CP, CN shipment forecasts hint at economic slowdown

Canada’s two railroad companies expect to ship less freight than previously forecast this year, signalling a potential economic slowdown given the transportation industry’s status as a bellwether for growth.

Canadian National Railway and Canadian Pacific Railway both revised their annual volume predictions this week as they reported quarterly results, with CN now expecting slightly negative volume growth, down from mid-single digit growth, and CP forecasting low-single digit volume growth, down from mid-single digit growth.

CN blamed declining volumes on “deterioration in North American rail demand, as the economy continues to weaken.”

CP expects to “navigate softer volumes, macroeconomic challenges and geopolitical tensions in the fourth quarter.”

The lower forecasts come amid mounting fears of a global recession and trade tensions, particularly between the U.S. and China. But both companies reported increased revenue (CP had a record quarter), higher adjusted profit and lower spending as a proportion of revenue in the third quarter.

Still, both railways already saw quarterly drops in shipments of metals and minerals, grain and potash, with CN also reporting a decline in forestry products. Specific culprits over the past three months include a late grain harvest and hiccups in Alberta’s contracts for crude oil by rail, analysts say.

For CP, potash was “exceptionally weak” due to delays in contract signings between producers and buyers in China and India, National Bank analyst Cameron Doerksen noted to clients. He noted he wasn’t surprised by the lower volume guidance, but remained optimistic about the longer-term potential for shipments.

The amount of crude by rail shipments are expected to increase when Alberta sorts out its contract situation, he noted, adding the government is trying to transfer its contracts to private industry.

Along with crude, Citi analyst Christian Wetherbee noted a positive outlook for intermodal shipments. Top tier railroads generally posted strong performance when it comes to controlling costs this quarter, Wetherbee noted, which “supports the belief that stocks can outperform in choppy markets.”

“That said, a better volume outlook is key to incremental upside,” he wrote.