U.S. Rail Problems To Persist Through 2015

WASHINGTON - Sep 28/14 - SNS -- Rail service in the United States is not expected to return to normal until later in 2015 and possibly not until 2016.

"Some shippers expect service problems to worsen as soon as the railroads are hit with the demands from this year's harvest," reports the USDA Agricultural Marketing Service in its September 25 Grain Transportation Report.

"BNSF and CP's latest weekly status updates to the Surface Transportation Board (STB) show the rail backlog has not gone away and has even started increasing again for BNSF. However, BNSF stated in its fall service letter to the STB that customers could expect service improvements going forward. BNSF plans to run a record number of shuttles to accommodate this year's potentially record harvest.

"Canadian Pacific Railway's (CP) fall service letter announced it was current with customer demand and would have older grain car orders cleared by October 1, with the possible exception of some remaining North Dakota grain orders. CP also recently announced its plan to invest $500 million on its U.S. network, including $184 million to increase capacity. Capacity investments on BNSF are already underway."

The service problems are being reflected in bids in the secondary railcar market. They remain high in anticipation of continued rail service problems. Shuttle bids for BNSF Railway's (BNSF) guaranteed service averaged $4,100 per car for the week of September 18, the highest since March. Railroads have indicated the network is unlikely to recover until 2015 or 2016.

By contrast, ocean rates are currently low and are likely to remain moderate during the fall harvest, given the existing excess vessel supply that persists in the market.

The USDA said that during August, the cost of shipping bulk grain from the U.S. Gulf to Japan was $43.20 per metric ton (MT), a 24% decline since January, a 5% decline from the same period last year, and an 18% decline from the 4-year average. The cost of shipping from the Pacific Northwest was $24.05 per MT, a 15% decline since January, a 2% decline from the same period last year, and a 17% decline from the 4-year average.

Meanwhile, the dry bulk vessel fleet continues to increase in size even as ocean freight rates continue to fall. According to a June report by O'Neil Commodity Consulting, the dry bulk fleet is estimated to grow by 5% this year as 52 million deadweight tons (mdwt) of capacity are added to the fleet. As of June, 1,989 new vessels (163 mdwt) were on the order book.

Most of the newly ordered vessels are Panamax, the type typically used to transport grains, and that segment is growing at a record pace. The fleet size is currently 191 mdwt, and growing at 9% year to year. If the current growth rate persists, it is likely that the fleet size will reach 200 mdwt by the end of the year.