Rail intermodal to ‘struggle’ in 2023, consulting firm says

January 18, 2023

Rail service improvements, as well as economic factors, could influence carload growth

Consulting firm FTR Transportation Intelligence expects rail intermodal to face a tough year in 2023 amid weaker demand, a competitive truck market and a shift in U.S. port activity away from the West Coast to East and Gulf ports that utilize shorter inland hauls.

All of the rail intermodal segments — domestic and international — “are going to struggle” in 2023, said Todd Tranausky, FTR vice president for rail and intermodal, during a webinar last week.

Growth could happen in the fourth quarter amid peak season,Tranausky said: “There is light at the end of the tunnel, but it’s just a little bit further out.”

Intermodal’s ability to compete with trucks has steadily eroded since the second half of 2022, and that will persist through the middle point of this year, according to Tranausky. Rail intermodal could improve around that time frame, but the segment is still expected to be negatively positioned throughout ’23. 

“Intermodal [will have] an uphill climb relative to truckload in terms of attracting volume, and this just piles on in addition to the port shifts [that call for more short-haul than long-haul movements],” Tranausky said. 

That market environment favoring trucks could result in better pricing for rail shippers, but it remains to be seen how much the railroads are willing to respond to that pricing pressure, especially given higher operational costs following the new labor agreement, he said.  

Meanwhile, carloads are also expected to face market pressures in 2023 after being behind the five-year average for much of ’22. 

Carloads include the transport of bulk commodities, such as coal or grain. Removing those two commodities, as well as petroleum volumes, is what Tranausky calls “economically sensitive freight,” or freight that might come from sectors closely tied to the underlying economy. This would include freight such as pulp and paper, lumber and wood, metals, automotive parts, crushed stone and sand and potash or fertilizer.

These commodities will need to pick up the slack in 2023 in order for carloads to experience growth, according to Tranausky. 

“We expect carloads to have another challenging year in 2023,” he said. “We expect to be right around flat on a full-year basis [amid a slowing economy].” 

Within specific commodities, chemical carloads, which have been a growth driver in the past five years, are still anticipated to flourish although that could be impacted by higher prices for natural gas, a feedstock used in chemical production. 

Meanwhile, the anticipated retirement of coal-fired power units this year so that utilities can meet environmental regulations could put pressure on coal demand, Tranausky said.

In addition to industry expectations for rail volume growth, stakeholders will be watching how rail service improves in the coming year. Those improvements in service will come in part from adding the resources to grow capacity, including efforts to expand the workforce. 

“We definitely saw some progress on the hiring process, but it took the first half of the year to get where they were just treading water,” Tranausky said.

FTR’s analysis comes at a time when inflation remains the elephant in the room, although there could be a potential cooling in the months ahead, according to Avery Vise, FTR vice president for trucking. Consumer spending is also holding up, with an increase in services expenditure offsetting some mild decreases in outlay for goods. 

Meanwhile, industrial production is anticipated to be flat, although production has been running above pre-pandemic levels, according to Vise.

Although U.S. imports have slowed dramatically in recent months, the effects of that differ based on the region. California ports have been hardest hit by the import slowdown, due in part to congestion from earlier in 2022 and also the labor situation at West Coast ports, where International Longshore and Warehouse Union members have been working without a new contract since last July. 

“California obviously is taking the brunt of what’s going on from an import perspective,” said FTR Chief Intelligence Officer Jonathan Sparks. 

In contrast, import activity in the U.S. Southeast has started to ease back but not to the extent of California, while Gulf Coast container activity remains robust, Sparks said. In the trucking space, diesel prices and insurance are expected to put pressure on carriers, particularly those that operate primarily in the spot market, Vise said. 

“The question is whether we will continue to see moderation [in diesel prices],” Vise said. 

New carrier formation surged just after the lockdown period of the COVID-19 pandemic, but the decline in diesel prices contributed to the number of new carriers trending lower in 2022. And while the contract sector has been able to absorb some of that loss, “that doesn’t look as likely to happen [in 2023],” Vise said. 

According to FTR’s estimate for active truck utilization, which the group says serves as a market tightness barometer, the utilization rate stayed high in 2021 and into the first couple of months in ’22 before falling sharply below a 10-year average. Vise believes that rate could continue to soften over the next several months, potentially bottoming out around the third quarter of this year.

But if the U.S. economy recovers heading into 2024, the trucking utilization rate could see a steeper upside as it seeks to catch up going into the new year, he said.

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