Top North America TEU Traffic Turns Flat At Midyear, Impacting Class I Rails

| About: iShares Transportation (IYT)

Summary

Top North America TEU traffic ends the first half of the year flat. Overall performance witnessed declines from January and February peak performance.

West Coast seaport performance still leads other regions, due mainly to stronger large seaport performance versus the East and Gulf coasts.

The peak season may provide some stability over the next few months, but the current trends could lead to negative performance for 2016.

Class I rail container traffic has continued to mirror these trends.

Top North America Seaport TEU Review

Growth in the Top North America twenty-foot equivalent unit (TEU) traffic has increased from 2013 through 2015. Growth during 2013 was below 2 percent, but both 2014 and 2015 have witnessed growth of 4.5 and 5 percent respectively. During the first two months of 2016, it appeared that this trend would continue; however, March through June has witnessed consistent declines.

Some of the most high-growth seaports during 2015, including New York/New Jersey, Savannah, Charleston and Houston, have continued to witness a complete reversal with negative TEU growth during the first five months of 2016. Major West Coast seaports, including Los Angeles, Long Beach, the Northwest Seaport Alliance, NSA and Oakland, have performed much stronger collectively.

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Port of Virginia, Norfolk International Terminal, NIT

The list below provides an overview of Top North America seaports. Collectively, these seaports reflected greater than 90 percent of total TEU traffic during 2015. The most notable positive performers continue to include the ports of Los Angeles, Virginia, Oakland, Lazaro Cardenas, Miami, Veracruz, Baltimore, Altamira, New Orleans, Halifax, Philadelphia and Boston.

Source: Seaport websites. All numbers are subject to change based on revisions.

*Note: The seaports of Port Everglades, Jacksonville, Wilmington DE and Mobile do not provide monthly TEU data, and all TTM data is based upon the most recent fiscal year; additionally, the total YTD performance excludes these three seaports which reflected 2.5 million TEUs as of 2015. Port Halifax provides quarterly TEU data, so all information is as of the most recent quarter.

The West Coast seaports witnessed a record0setting pace during January and February, which was largely driven by the labor union issues stemming from contract renegotiations during throughout 2014 and the first two months of 2015. Since then, the pace has slowed considerably, with exceptions being Los Angeles and Oakland and Northwest Seaport Alliance exports.

Major West Coast seaport TEUs were up over 0.8 percent, reflecting a 70 basis point (bps) decline from May, while the East Coast and Gulf Coast seaports were down 1 and 1.3 percent, reflecting a 200 bps decline and a 70 bps improvement respectively. YTD performance was flat, reflecting a 40 bps decline. West Coast seaport performance continued to lead, but is potentially headed for negative territory by year end.

Inventory levels remain the root cause for a softer TEU traffic market. Recently, consumer confidence has increased, but spending has continued to be tepid. With recent automotive industry sales declining and forecasts being reduced, the markets are getting jittery regarding 2016 remaining prospects. Like the various macro-economic indicators, opinions regarding how TEU traffic will shape up for the rest of the year continue to be mixed. The likeliness of a quick pick-up in traffic is probably not going to happen, but moderate improvement would be a positive development.

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Source: Seaport websites. All numbers are subject to change based on revision.

For the top ten seaport laden import TEUs, Los Angeles, Virginia and Oakland continued to lead the way. Los Angeles and Oakland did witness 240 and 220 bps declines respectively, while Virginia saw a 60 bps increase. The NSA improved by 60 bps, while Long Beach and Port Metro Vancouver improved by 130 and 90 bps respectively.

The Port of Lazaro Cardenas has continued to witness substantial growth in transshipments versus its import traffic, with transshipments up over 42 percent through June. Manzanillo, contrarily, witnessed transshipment declines at nearly 15 percent through June, suggesting a shift in market share. Prince Rupert's laden import performance remained marginal at nearly 1 percent.

East Coast seaports, including Baltimore and Miami, continued to be some of the strongest performers for laden import TEUs. Baltimore's laden TEUs declined by over 200 basis points from May, while Miami's numbers were flat. The Port of Charleston witnessed TEU traffic growth decline by 100 basis points to 3 percent from May. Boston's growth declined below 10 percent for the first time this year. The ports of New York and New Jersey and Savannah witnessed further marginal declines from May.

