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There is some uncertainty for commodities such as grain, lumber, coal and crude, but Canadian National (NYSE: CNI) leaders are “cautiously optimistic” about volumes and how the company might perform in the second half of the year.
“In regards to 2019, we are reaffirming our guidance with continued focus on costs, focus on our PSR [precision scheduled railroading] operation and focus on growth, but staying very mindful of market volatility,” CNI chief executive officer J.J. Ruest said during his company’s second quarter earnings call on July 23. PSR is an operational model that seeks to streamline operations and train schedules.
One area of uncertainty is how much Alberta crude oil CNI can ship in the second half of 2019. While August crude oil spreads are challenging, some new contracts will keep crude oil fundamentals strong for the second half of the year, said James Cairn, senior vice president of CNI’s rail-centric supply chain. A change in government policy that would privatize existing crude oil contracts could also affect demand, Cairns said. The Alberta government has crude-by-rail contracts with the Canadian railroads, but the change in leadership in Alberta earlier this year has resulted in talks to offload and privatize those contracts.
“It’s tough to say with government involved, but I think they have stated publicly that they fully intend to have the contracts transferred to the private sector by the fall. We are ready to go since those contracts get transferred over,” Cairns said.
Another area of uncertainty is for coal, Cairns said. Export-bound U.S. coal could recover in the third quarter as water levels on the Mississippi River subside, while a new coal mine in Canada could increase production. Canadian National has export facilities at Prince Rupert in Canada and New Orleans, Louisiana and Mobile, Alabama on the U.S. Gulf Coast.
A third area of uncertainty is grain. Canadian National has enough capacity to handle record grain volumes, but China’s ban of canola exports could result in some volume carryover.
Meanwhile, CNI has seen some market softness in its consumer products segment since that segment is more closely tied to consumer spending in North America, according to Keith Rearon, CNI senior vice president for consumer products and CNI’s supply chain.
North American motor vehicle sales are muted, but new product launches and continued growth in the sport utility vehicles segment could support auto volumes in the second half of the year, Reardon said. The company also has its sights on developing several projects and partnerships, including a partnership with Hutchison Ports to build a container terminal in Quebec City; a new relationship with PSA International, the new owner of the Halterm terminal in Halifax; and a developing relationship with TransX, the trucking and transportation services provider it acquired this year, Reardon said.
“We keep an eye on all of our markets. We try and keep control over that, make sure that we are rightsizing our resources continually,” Cairns said.
Despite facing uncertainty in the second half of the year, CNI saw its second quarter revenue grow by 9 percent to a record C$.396 billion, while its adjusted net profit rose to $1.25 billion from $1.12 billion in the second quarter of 2018. Canadian National reported its financial figures yesterday. All financial figures are in Canadian dollars; a Canadian dollar is worth US$0.76.
This article first appeared on www.freightwaves.com
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