Things are looking up on the rails. After about a year of stability (that is, limited growth), carload volume began to move up in the second quarter of 2018. According to data from the Association of American Railroads (AAR), North American carloads (excluding intermodal) were up 2.2 percent in the first half of 2018, but this figure masks an acceleration. In the first quarter of 2018, carloads were up only 0.3 percent year over year, but in Q2, they rose a solid 4.2 percent. Volume increased sequentially from Q1 to Q2 by 5.4 percent. The gains were broad-based, with only three of the 20 commodity groups included in the AAR data showing year-over-year losses in Q2.
The timing of the surge tells us something about what is and isn't happening. First, what isn't: Most likely the improvement is not coming from highway freight converting to rail carload. Truck capacity began to tighten up in Q4 2017, as the federal mandate that most trucks must be equipped with an electronic logging device (ELD) approached, and then got extremely tight after the mandate took effect in December. This situation remained through the first quarter of this year and persists today. Yet the tightening truck capacity did not affect carload activity, which remained very quiet in the first quarter. These days, there is little freight that can easily move between truck and rail. Rather, each mode has developed its own distinct market, and structural barriers inhibit easy shifts between modes.
Article Figures
[Figure 1] Four-week avg. merchandise train speeds: Total networkEnlarge this image
It's more likely that the improved rail carload picture in the second quarter represents an acceleration in the industrial economy. Gross domestic product (GDP) growth in Q1 was only 2 percent, roughly in line with prior performance over the course of the recovery. But all indications are that growth has moved up in Q2, and accelerating rail carload activity is one of the strands of evidence.
This growth in carload volume has been impressive given the continued decline in the use of coal for power generation despite the Trump administration's efforts to the contrary. (Coal has historically been the "bread and butter" of rail traffic.) The economic power of low-priced natural gas is simply too strong for coal generation to overcome. Coal carload activity in the first half of 2018 was unchanged from the prior year, mainly as a result of stronger coal exports offsetting for the moment the decline in utility coal.
The competition over operating ratio
The railroads continue to compete with each other to achieve the lowest operating ratio (OR), which is defined as expenses divided by revenue. A key method for driving down cost (and therefore improving OR) has been to lengthen trains, thereby increasing the number of cars and amount of freight handled by one crew. A critical tool in this effort has been the use of distributed power, in which unmanned locomotives located within or at the rear of the train are controlled remotely by the crew at the front of the train. Dispersing the locomotives reduces the forces generated within the train and also speeds up brake application, enabling the safe operation of much longer trains of 12,000 feet or more.
Another major recent influence on operating ratios has been the application of the concept of "precision scheduled railroading" (PSR) as promoted by the late E. Hunter Harrison, who was in the midst of implementing this operating philosophy on the CSX system at the time of his death after earlier stints at Canadian National and Canadian Pacific. While the PSR transformation involves lengthening trains, it also entails a wholesale revision of railroad operating plans, with reductions in yards, assets, and workforce in order to wring the maximum amount of efficiency out of the railroad infrastructure.
Cost reduction is only half of the operating ratio equation, however. The other means of reducing the operating ratio is raising revenue. In the absence of volume growth, this has meant continuing to raise rates at a pace exceeding that of the industry's cost inflation, a trend that has been in place for many years.
This transformation of operating practices, is not, however, evolving in a completely smooth manner. Train service has suffered. Figure 1 represents the four-week moving average of the composite merchandise train speeds of all the Class I railroads (except Canadian Pacific) as drawn from the weekly EP-274 reports the railroads make to the U.S. Surface Transportation Board. Merchandise trains are the mixed freight trains that carry the broad span of commodities handled by the railroads. The category excludes the unit trains of coal, oil, or grain, which are tracked separately, and excludes intermodal trains as well.
While average train speeds are a highly imperfect means of measuring service quality, they are useful indicators when the numbers move dramatically. Such is the case right now. Average merchandise train speeds have deteriorated substantially thus far this year, standing most recently at just 19.6 miles per hour (mph), down more than 5 percent from the same time last year and 8.7 percent lower than the average performance of the past five years. Much of the deterioration occurred during the first quarter in the absence of traffic growth, so while more volume may be contributing to the problem now, it certainly isn't the sole reason for the decline.
Intermodal: opportunities and challenges
There is a sector where rail and truck compete fiercely for market share, and that's domestic intermodal. Intermodal consists of two distinct market segments, each roughly equal in size. The international segment involves the inland movement of ISO (or international) containers from overseas. This segment mainly responds to international trade trends and port routing decisions by ocean carriers and shippers. The domestic segment covers the movements of domestic containers and trailers, and it responds to the competitive posture of intermodal vs. truck. The aforementioned shortage of truck capacity has provided intermodal with a golden opportunity to take freight off the highway. Indeed, domestic intermodal is growing briskly, with volume up 8.6 percent year over year for the first two months of Q2 2018. But earlier during the shortage, growth was restrained by a shortage of domestic containers. Intermodal carriers are now working to right-size their fleets to meet the current demand.
