating with Kinaxis, a leading supply chain technology provider, is instrumental in providing solutions for a large and complex business like ours.”
The firms’ “GEP Global Supply Chain Volatility Index” tracks demand conditions, shortages, transportation costs, inventories, and backlogs based on a monthly survey of 27,000 businesses.
The rise in underutilized vendor capacity was driven by a deterioration in global demand. Factory purchasing activity was at its weakest in the year-to-date, with procurement trends in all major continents worsening in September and signaling gloomier prospects for economies heading into Q4, the report said.
According to the report, the slowing economy was seen across the major regions:
North America factory purchasing activity deteriorates more quickly in September, with demand at its weakest year-to-date, signaling a quickly slowing U.S. economy
Factory procurement activity in China fell for a third straight month, and devastation from Typhoon Yagi hit vendors feeding Southeast Asian markets like Vietnam
Europe's industrial recession deepens, leading to an even larger increase in supplier spare capacity
"September is the fourth straight month of declining demand and the third month running that the world's supply chains have spare capacity, as manufacturing becomes an increasing drag on the major economies," Jagadish Turimella, president of GEP, said in a release. "With the potential of a widening war in the Middle East impacting oil, and the possibility of more tariffs and trade barriers in the new year, manufacturers should prioritize agility and resilience in their procurement and supply chains."
Pharmaceutical groups are breathing a sigh of relief today after federal regulators granted many of them more time to come into compliance with strict track and trace rules required by the Drug Supply Chain Security Act (DSCSA).
The regulation was initially scheduled to be required by 2023, but that has been delayed due to the steep logistics and IT challenges of managing the reams of data that must be generated, stored, and retrieved. The most recent target update was November 27, but industry experts say many businesses would probably have missed that date, too.
Facing that reality, the FDA yesterday again delayed that deadline until next year, setting new deadlines for various trading partners: Manufacturers and Repackagers have until May 27, 2025; Wholesale Distributors have until August 27, 2025; and Dispensers with 26 or more full-time employees have until November 27, 2025.
Pharmaceutical businesses quickly cheered the move. “HDA and our pharmaceutical distributor members applaud the FDA’s decision to grant an exemption for the DSCSA’s enhanced drug distribution security (EDDS) requirements for eligible trading partners,” said Chester “Chip” Davis, Jr., president and CEO of the Healthcare Distribution Alliance (HDA), which is an industry group representing primary pharmaceutical distributors, who connect the nation’s pharmaceutical manufacturers with pharmacies, hospitals, long-term care facilities, and clinics.
“While many in the supply chain have made significant progress throughout the stabilization period, some are still struggling to establish data connections. Given the interdependency of the pharmaceutical supply chain, FDA’s phased-in approach will allow supply chain partners to better align their data exchange processes to ultimately achieve full implementation and also acknowledges the progress made thus far,” Davis said.
“As we continue to make progress toward full DSCSA implementation, HDA and our distributor members will remain engaged with our public- and private-sector partners to share information and education, as we move toward our shared goal: helping patients and providers safely access the medicines they need.”