For the Gulf Coast, the Port of Houston witnessed an over 300 bps improvement from May, while the Port of Veracruz witnessed improved laden performance towards 4 percent.

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Source: Seaport websites. All numbers are subject to change based on revision.

For the top ten seaport laden export TEUs, the West Coast continued its strong performance, with four of the six providing positive results YTD. Long Beach remained flat, and Los Angeles remained stable but did witness a 130 bps decline, while the NSA and Oakland witnessed 20 bps improvement and 250 bps declines respectively from May. Vancouver was flat, while Prince Rupert witnessed an over 250 bps decline for laden export TEU performance from earlier in the year. Neither Lazaro Cardenas nor Manzanillo break out their laden information.

Leaders for the East Coast loaded export TEUs continued to be Boston, Baltimore and Miami, with growth near 17, 7 and 4 percent, respectively, through June; all were down from May, with the exception of Miami, which was flat. New York and New Jersey and Virginia witnessed a 50 and 110 bps improvement, respectively, from May, but Savannah experienced a 20 bps decline. The Port of Charleston witnessed a 40 bps decline to negative 2.9 percent. For the Gulf Coast, Houston witnessed improved performance from May to negative 4.2 percent, while Veracruz witnessed improved performance from May to negative 4.5 percent.

North America Class I Rail Container Review

Class I rail operators break down their container performance by international and domestic services. For international containers, traffic moved proportions were as follows: BNSF (NYSE:BRK.B) and Union Pacific (NYSE:UNP) near 50 percent, Norfolk Southern (NYSE:NSC) near 60 percent and CSX Corp. (NYSE:CSX) near 40 percent. Both Canadian rail operators have a majority of their container moves being international.

In addition to direct haulage of international containers, a substantial amount of international containers are transloaded to domestic containers with close proximity to seaports, mostly for BNSF, Union Pacific, Norfolk Southern and CSX. From this perspective, a majority of container traffic for Class I rail operators is driven by seaport TEU traffic. For Class I rail operators who are lagging their peers, it should be assumed that truck carriers, including drayage and medium- to long-haul drivers, are benefiting, especially in the lower fuel cost environment.

Additional companies directly benefiting from these trends include JB Hunt (NASDAQ:JBHT) and Hub Group (NASDAQ:HUBG). Many others in the freight sector also benefit, including ocean freight forwarders like Expeditors International (NASDAQ:EXPD), major truck brokers like CH Robinson Worldwide (NASDAQ:CHRW) and XPO Logistics (NYSEMKT:XPO), among others.

Source: Class I weekly intermodal traffic

Class I rail operator container traffic has been provided above through June 2016 over the trailing twelve-month (TTM) period, through week 26. Based on this information, it is clear to see that BNSF witnessed strong declines of 190 bps from May. Norfolk Southern and CSX Corp. also witnessed declines of 90 bps each. Union Pacific was mostly flat, while Canadian Pacific (NYSE:CP) witnessed declines of 80 and 50 bps, respectively. Kansas City Southern (NYSE:KSU) witnessed an improvement of 100 bps from May.

Through February 2016, not one Class I rail operator witnessed negative container traffic. This is highly consistent with the much stronger seaport performance during these first two months across the U.S. Through the first half of the year, only BNSF, Norfolk Southern and CSX just barely remained in positive territory.

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Source: Class I weekly intermodal traffic

Looking to Class I rail traffic for the month of July as a leading indicator for seaport TEU traffic, it would appear that further declines may be in order. But Union Pacific, Kansas City Southern and Canadian Pacific have displayed improvement, while no other Class I witnessed declines above the 80 bps level.

Summary

Based upon these declines, we may see some continued softening for the updated seaport TEU traffic numbers during July. Experts have had varying opinions regarding how TEU traffic will shape up for the year. The Class I rail monthly update report will be coming out later this week as well, but visibility is not very clear at the moment.

The key focal point will continue to be consumer spending during the second half of the year, especially for summer and the upcoming Thanksgiving and Christmas holidays. Intermodal is a very important operating segment for all Class Is, and in the event overall, top North America seaports witness negative performance during 2016 - this may contribute to reduced operating performance. Currently, this appears to be shaping up at a more marginal level, having limited upside potential with each passing month.

Disclosure: I am/we are long JBHT, CNI, XPO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.