(Continued)

“We attribute the more severe 4Q08 volume declines to the following factors: continued weakness in the cyclical group of forest products, accelerated weakness in the motor vehicle sector, general economic slowness in the US and economic deceleration of other world economies,” he said.

Comparing year to date vs. quarter to date year-over-year changes by commodity type, in 4Q08, the product segments that have experienced accelerated volume declines across the rail industry are grain, petroleum/chemicals, metals, and motor vehicles. “We believe these segments are being negatively impacted by slowing export volumes, less-than-full petrochemical production, slumping metal prices, and general economic weakness.”

The analyst's report adds that there are some cases of customer-specific issues leading to rail volume declines, including a strike affecting three potash mines (now resolved), which negatively impacted both Canadian National and Canadian Pacific volumes in the fourth quarter.

Weekly Carload Y/Y Comparison

(total carried in wk 46, excludes intermodal)
CSX -11.3%
NSC -10.6%
BNI -6.2%
UNP -8.7%
CNI -14.4%
CP -11.7%

Weekly Intermodal Y/Y Comparison

(total carried in wk 46)
CSX -7.7%
NSC -5.0%
BNI -7.4%
UNP -14.8%
CNI -11.5%
CP -6.2%

As of November 7, the spread in ocean rates (i.e., spread between ocean rates from the Gulf to Japan and the Pacific North West to Japan) for bulk shipments of grain was only $10 per metric ton.

The ocean spread reached its high of $69 per metric ton in mid-May. The decline in ocean spreads has come as bulk ocean freight rates have declined to their lowest levels in years. The Gulf-to-Japan rate of $29 per metric ton is the lowest level since February 2003 and 79% below the high in May 2008. The Pacific North West-to-Japan rate of $19 per metric ton is the lowest level since December 2002 and 76% below the high in May 2008. Larkin attributes the declines to factors that include slowing global economic conditions and difficulties importers may be having securing credit.

The analyst believes the sharp decline in ocean spreads will encourage shippers to move grain exports out of the Gulf rather than the Pacific North West.

This trend has negative implications for Burlington Northern Santa Fe because it is the biggest rail beneficiary of moving long-haul export grain to the Pacific North West.