Has the Intermodal Rail Rate Bubble Burst?

After hitting all-time highs in 2018, intermodal rail traffic is down in the first quarter of 2019.

Is it because of weather? Trade? The economy? A soft trucking spot market? Something else?

Nobody is entirely sure why intermodal rail rates have been sluggish recently, but the fact is that they're down so far in 2019 — and rather significantly. In fact, after a slow January 2019 compared to a year ago, rail volumes dipped further in February and continued their slide into mid-March. Compared to the same week last year, rail volumes are down nearly 7 percent, per data from The Association of American Railroads. Carloads have seen a decrease of about 2.7 percent on the year.

It's interesting to note that rail volumes and carloads are currently slumping, especially when you consider how 2018 was a landmark year for both. On the heels of the U.S. levying tariffs against China (and others), rail volumes increased by nearly 5 percent on the year from 2017. However, this growth was largely due to the threat of a looming trade war, which put increased pressure on intermodal shippers to get product out before further tariffs could be instituted.

We're already seeing analysts correct their projections to just a point or two of growth for truckload and intermodal shipments, with a possible decline in the LTL market."The slowdown is definitely here at this pointbut we don't foresee a recession at this point [in the near term.]"," said Tim Denoyer, Vice President and Senior Analyst, ACT Research, told attendees at the ACT Research 60 conference.

With all this being said, what's the explanation for the dip in freight right now, especially when you consider that the U.S. pumped the brakes on its previously planned tariff increase on certain foreign that were supposed to come to fruition on January 1, 2019? Could it be that the supply chain adjusted? Is the trucking capacity crisis over? Is logistics an issue? Or is it the previously noted weather or trade issues? The jury is out.

What's Behind the Intermodal Rail Rate Slide?

While there are no concrete answers, there are a number of probable conclusions that can be drawn.

Weather - For instance, a February dip that continued into March could very well be explained by weather, especially considering the polar vortex-type storm fronts that prevented businesses from opening and put a stop to the day-to-day routines of many. Experts say 2019's start isn't too unlike that of previous years in that things start slow and gradually pick up as the season changes to spring. It's one way to look at the slowdown, albeit this year's numbers are a bit down from last year's — down 0.3 percent year-over-year through January and February 2019 to be exact.

Trade - Trade uncertainty is another probability. While it appeared that a trade pact between the U.S. and China was imminent at the end of 2018 when the U.S. government delayed imposing greater tariffs on certain goods, no further progress has seemingly been made in talks. This has continued to cause trade anxiety between shippers. However, it's also worth noting that there was likely a fair amount of trade anxiety a year ago at this time when intermodal rail was booming. Perhaps shippers worked proactively?

Demand - It also makes sense to factor in product demand, especially those products with regular ebbs and flows like coal, stone, grain, sand and gravel. The lack of demand for such products have received blame by many experts for the decrease thus far in 2019.

Trucking - Finally, another factor is a soft trucking spot rate market. Intermodal prices tend to piggie-back on trucking spot market rates, and as trucking spot rates have come back down to reality so have rail prices. Historically, when trucking capacity is in short supply, shippers try to make up the difference by expanding their routing options. Due to the higher costs associated with intermodal freight, shippers will return to the trucking market as soon as those rates decline, and so far 2019 has been no different.

The Outlook?

Time will tell if intermodal rates continue to decline throughout the spring, summer and rest of 2019. What's important to note is that many of the trends seen in 2019 so far aren't unlike what's been seen in the past. As demand picks up and the weather improves, it's likely that intermodal rail and carloads will as well. If they're on track for another record breaking year or if 2018 was an outlier still remains to be seen.

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