The rail industry has been in a state of flux for the past few years, with economic and environmental conditions causing upheaval in demand for various freight categories and general uncertainty slowing stock growth and technology adoption. But the tides are turning as we head into 2018. Here’s a look at the top five rail industry trends for 2018:
- Rail Traffic Likely to Increase
- Coal Transport Expected to Remain Strong
- Railroad Stocks Poised for a Positive 2018
- Railroad Technology Innovations Will Take Hold in 2018
- Transport Management Systems Will Become the Norm
Read on to learn more about how each of these trends is shaping the outlook for the rail industry in 2018 and beyond.
1. Rail Traffic Likely to Increase
In 2016, rail traffic was the second-lowest on record over the past decade (measured by revenue ton-miles), but tie demand in the same year was only 500,000 lower than its peak, in 2013. But in comparing data through June 2017 to 2016 data, RTA found that rail traffic increased year-over-year, with Class 1 freight volume in carloads rising by 4.5% year to date and regional railroad volume jumping even more with 4.9% growth. The biggest contributors to this growth include:
- Coal: 20% increase
- Nonmetallic minerals: 8% increase
- Metallic ores and minerals: 4% increase
- Intermodal shipments: 2.3% increase
Regional roads experienced growth as well:
- Coal: 15% increase
- Stone, clay, and aggregates (including fracking sand): 20% increase
- Petroleum and coke: 9% increase
- Intermodal: 7.8% increase
At the same time, however, other segments slowed or remained stagnant for both freight sectors, including chemicals, forest products, and lumber.
2. Coal Transport Expected to Remain Strong
RTA notes that the recent increase in coal demand is a positive development for railroads and expects the trend to increase in the near future. This expectation is based on three factors:
- Coal stockpiles at power plants were down by 15% on average as of March 2017, compared to year-over-year data from March 2016, according to the Energy Information Agency (EIA).
- The number of days of burn, an estimate of coal supply in the context of a power plant’s current stockpile and historical consumption data, was down by 4% during the same period.
- Higher temperatures were anticipated by the National Oceanic and Atmospheric Administration (NOAA) for most of the United States for the 90-day period following RTA’s report. As a result, power plants are expected to maintain higher demands for coal. As of November 2017, NOAA predicts higher than average temperatures through a substantial portion of the south and southeastern United States, as well as a sizeable portion of the southwest U.S., for the period between December 2017 and February 2018, so this is a contributing factor expected to continue.
3. Railroad Stocks Poised for a Positive 2018
A 60% increase in coal exports in 2017 has given the rail industry momentum. With U.S. production expected to increase by 2.4% in 2018 (over 2017), coupled with an anticipated increase of 3.4% in the consumption of coal for electric power generation and other sectors, David Zanoni, in a report for Seeking Alpha, says he anticipates that railroad stocks will soar in 2018.
U.S. GDP is expected to rise by 2.4% in 2018, 0.3% higher than expected growth for 2017 and much greater than the 1.6% growth experienced in 2016. Zanoni points out that this increased revenue is “likely to find its way on the railroads” in the form of both goods and commodities as consumption grows. This outlook marks a turnaround for the rail industry following a downturn in coal exports and other factors in 2016.
4. Railroad Technology Innovations Will Take Hold in 2018
Many industries have already undergone a major technology shift, adapting technology innovations that promote the sharing of data in real-time, increase efficiency, and lower costs. The rail industry has been slower to adapt these innovations compared to some industries, such as warehousing, but in 2018, we may begin to see a larger shift as the rail industry embraces the Internet of Things (IoT), cloud computing, and Big Data analytics more strongly than before.
This trend had already begun by 2017, although as the cost of implementation shrinks and the barriers to entry lower as the technology matures, companies in the rail industry may be more likely to invest in technological advancements due to the increased likelihood of a faster ROI.
5. Transport Management Systems Will Become the Norm
Along with the demand for the rail industry to leverage technology innovations to drive efficiency comes the need for comprehensive software systems that can support the complex needs of railroad companies. Transport Management Systems (TMS) serve as the bridge that connects the many aspects of rail transport and freight together. In 2014, just 35% of shippers were using TMS, most of them bigger organizations with the budget to invest.
The early iterations of TMS were rather rudimentary, with only basic functionality, and were often cost-prohibitive and therefore adopted only by the major 3PL companies and major shippers, the TMS of 2018 and beyond will become essential for companies of all sizes. This is driven by software developers realizing that mid-level companies make up the largest portion of the industry worldwide and recognizing the need to cater to this audience to obtain a greater market share. Plus, the software itself is becoming more advanced, moving beyond the basics of transportation management to provide a more comprehensive solution that encompasses shipping solutions and other functionality as well.
“Each new generation of TMS products is coming with enhanced mobility, improved usability, new forms of optimization, and better analytics,” according to a report from Supply Chain Brief. “They are no longer focused only on freight savings measures; the latest systems are designed to improve delivery capabilities, increase warehouse efficiencies, reduce inventory, and improve cash flow.” As such, growth is expected to remain strong going into 2018, through the mid-2020s when market saturation is anticipated.
While the rail industry may have experienced a few unexpected curves in the road for the past few years, the outlook moving into 2018 and beyond is strong. Driven by positive developments, investments in technology and strong growth in rail stocks is likely in the year ahead.