As America’s coal industry continues to diminish, the nation’s railroad industry is facing some significant headwinds. Coal once filled 40 percent of carloads being transported across the country—that number has dropped to closer to 30 percent, according to the Association of American Railroads. To offset that 10 percent reduction in market share, the rail industry is turning to capitalizing on the very factor that’s undermining the coal sector: the nation’s unconventional energy boom.
Filling the Widening Gap
With rail rates largely driven by demand in today’s market, the industry is seeking out new ways to fill capacity. This is an interesting twist, given the fact that rail rates moved in lockstep with fuel costs both before and after the national recession. With fuel and labor costs declining or stagnating for the last several years, railroads were able to increase their prices based on improving demand.
But not every sector presents good news for the rail industry. The coal segment, for example, is particularly weak. Undermined by the availability of cheap natural gas, and accordingly, the nation’s unconventional energy boom, the domestic coal industry’s production has declined. Carload traffic for coal is down about 25 percent compared to the pre-recession timeframe, according to IHS experts, or roughly equal to that of the mid-1980s.
Finding New Sources of Business
Much like other industries whose mainstays were readjusted both during and after the recession, railroads are seeking out new ways to fill capacity. One alternative route is the transport of oil that’s generated by unconventional methods. Petroleum traffic is up 150 percent since 2011, for example. As it happens, rail is a primary method for moving oil—a natural resource that’s frequently extracted in far-flung locales that lack pipeline infrastructure. Other important materials used in the oil extraction process (i.e., fracking sand) are also frequently transported via rail.
Rail’s recent movement into the alternative energy field is not only influencing traffic, but it’s also impacting equipment purchases. Tank cars comprise about 50 percent of the rail cars that were delivered in 2013, according to IHS, which expects similar production levels for 2014. Covered hoppers are also in high demand, namely for their ability to transport fracking sand and other critical extraction materials. Those are the two main sectors that are showing strength in the rail car industry right now, with most other rail car types exhibiting little or no growth.
Full Speed Ahead
In addition to energy, sectors like grain and intermodal both present opportunities for the rail industry. Grain is on an upswing, for instance, with last year’s harvest producing a much larger crop than that of the previous year (when there was a drought to contend with). Intermodal also remains a bright spot as more companies use multiple modes of transportation to ship goods domestically and internationally.
Looking ahead, IHS experts predict that the rail industry will post 2.5 to 4.0 percent year-over-year price growth over the next 18 months. This is fairly normal for the sector in which rail rates tend to increase faster than those of other transportation modes. And while coal isn’t expected to rebound any time soon, energy and other opportunities remain bright spots for the nation’s railroads in the coming year.