Freight Rail, Mark Carter

Things not looking too good at the station

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COMMENT: Rail freight in Australia is in the doldrums with reduced revenues and profits combined with falling volumes and some aspects of the industry going backwards at a rate not seen since the pre-privatisation era, argues Mark Carter.

At AusRAIL, back in November, several speakers waxed lyrical as to how this was a most exciting time to be involved in the rail industry. Now there may be some truth in this if you are involved in the urban and light rail sectors, where money does seem to be flowing and things happening, but there is nothing that could really be said to be exciting about the future of Australia’s rail freight industry at the moment.

Optimism is a noble sentiment – even our Prime Minister is telling us that this is the most exciting time to be an Australian – but I am far from convinced. Optimism without substance is just jingoism and all parties could do with a good reality check to being them down to earth.

I would venture to say that in fact things are quite the opposite and go as far as to say that things are the worst they’ve been in the Australian rail freight industry since the lead up to privatisation.

Both of our rail freight majors reported falling volumes and profits in their half yearly reports last month, investment in interstate rail is virtually at zero, and in case you hadn’t noticed our locomotive and rolling stock manufacturing businesses have virtually disappeared.

Profits are down, volumes are down and there is a world of uncertainty surrounding the imminent takeover of Pacific National by a bunch of overseas pension funds.

Aurizon’s above rail revenue was down by 12% in the six months to the end of December 2015 (1H 2016) when compared to the previous corresponding period and underlying EBIT down 22%. Pacific National’s revenue was down 1.3% while EBIT was stable.

Aurizon’s coal business moved 4% less coal in 1H 2016 while Pacific National’s tonnages were down 2.5%, quite a turnaround from the boom times of just a few years ago.

Intermodal volumes look decidedly dodgy for both operators with PN registering a 4.7% decline in intermodal division revenue driven by an 8.8% drop in nett tonne kilometres , a surprising 4.3% increase in TEUs, and a 1.2% decline in steel traffic.

Aurizon isn’t quite so specific in its figures but recorded freight revenue (exc. coal & iron ore) as being down by 22%. A few other indicators would suggest interstate intermodal on the network is in freefall at the moment and has been for a while now.

Despite PN suggesting that an improvement in North South volumes had offset a decline in East West numbers, it wasn’t enough to stop PN director David Irwin predicting a gloomy future for rail freight in Australia, recently telling the Australian Logistics Council Forum 2016 that, “without a renewal of infrastructure investment, rail freight would likely decline, and then end, in Australia”.

Talking about rail investment in the context of the Inland Rail project, Irwin said, “We and our freight forwarding customers are flogging a dead horse trying to attract freight from road.

“Their customers are rational people. They want the fastest transit at the best price. Rail freight share is going into decline.

“All the freight will go by road, or by coastal shipping, especially as freight volumes grow. It will all go by road. If Inland Rail is a no-go decision, then investment decision in ten years will have to be made in an environment of no-go rail,” he suggested.

Now to be fair, the industry currently seems to be caught in a perfect storm of a depressed global economy, plummeting economic growth in China, falling commodity prices and growing environmental awareness – acknowledging that several of these factors are closely intertwined.

Since the GFC back in 2008 and despite the subsequent mining development boom in Australia, the global economy has only occasionally managed to show signs of promise in recent years. Now China’s latest woes have put everyone in a funk and iron ore and coal prices are a fraction of what they were a couple of years ago.

Iron ore has shown a bit of rebound in the last month or so, though whether it is sustainable or not remains to be seen, but as is sometimes the case the volatility of the market is such that anything is possible.

Coal on the other hand is another matter and something to be tackled in detail in a future column. But the tide does appear to be turning away from fossil fuel dependency, not just in demand for Australian coal, but in its use in places such as the US and the UK where falling volumes brought on by environmental constraints is hitting some freight operators hard.

This doesn’t mean coal volumes falling away dramatically just yet, though that is still a possibility, but it means the sustained growth we have seen over the last decade or so is highly unlikely to continue.

The days of relying on just hauling rocks must surely be well and truly over – highlighted even more so by Aurizon’s ill-timed folly in purchasing a share of Aquila Resources, which has impacted heavily on its bottom line.

As mentioned, the slump in intermodal volumes continues and while multiple, variable factors make it difficult to determine exactly where the decline is coming from some blame must lie with the major freight operators.

While the good times rolled, intermodal and general freight were seen as a mere distraction and largely ignored by Aurizon and Pacific National, and while we might hope for change, Aurizon’s renewed and publicly stated greater focus on intermodal is barely recognised in its 1H 2016 presentation with the focus continuing on the black stuff.

Despite the economic downturn, especially in Western Australia, continuing to hurt volumes, we are continually told that the overall freight task is growing, but we are seeing little or no sign of this reflected in rail volumes. Some continues to leak to foreign flagged coastal shipping, but it can only be concluded that road is still winning the battle.

Unfortunately the half yearly and annual reports seem be more about making excuses about these downward trends, rather than tackling the real issues the businesses face head on. Losses are frequently put down to write offs, costs associated with asset sales, and market conditions while any gains only seem to flow from business improvement programs rather than winning new traffic.

To end on a positive it is worth noting that QUBE is still growing the rail business it inherited from P & O Ports a few years ago, ironically some of that growth coming at the expense of PN, but there are other traffic flows that relatively new to rail such as the Visy traffic at Harefield in New South Wales.

And we are also seeing freight companies such as Fletchers and Crawfords investing in their own locomotives and rolling stock, contracting out train management to smaller niche operators and shunning the big two – perhaps we are seeing a generational change in the way rail freight is handled in Australia and big is not necessarily always better?