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RBC Dominion Securities this week released its RBC Compass, 2015 North American Railroad Shipper Survey.
The survey taps into the views of the Class 1 railroads’ top customers, with key findings focusing on shippers’ expectations for 2015 regarding: the direction of rail rates; volume growth; and service performance.
This year, the survey also solicited shippers’ views on recent changes to Canadian rail regulation as well as anticipated market shifts between Canadian National Railway (CNR) and Canadian Pacific Railway (CP), said analyst Walter Spracklin.
The main takeaways from the survey are as follows:
1) Pricing gains to accelerate. Survey findings reflect a strong upward shift in pricing expectations as the share of respondents forecasting rate increases of 4 to 6 per cent more than doubled to 53 per cent (from 25 per cent last year).
2) Volume pipeline continues to build. Shippers’ volume expectations once again converged on flat to modest growth, between 1 to 5 per cent; “however, the survey notes a positive shift in respondents’ forecasts as the share of participants anticipating modest growth increased to 51 per cent (from 40 per cent last year).”
Based on discussions with shippers, “we believe these findings signal greater business confidence due to favourable macro trends notwithstanding recent oil price volatility. Survey findings on volume reinforce our growth outlook for the Class 1 railroads as we are assuming volume increases of 1.4 to 5.1 per cent across the group in 2015. The positive shift in shippers’ volume expectations points to strengthening demand and we see potential upside to the consensus outlook as shippers’ forecasts historically have reflected a healthy dose of conservatism,” Spracklin said.
3) Shipper sentiment sours on North American rail service.
Survey findings indicate that shippers’ view of rail service has deteriorated in 2014 as negative ratings (“Fair” or “Poor”) surged to 77 per cent of all responses, up from 32 per cent last year.
While the negative service trend is significant, the decline in customer satisfaction is being viewed as a temporary sentiment shift driven by unforeseen factors that were out of carriers’ control (largely weather-related).
Notwithstanding the temporary nature of the negative service trend, and the positive trend in share values, the survey indicates that that rail players should concentrate on service levels in the year ahead.
“We consider the decline in customer satisfaction to be a temporary sentiment shift caused by unforeseen factors that were largely out of carriers’ control,” Spracklin wrote.
Spracklin said the poor grade shouldn’t hurt the railways’ stock price due to the strong price and volume outlook by shippers for 2015.
Canadian National Railway received the most positive ratings of the six large railways in Canada and the U.S. The next best performer was Union Pacific Railway.
Rankings for the other four, including Canadian Pacific, were not given.
Montreal-based CN benefited from relatively strong operating metrics such as train speeds and dwell time in terminals to beat rivals. Still, the proportion of shippers who gave CN just a fair or a poor rating doubled to 63 per cent this year. Just seven per cent rated CN’s service as excellent, down from 15 per cent last year and 22 per cent in 2013.
Criticism focused on capacity constraints, railcar shortages, and transit time issues.
“Service has been terrible, but CN Rail has been the best of the group,” said one shipper, who was not named.
Shippers want an ongoing review of the Canada Transportation Act to recommend holding the railways accountable for service by imposing financial penalties for poor performance.
Service was the leading factor for shippers in deciding which carrier to use this year, with freight rates not playing a prominent role, the survey said. Service and price were equally important to shippers who shifted their business between the two Canadian railways last year.
About 80 per cent also expect trucking prices to increase by up to six per cent next year, compared with last year’s forecast for flat or modest rate increases.
BMO Capital Markets analyst Fadi Chamoun said rail demand to move heavy crude from Western Canada is unlikely to be impacted by the recent decline in crude prices.
“With limited pipeline capacity available until 2018 or later, … (the) projected production ramp-up over the next two years is expected to be shipped by railroads,” he wrote in a report.
Chamoun said frack sand is most vulnerable if lower prices curtail drilling. But reduced demand for crude or frac sand shipments would help the railways restore overall service levels.
By way of comparison, the 2014 North American Railroad Shipper Survey last year noted that key findings of the study focus on shippers’ expectations for 2014 regarding: the direction of rail rates; volume growth; and service performance.
In addition, that year a set of questions were added to get shippers’ perspective on the impact of recent management changes at Canadian National Railway and Canadian Pacific Railway .
As in previous years, that survey focused on rail customers’ views on recent trends and expectations for 2014 related to the direction of rail rates (i.e. core pricing excluding fuel surcharges); anticipated levels of business activity (i.e. volume growth); the potential to transfer freight between modes (truck and rail); the level of service provided by the Class 1 railroads; and the impact of the current regulatory environment.
The 2014 survey had also solicited Canadian shippers’ views on the provisions of the Fair Rail Freight Service Act-and whether they experienced any change in service levels from CNR or CP following the ratification of this Act in June.
In terms of key takeaways, the 2014 survey found that most shippers had expected a slowdown in the pace of rail rate increases. A strong majority of respondents, 71 per cent expected rail rates to increase in 2014 with the largest group, 42 per cent, forecasting 1-3 per cent growth. For the second consecutive year, shippers’ outlook on pricing growth had moderated as the proportion of respondents that expected rates to rise in excess of 4 per cent had more than halved over the previous two years, from 65 per cent for 2012 to 28 per cent for 2014.
Although pricing gains appeared to be slowing, it was important to note that very few respondents, 3 per cent, expected rates to actually decline the next year, which was consistent with previous survey results.