SEP-OCT 2018

Crossties is published for users and producers of treated wood crossties.

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CONTACT RTA WEBSITE BECOME A MEMBER BECOME A MEMBER RTA WEBSITE CONTACT Cahaba Pressure Treated Forest Products Eagle Metal Products East Coast Railroad Gross & Janes Co. Hurdle Machine Works Koppers Inc. CROSSTIES • SEPTEMBER/OCTOBER 2018 10 MARKET OUTLOOK Prologue Mother Nature and a 3T (topsy-turvy-tariff) world have created an environment eerily familiar yet seemingly impossible given the pains that 2013-2014 visited upon the tie community and railroads. Readers may recall between 2013 and 2015 ties were in such short supply that many problems arose. Why then does the industry find itself facing the same (if not worse) inventory-to-purchases imbalance just 3 years hence? Before getting to the surveys, a review of RTA member-reported data (see sidebar on exciting changes coming to the format of the monthly reports) for production and inven- tory sets the table for what may be served up next. RTA members' reported monthly inven- tory and production data is used to calculate a 'purchases estimate' and an Inventory-to- Sales Ratio (ISR). This is done by measur- ing the change in inventory from month-to- month vs. the incoming production of ties at treating plants, concentration yards and railroads. Since 2016, RTA has calculated the purchases and ISR from the change in the three-month moving average (3MMA) of inventory levels. This is done to smooth the data plus account for any inventory adjustments that may arise from quarterly physical counts. Although there shouldn't be much variance from these counts, when it does happen it skews interpretation of the month-to-month data. A 3MMA helps those reviewing the data not get caught up in micro-analysis. Resolving that concern, however, also requires readers to assess the information from a slightly different perspective. Since April 2017, RTA has reported 17 consecutive months of negative inventory change (through August 2018 data). With this in mind, think about how inventory change is calculated using a 3MMA, and then consider the effect on ISR based on that moving average. With so many inven- tory drawdown months, it's hard to imagine how ISR won't continue edging down. During that same time period, the 12-month moving average (12MMA) of tie purchases moved only a little bit. The tie purchases annual rate is down only 1.9 per- cent based on 12MMA. Even with demand declining some, ISR at 0.66, is now within shouting distance of his- toric lows—lows not seen since 1997. One reason behind this, 2016 and early 2017 saw too much white and black tie inventory built. Tie procurement and treat- ing remained at a torrid pace beyond the point in 2015 when the market became sated. Couple that with a lower normalized level of demand and ISR skyrocketed to 0.99 in March of 2017—a level seen only twice in the last 30 years. So, it stands to reason an adjustment was in store. But has the adjustment gone too far? Or rather, perhaps asking how the adjustments were implemented is a better question. If action had been taken earlier, would the result have led to a softer landing sooner for the railroads, suppliers and tie inventories? Water under the bridge. However, the fear now is that inven- tory has swung past a tipping point and the industry may have found itself right back in the middle of a 2013-2014 like crisis, pursu - ing material from a sawmill base less pre- pared to be quite so resilient this time. This worry is hard to quantify. It's dicey, though, to count on ties springing forth with a flick of a switch under the current circumstances mills now face. So how could future demand expectations affect the situation? Tie Demand Expectations In the 2017 surveys, Class 1s predicted that 2018 new wood installs would be 15,250,000. It's encouraging that in this year's survey (see Table 2) results indicated 2018 will end up with installs of 15,650,000. Even this small increase in demand could add to tie inventory angst. And, with improved economic activity, and suppliers enjoying a better second half in shipments than they did in the first two quarters of this year (August purchases up by 16.8 percent over July, for example), inventories seem likely to continue their descent. The same 2018 surveys predict that 2019 installs will exceed this year to 15.9 mil- lion, bolstered mainly by expected increases from Canada. Plus, there could also be some increase in the eastern U.S.—but only if supply can match up. Stories from the field and the surveys suggest that the western roads final 2019 programs are fluid. That's not to suggest indecisiveness, only that an inflection point could be on the horizon, even if it is only temporary. Maybe by the time of the RTA's 100th Annual Conference, modifications, if any, will come more into focus. Given the state of inventory, however, it's only a coin-toss if increased installs can occur. Final increased tallies in installa- Survey Says ? The World Is Flat For Tie Demand (…at the moment) By RTA's Economic Team As RTA looks to step into its second century of service to the treated hardwood crosstie industry and its suppliers and customers, our Economic Team is hard at work preparing a refresh of its statistical reports. Commentary and graphical representation of the data will receive a significant makeover and will be available in PDF format for download. The underlying data will be still available as an Excel file, though, possibly, slightly reshaped format for readability. Look for a preview of the first edition in the November/December issue of Crossties. The full report will be available as a separate link on as soon as the October monthly data is received from producers. RTA Updates Look Of Statistical Reports

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