(The following story by Brent Jang appeared on the Globe and Mail website on July 26, 2010.)
TORONTO — The transport sector is expected to shrug off a diminished appetite in China for coal and iron ore while thriving on robust demand in North America for consumer products from flat-screen TVs to iPads.
“The pace of growth is slowing, but growth hasn’t stopped, by any means,” RBC Dominion Securities Inc. analyst Walter Spracklin said in an interview. “We’ve been told already by transportation companies that it will be a choppy recovery, and that’s what we’re seeing.”
For the week ending July 17, for example, coal shipments at Canadian National Railway Co. (CNR-T64.74-0.24-0.37%) and Canadian Pacific Railway Ltd. (CP-T61.200.200.33%) rose an average of 10.3 per cent, compared with the same week in 2009. But the latest weekly improvement is lower than the average increase of 24 per cent in carloads of coal in the first 28 weeks of 2010, compared with the same period last year.
North American freight carriers – including CN, CSX Corp. (CSX-N53.861.212.30%) and Union Pacific Corp. (UNP-N75.461.562.11%) – have reported strong second quarters. Mr. Spracklin expects Calgary-based Canadian Pacific to post impressive numbers when it releases its second-quarter results on Wednesday, despite flooding that temporarily closed a key section of CP’s tracks in southern Alberta in late June.
While major railways are bracing for a slowdown in exports of some commodities, they continue to benefit from importing consumer goods in containers. International courier firms are also seeing ongoing signs of a global economic rebound, notably in retail items such as electronics.
FedEx Corp. (FDX-N83.394.435.61%) has become the latest transport company to raise its outlook, announcing Monday that it forecasts its diluted share profit for its fiscal first quarter ending Aug. 31 will range from $1.05 (U.S.) to $1.25, up from its previous guidance of 85 cents to $1.05. FedEx’s move follows United Parcel Service Inc.’s (UPS-N64.881.211.90%) decision last week to raise its outlook.
“UPS remains our favourite asset-intensive way to play a recovery in trade,” RBC analyst John Barnes said in a research note.
Despite various bright spots, the Association of American Railroads is sounding a cautionary note about the economy.
“Rail traffic in June, 2010, is consistent with an economy that is in far better shape than it was nine months or a year ago, but is, in the words of former Federal Reserve chairman Alan Greenspan, more than likely undergoing a pause,” the association said in a recent report to its members in Canada, the United States and Mexico.
Average month-over-month carloads at U.S. railways slipped slightly in May and June, compared with April. “The declines in rail carloads over the past couple of months have not been huge, and they certainly don’t prove that the wheels are coming off the economy’s bus,” according to the association.
“That said, an economy several months into a recovery from the worst recession in decades should be yielding rail traffic levels heading north, not south.”