Freight Rail

Down, down, volumes are down

Aurizon freight train. Photo: Aurizon

A new lease of life for Pacific National and a new MD for Aurizon might signal that the winds of change are about to blow through the rail freight industry in Australia, but the latest round of figures suggests the winds will need to be gale force, Mark Carter writes.

As most of us know, the split up of logistics and transport specialist Asciano, parent of company of Pacific National, was finally initiated on 19 August. While the ports and logistics business units have been purchased by QUBE and Brookfield, ownership of the PN business has been transferred to a group of pension funds and investment banks.

Now I’m sure these guys have done their due diligence, but I also have a sneaking suspicion they haven’t quite got a grip of what they have bought into? With both major rail freight operators reporting reduced revenues and volumes for FY2016 it could be argued that the rail freight business is at its lowest ebb since the brave new world of privatisation was thrust upon us at the end of the 1990s.

Prior to the official breakup of the company, Asciano revealed its FY2016 results showing revenues down 5.4% from $3.84bn in FY2015 to $3.63bn, with statutory net profit after tax falling 24.4% to $272m, down from $359.6m the previous year.

Pacific National revenues, which accounted for a whopping 65.2% of the Asciano total, dropped by 2.3% to $2.37bn. PN experienced a 3.8% decline in bulk rail revenue (net of coal access) driven by a 3% increase in coal ntks, but offset by a 13.9% decline in other bulk ntks.

Things were no better over at rival Aurizon whose results also highlighted a modest profit based on falling volumes and a number of asset impairments. Statutory net profit after tax was down by 88% to $72m, which included $226m related to the failed investment in Aquila Resources. Overall revenue declined by 9% to $3.5bn while freight revenues were impacted by a 9% reduction in volumes.

Coal remains the dominant earner for both companies, but the outlook does not appear particularly promising whichever ever way you view it.

Aurizon’s haul decreased 2% by volume to 206.8mt for FY2016 and the company says it sees little growth in FY2017 with volumes expected to remain flat in the range of 200mt – 212mt.

Pacific National coal volumes were down by 2.5% from 162.8mt to 158.8mt for the year and though tonnages increased in Queensland, in the Hunter Valley they were down; the length of haul (measured in net tonne kilometres) did increase by 3%.

There are other factors at work that can skew the figures a bit, with some miners running their own trains in New South Wales, and BMA in Queensland, but the overall consensus would be that the coal market remains challenging with little sign of any significant growth in the future.

It will be interesting to see what value, for example, is put on the 15-year contact offered by Glencore as part of their sell off of rail assets – something that seems to have gone quiet in recent months?

A recent article in Lloyds List Australia highlights a report by energy market analysts Wood Mackenzie that predicts measures aimed at limiting a global average temperature rise to two degrees Celsius would further dent Australian thermal coal exports, the report released soon after the USA and China formally ratified the COP21 Paris climate agreement during the G20 summit in China.

While Australia would be impacted less than most of its competitors due to higher quality of its coal, it would still see exports decline 35% by 2035 from current levels.

So with coal already on the nose and market conditions likely to get worse, to what will the rail industry turn to in order to shore up its profits? There is only so much you can claw back from Business Improvement Programs, before you have to look at growing the business again.

Grain has been a staple for the rail industry in the past, but the rates of return aren’t great and the volatile seasonal nature of the industry doesn’t help plan for the future.

Perhaps intermodal or even general freight? There’s a lot of contestable traffic out there still, especially on the North South corridor, but even here the industry has failed to innovate to capture market share.

PN’s Intermodal rail revenue dropped by 3.7% to $878.1m in FY2016, driven by a 6.4% decline in ntks. Despite the drop in revenue, container volumes did increase from 771,500teu to 799,100teu for the year – a 3.6% increase.

Aurizon’s intermodal figures are not so easily separated from its general freight revenues, which in FY2016 dropped by 20%. The company says it will undertake a performance review of its intermodal and diversified bulk freight businesses over the coming months in light of “difficult market conditions”.

Despite suggestions of a ‘flat economy’ in defending some of these figures, the most basic equation has the Australian economy continuing to grow. While claims of a doubling of the freight task by 2030, a tripling by 2050, even a quadrupling by 2040, may now be seen to be rather outlandish, the reality is that despite slowdowns and hiccups the economy has continued to grow and logically so has the freight task.

So even if things are a bit sluggish the patient should still be showing some signs of life? Unfortunately there is no real data to determine whether or not rail is capturing market share from the road transport industry, but it would seem that that rail has failed to capitalise on any of the growth of the last couple of years and there is little evidence to suggest the answer is anything but negative.

And just in case you were wondering, a report released last week by the National Transport Commission projects domestic freight to increase by a more modest 26% over the next decade – let’s hope we see at least a portion of that on rail.