Meanwhile, the old stalwart "trailer on flat car" (TOFC) is helping to fill the gap. Intermodal movements of trailers were up over 17 percent year to date through May and over 21 percent quarter to date. TOFC strength is coming from three sources:
1) Movement of smaller trailers (primarily 28-foot "pups") filled with e-commerce-related cargo by parcel and less-than-truckload (LTL) carriers,
2) "Safety valve" movements by shippers who can't find a domestic container, and
3) Trailer moves by over-the-road truckers who don't own domestic containers but are using intermodal to handle load volume for which they otherwise can't find enough drivers.
There are, however, sources of concern regarding the sector's ability to handle the demand. Intermodal trains have not been immune from the rail network's general slowdown. The delays have caused trains to bunch up, which greatly impedes terminal productivity and slows equipment velocity. Drayage, the short-haul highway movement of intermodal equipment, has also been a major disruptor. Long-haul drayage carriers are subject to the new electronic logging device (ELD) requirement if their hauls exceed 115 miles from the intermodal ramp, but short-haul carriers are not. This has caused many carriers to migrate towards shorter hauls. The result has been a shortage in "long-haul" dray capacity for moves of around 200 miles from the intermodal ramps, and rates have been skyrocketing.
While Q2 typically marks the seasonal peak for truckload carriers, intermodal traffic usually peaks closer to the holidays with October typically being the busiest month. In a normal year, October domestic intermodal volume is typically about 7 percent higher than in May. With the system already showing signs of strain, there is real concern over its ability to handle the increased volumes to come.
For the balance of 2018, carload growth will likely be determined by the path of the economy. Will the presumably strong performance of the second quarter endure? Or will increasing interest rates, federal deficits, and possible trade disruption prove to be a drag that brings growth back down to previous levels? Meanwhile, the railroads will find it difficult to recruit the manpower they need to meet increasing demand with unemployment at very low levels, so service recovery may prove difficult. Meanwhile, intermodal will have all it can handle through the balance of this year as tight truck capacity will lead to robust demand. Intermodal's growth will only be limited by its ability to accept it.
A hefty 42% of procurement leaders say the biggest threat to their future success is supply disruptions—such as natural disasters and transportation issues—a Gartner survey shows.
The survey, conducted from June through July 2024 among 258 sourcing and procurement leaders, was designed to help chief procurement officers (CPOs) understand and prioritize the most significant risks that could impede procurement operations, and what actions can be taken to manage them effectively.
"CPOs’ concerns about supply disruptions reflect the often unpredictable nature and potentially existential impacts of these events," Andrea Greenwald, Senior Director Analyst in Gartner’s Supply Chain practice, said in a release. "They are coming to understand that the reactive measures they have employed to manage risks over the past four years will not be sufficient for the next four.”
Following supply disruptions at #1, the survey showed that the second biggest threat to procurement is seen as macroeconomic factors, which include economic downturns, inflation, and other economic factors. While more predictable, those variables can substantially influence long-term procurement strategies.
And the third-most serious perceived risk was geopolitical issues, including tariffs and regulatory changes, and compliance issues, including regulatory and contractual risks.
In addition, the survey also revealed that “leading organizations” are 2.2 times more likely to view energy availability and cost as a top risk; indicating a focus on future emerging risks. As electrification drives demand for power, brittle grid infrastructure raises concern about whether the energy supply can keep pace. Therefore, leading organizations recognize that access to energy will become a significant future risk.
The market for environmentally friendly logistics services is expected to grow by nearly 8% between now and 2033, reaching a value of $2.8 billion, according to research from Custom Market Insights (CMI), released earlier this year.
The “green logistics services market” encompasses environmentally sustainable logistics practices aimed at reducing carbon emissions, minimizing waste, and improving energy efficiency throughout the supply chain, according to CMI. The market involves the use of eco-friendly transportation methods—such as electric and hybrid vehicles—as well as renewable energy-powered warehouses, and advanced technologies such as the Internet of Things (IoT) and artificial intelligence (AI) for optimizing logistics operations.
“Key components include transportation, warehousing, freight management, and supply chain solutions designed to meet regulatory standards and consumer demand for sustainability,” according to the report. “The market is driven by corporate social responsibility, technological advancements, and the increasing emphasis on achieving carbon neutrality in logistics operations.”
Major industry players include DHL Supply Chain, UPS, FedEx Corp., CEVA Logistics, XPO Logistics, Inc., and others focused on developing more sustainable logistics operations, according to the report.
The research measures the current market value of green logistics services at $1.4 billion, which is projected to rise at a compound annual growth rate (CAGR) of 7.8% through 2033.
The report highlights six underlying factors driving growth:
Regulatory Compliance: Governments worldwide are enforcing stricter environmental regulations, compelling companies to adopt green logistics practices to reduce carbon emissions and meet legal requirements.
Technological Advancements: Innovations in technology, such as IoT, AI, and blockchain, enhance the efficiency and sustainability of logistics operations. These technologies enable better tracking, optimization, and reduced energy consumption.
Consumer Demand for Sustainability: Increasing consumer awareness and preference for eco-friendly products drive companies to implement green logistics to align with market expectations and enhance their brand image.
