Buffett Railroad Sees Economy Sapping Pre-Holiday Peak

North American railroads from Warren Buffett’s Burlington Northern Santa Fe to CSX Corp. (CSX) are bracing for limited increases in pre-holiday shipments as weak consumer sentiment exacerbates shrinking corn and coal loads.

BNSF, which moves imported Asian consumer goods from West Coast ports, hasn’t seen a measurable gain in holiday-related volumes, Chief Marketing Officer John Lanigan said this week. CSX, the biggest carrier in the eastern U.S., and Canadian Pacific Railway Ltd. (CP) both forecast a “modest” advance.

The peak rail-shipping season, which usually boosts second- half profits, is under threat after the Midwest drought scorched crops and U.S. consumer confidence fell the most in 10 months in August. Retailers and manufacturers may be deferring orders like they did last year pending evidence that spending will pick up.

“There’s too much caution in the supply chain across the retail and tech industries, where there is reluctance to stock anything resembling excess inventory,” said Matt Troy, a Susquehanna Financial Group analyst in New York. “Lack of confidence in the economy and market is fueling a lot of fear. Fear breeds inertia. People sit on their hands.”

Rail volumes traditionally start to peak in the last two weeks of August as shipments of consumer products bound for store shelves converge with the U.S. harvest and coal for utilities’ winter stockpiles.

‘Muted’ Peak

Union Pacific Corp. (UNP), the largest U.S. railroad, forecast a “muted” 2012 peak, with volumes rising 5 percent to 8 percent over previous months’ levels. That contrasts with a 10 percent to 12 percent jump in previous peaks, Eric Butler, marketing and sales executive vice president, said on a July 19 earnings call.

Executives weren’t available this week to discuss Omaha, Nebraska-based Union Pacific’s outlook ahead of Dahlman Rose & Co.’s Global Transportation Conference in New York starting Sept. 5, said Tom Lange, a spokesman. That event will give investors a chance to evaluate industry leaders’ outlook.

“The real question is whether they’re optimistic or just hopeful,” said Donald Broughton, an Avondale Partners LLC analyst in St. Louis who has a market outperform rating on Union Pacific, CSX and Norfolk Southern Corp. (NSC), the largest publicly traded U.S. carriers.

Any projection now for a seasonal peak “is more hope than it is optimism,” Broughton said in a telephone interview.

Inventory Management

“We do not anticipate a strong peak season this year,” BNSF’s Lanigan said in an e-mailed response to questions, without quantifying the size of any gains. Customers are “managing inventories carefully as they enter the traditional holiday selling season.”

CSX cited the drought’s role in damping volumes as part of its prediction for a “modest” peak. Second-half growth in intermodal shipments, which can move by train, truck or ship, will be similar to the first half at Jacksonville, Florida-based CSX, according to an e-mailed response to questions. The first- half increase was 8 percent.

Canadian National Railway Co. (CNR), whose network includes U.S. lines running from the Canadian border to New Orleans, said it foresees “somewhat higher” seasonal shipments, without giving details. That forecast came on a July 25 earnings call, the same day as Canadian Pacific’s projection of a “modest” peak.

The lack of a traditional peak may not be significant, according to Norfolk, Virginia-based Norfolk Southern. Pre- holiday shipping now starts in the summer, when costs are lower, Chief Marketing Officer Donald Seale said in an e-mailed response to questions.

Not Traditional

“We expect volume growth with both share shifts and seasonal retail demand, but not in the sense of what we used to see in traditional peak season,” he said. A 52-week high in intermodal volumes earlier this month still isn’t enough to produce a “significant fall peak,” Seale said.

Shippers have been shying from overstocking in the years since the 2008 financial crisis as they improve their ability to balance freight flows over time, said David Vernon, an analyst at Sanford C. Bernstein & Co. in New York.

“The traditional wait, wait, wait and ship-it-all late model -- they’ve been burned too many times,” Vernon said in a telephone interview.

Railroads have long been viewed as a gauge for the U.S. economy, a connection that Buffett cited in 2009 when his Berkshire Hathaway Inc. (BRK/A) announced that it was buying the rest of Fort Worth, Texas-based BNSF.

Benchmark Index

The Standard & Poor’s 500 Railroads Index (S5RAIL) is trailing the S&P 500 Index in 2012, reversing the year-earlier results. The rail-carrier index’s 9 percent gain in 2012 through yesterday compared with an 11 percent advance for the broader S&P 500.

In 2011, the shipping peak didn’t take shape until late September, as the U.S. summer months ended with concern that the nation was headed for a so-called double-dip recession. Shippers that began the pre-holiday season with leaner inventory then stocked up for holiday sales.

Intermodal shipments, which are often consumer goods, rose 4.6 percent in 2012 through Aug. 25, the Association of American Railroads said yesterday. The increase a year earlier was 5.8 percent.

Total carloads are down 1.3 percent, the Washington-based trade group said, with declines of more than 8 percent for coal and grain. Utilities have pared coal shipments as they substitute cheaper natural gas as a fuel, and the worst U.S. drought since 1956 curbs agricultural cargoes.

Broughton, the Avondale analyst, said he remains on watch for signs that a peak shipping season will materialize.

“Every day that passes that it doesn’t arrive casts further doubt that it ever will arrive,” he said. “If your date is supposed to pick you up at 7 p.m. and it’s 7:30 p.m., they may be late. Somewhere around 9 p.m. you realize you’ve been stood up. If by mid-September we haven’t seen a surge, then the economy is being stood up.”

To contact the reporter on this story: Victoria Stilwell in New York at vstilwell1@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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