CN Rail head sees another record for crude shipments after increasing capacity

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Canada’s largest railway expects to top 2018′s record crude-by-rail volumes in the new year, but is braced for any ill effects from China-U.S. trade tensions, said Canadian National Railway Co.'s chief executive officer, Jean-Jacques Ruest.

“We’re very optimistic about 2019. I mean, there are all kinds of clouds out there but we still see a lot of demand for freight,” Mr. Ruest, a 23-year CN veteran, said. Mr. Ruest stepped into the top job in March, after Luc Jobin departed amid a storm of complaints from customers and governments over a backlog of freight that left shippers grappling with factory shutdowns and cash shortages.

Rival Canadian Pacific Railway Ltd. and the big U.S. carriers faced similar complaints last winter, but at CN the network congestion appeared more severe, compounded by new traffic from the recently expanded container terminal in Prince Rupert, B.C.

CN apologized to customers and intensified efforts to hire and train new crews, and add more locomotives and rail cars, as well as increase its capacity to handle more freight by expanding yards and building new tracks on parts of its western Canadian railway.In April, CN cut its profit outlook and posted a 16-per-cent drop in quarterly profit from the same period a year earlier as the railway construction season began. In all, CN’s capital expenditures in 2018 reached a record $3.5-billion – 25 per cent of revenue – and the company plans to spend a similar amount in 2019.

“We’re entering this winter in much better shape than last year,” Mr. Ruest said.

Christian Wetherbee, a stock analyst at Citigroup Inc., said CN has recovered more quickly than expected, even as it moves more freight.

“This time last year they had just a surge of volume,” Mr. Wetherbee said from New York. “That’s difficult. When you’re just pouring it in on one side it’s going to have to come out another, and that manifested itself in some of that [service] deterioration.”

The expanded capacity has helped CN meet demand from grain farmers and potash miners, as well as oil shippers facing rising production amid a persistent pipeline shortage. Mr. Ruest said CN is hauling about 140,000 tank cars of oil a year on an annualized basis – exceeding the previous peak in 2014 – and could see that volume rise in 2019. He said CN is in talks with Alberta’s petroleum marketing commission about Premier Rachel Notley’s plan to purchase tank cars and locomotives to relieve the oil glut and raise producer prices.

When the first crude-by-rail boom of 2013 and 2014 ended, many railways were left with contracts that were unfilled and tracks that lead to shuttered terminals. This time, railways are extracting better terms from oil shippers, including minimum volumes, multi-year contracts and higher fees, knowing the surge will last only until pipelines are built.

“Crude by rail disappeared and it came back again,” Mr. Ruest said. “Now we’re in the cycle where there’s a bigger need for the railway industry to complement what the pipeline can do and we’re keen on doing that, but we will never do that to the detriment of our existing long-term commodities like potash, grain, lumber – the stuff that’s been with CN when CN was created in 1919.”

The year 2019 begins with stock markets in turmoil and trade tensions threatening to dampen economic growth.

Citigroup’s Mr. Wetherbee said the outlook for the North American railway industry is tied to that of the broader U.S. economy. “Our expectation is there will be a deceleration in the pace of economic growth and therefore freight growth as we move into 2019,” he said.

Benoit Poirier, an analyst at Desjardins Securities, said the China-U.S. trade spat depressed trans-Pacific container rates in December, amid signs January volumes will soften. However, he said ocean carriers have said the decline in U.S. imports might not be as severe as feared, and U.S. industrial production will be robust, which is good news for rail carriers.