Corporate Social Responsibility (CSR): Companies are prioritizing sustainability in their CSR strategies, leading to investments in green logistics solutions to reduce environmental impact and fulfill stakeholder expectations.
Expansion into Emerging Markets: There is significant potential for growth in emerging markets where the adoption of green logistics practices is still developing. Companies can capitalize on this by introducing sustainable solutions and technologies.
Development of Renewable Energy Solutions: Investing in renewable energy sources, such as solar-powered warehouses and electric vehicle fleets, presents an opportunity for companies to reduce operational costs and enhance sustainability, driving further market growth.
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."
For example, millions of residents and workers in the Tampa region have now left their homes and jobs, heeding increasingly dire evacuation warnings from state officials. They’re fleeing the estimated 10 to 20 feet of storm surge that is forecast to swamp the area, due to Hurricane Milton’s status as the strongest hurricane in the Gulf since Rita in 2005, the fifth-strongest Atlantic hurricane based on pressure, and the sixth-strongest Atlantic hurricane based on its peak winds, according to market data provider Industrial Info Resources.
Between that mass migration and the storm’s effect on buildings and infrastructure, supply chain impacts could hit the energy logistics and agriculture sectors particularly hard, according to a report from Everstream Analytics.
The Tampa Bay metro area is the most vulnerable area, with the potential for storm surge to halt port operations, roads, rails, air travel, and business operations – possibly for an extended period of time. In contrast to those “severe to potentially catastrophic” effects, key supply chain hubs outside of the core zone of impact—including the Miami metro area along with Jacksonville, FL and Savannah, GA—could also be impacted but to a more moderate level, such as slowdowns in port operations and air cargo, Everstream Analytics’ Chief Meteorologist Jon Davis said in a report.
Although it was recently downgraded from a Category 5 to Category 4 storm, Milton is anticipated to have major disruptions for transportation, in large part because it will strike an “already fragile supply chain environment” that is still reeling from the fury of Hurricane Helene less than two weeks ago and the ILA port strike that ended just five days ago and crippled ports along the East and Gulf Coasts, a report from Project44 said.
The storm will also affect supply chain operations at sea, since approximately 74 container vessels are located near the storm and may experience delays as they await safe entry into major ports. Vessels already at the ports may face delays departing as they wait for storm conditions to clear, Project44 said.
On land, Florida will likely also face impacts in the Last Mile delivery industry as roads become difficult to navigate and workers evacuate for safety.
Likewise, freight rail networks are also shifting engines, cars, and shipments out of the path of the storm as the industry continues “adapting to a world shaped by climate change,” the Association of American Railroads (AAR) said. Before floods arrive, railroads may relocate locomotives, elevate track infrastructure, and remove sensitive electronic equipment such as sensors, signals and switches. However, forceful water can move a bridge from its support beams or destabilize it by unearthing the supporting soil, so in certain conditions, railroads may park rail cars full of heavy materials — like rocks and ballast — on a bridge before a flood to weigh it down, AAR said.
Imports at the nation’s major container ports should continue at elevated levels this month despite the strike, the groups said in their Global Port Tracker report.
To be sure, the strike wasn’t without impacts. NRF found that retailers who brought in cargo early or shifted delivery to the West Coast face added warehousing and transportation costs. But the overall effect of the three-day work stoppage on national economic trends will be fairly muted.
“It was a huge relief for retailers, their customers and the nation’s economy that the strike was short lived,” NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said in a release. “It will take the affected ports a couple of weeks to recover, but we can rest assured that all ports across the country will be working hard to meet demand, and no impact on the holiday shopping season is expected.”
Looking at next steps, NRF said the focus now is on bringing the International Longshoremen’s Association (ILA)—the union representing some 45,000 workers—and the United States Maritime Alliance Ltd. (USMX) back to the bargaining table. “The priority now is for both parties to negotiate in good faith and reach a long-term contract before the short-term extension ends in mid-January. We don’t want to face a disruption like this all over again,” Gold said.
By the numbers, the report forecasts that U.S. ports covered by Global Port Tracker will handle 2.12 million twenty-foot equivalent units (TEU) for October, which would be an increase of 3.1% year over year. That is slightly higher than the 2.08 million TEU forecast for October a month ago, and the strike did not appear to affect national totals.
In comparison, the August number was 2.34 million TEU, up 19.3% year over year. The September forecast 2.29 million TEU, up 12.9% year over year, November is forecast at 1.91 million TEU, up 0.9% year over year, and December at 1.88 million TEU, up 0.2%. For the year, that would bring 2024 to 24.9 million TEU, up 12.1% from 2023. The import numbers come as NRF is forecasting that 2024 retail sales – excluding automobile dealers, gasoline stations and restaurants to focus on core retail – will grow between 2.5% and 3.5% over 2023.
Global Port Tracker, which is produced for NRF by Hackett Associates, provides historical data and forecasts for the U.S. ports of Los Angeles/Long Beach, Oakland, Seattle and Tacoma on the West Coast; New York/New Jersey, Port of Virginia, Charleston, Savannah, Port Everglades, Miami and Jacksonville on the East Coast, and Houston on the Gulf Coast.