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Jan.9, 2017

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2017 ANNUAL REVIEW & OUTLOOK & OUTLOOK & 98 THE JOURNAL OF COMMERCE www.joc.com JANUARY 9.2017 SURFACE TRANSPORTATION fuel costs, the strong US dollar, and moder- ate consumer demand. Shippers are using that leverage to ham- mer down domestic intermodal pricing. Domestic intermodal operators, struggling to stem the fl ow of freight to the highway and to fi ll trains, have had to keep rates low. The Cass Intermodal Price Index, a mea- sure of market fl uctuations in US domestic intermodal costs, rose for the fi rst time in nearly two years in October. But the index was up just 0.4 percent year-over-year and it marked the fi rst year-over-year increase since December 2014. Avondale Partners, which publishes the index for Cass Infor- mation Systems, made it clear that "one month does not make a trend" and that the October fi gures were impacted by fuel costs, which were fl at year-over-year. "We expect intermodal rates will continue to remain subdued," the group said. Shippers agree. According to a survey of shippers and brokers released at the JOC Inland Distribution Conference in Memphis in November, more respondents thought intermodal rates would fall, 28 percent, than assumed they would rise, 22 percent, and 51 percent said they expect intermodal pric- ing to stay fl at year-over-year. Even the railroads agree. Executives at Union Pacifi c Railroad, the largest rail operator in the US, told investors in October that the western railway's pricing power had waned. CSX Transportation told investors it had advised sales teams to "sell through the trough." There simply isn't any fl exibility to raise rates when there's nothing on the rails, according to the railroads. Total intermodal volume fell 4.6 per- cent year-over-year in the third quarter, the Intermodal Association of North America reported in its quarterly Intermodal Mar- ket Trends and Statistics report. It marked the second consecutive quarter that overall BY REYNOLDS HUTCHINS Rail What to watch for in 2017 Positive Train Control CP Expansion AT A CROSSROADS Struggling with listless domestic and intermodal demand, railroads are looking for a spark to turn around a buyer's market T he North American railroad industry avoided many of the major shocks that threatened to disrupt its system in 2016. Instead, the industry grappled with something more gradual: a slowdown, as freight demand fell to historic lows and pulled intermodal traffi c and shipping rates down with it. Now, neither shippers, analysts, nor railroaders themselves expect to see a rebound in intermodal volume or pricing until the second half of 2017, at least. It's a shipper's market. Not only has weak demand eroded domestic shipping rates, but it also may have slowed the steady increase of rail transportation of ocean containers. At the same time, intermodal Class I service — specifi cally train speeds — remains at historic highs after recovering in the early months of 2016 to levels predating the 2013- 2014 winter that roiled networks. And the industry has managed to sidestep many of the major threats to those service level gains, from the failed merger of Canadian Pacifi c and Norfolk Southern and the rollout of new international container weight reg ulations to the collapse of South Korean ocean carrier Hanjin Shipping. Navigating those diffi cult turns has been a challenge for railroaders, many of whom complain that they still haven't seen a return on the billions of dollars they've pumped into infrastructure to boost those service levels. But what's bad news for the railways is good news for shippers, according to Mike Burns, vice president of global transportation services at retailer Big Lots, who spoke at the Intermo- dal Association of North America's Intermodal EXPO 2016 in Houston in September. "The longer it doesn't get fi xed, the more dysfunctional it is, the better it is for the shipper," he said. Shippers moving domestic freight throughout the US are enjoying the kind of pricing power they usually only hold during recessions. That's thanks to the confl uence of a thick layer of excess capacity on both roads and rails, as well as overstocked inventories, lower "The longer it doesn't get fixed, the more dysfunctional it is, the better it is for the shipper."

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