Crossties is published for users and producers of treated wood crossties.
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R TA EVENT CALENDAR TACT US TACT US A DVERTISE RTA EVENT CALENDAR S tella-Jones C orp. Wheeler Lumber R ailway Tie A ssociation Nisus Corporation CROSSTIES • JANUARY/FEBRUARY 2015 1 1 BY RTA FORECAST TEAM The U.S. economy is performing relatively well, with an increasing GDP growth rate out- look (S&P;). The job market is improving as well, and is up by 2.1 percent in 2014, the highest growth rate in 15 years (Federal Re- serve Bank of St. Louis website). Furthermore, real median household income is finally in- creasing (1.2 percent as of November 2014), after a huge decline during and after the most recent recession (The Economist Jan. 3, 2015, p. 21). This shows the economic expansion, which began in mid-2011, is benefiting ordinary households. In addition to this, the rapid and unexpected reduction in the price of gasoline and other fuels has released extra spending power…another boon for the U.S. consumer. However, falling crude oil prices create a headwind in other quarters. As reported by Reuters on Jan. 21, three major oil companies announced current or future layoffs. Baker Hughes has so far cut 1,000 jobs, while Hal- liburton and Schlumberger announced future job cuts of 7,000 and 9,000, respectively. Many small shale drillers are scaling back development of new wells, and the falling revenue for some leveraged companies may be detrimental as is the case of WBH Energy Partners filing for chapter 11 bankruptcy as reported by CNBC on Jan. 12. U.S. oil produc- ing states have also been affected. Alaska's government contemplates a 50 percent cut on CAPEX, mainly roads and bridges. Furthermore, decreased oil revenue is expected to cause budget short falls in Louisiana. Texas has lost 2,300 oil and gas- production-related jobs to date (New York Times, Dec. 27, 2014). All of these events will have some negative impact on regional banks in these states and Wall Street investors are trying to assess the downside risk (Nathan Stovall, SNL Finan- cial). If affected in this way, banks could be caught in a sudden wave of uncollec- table loans. This, in turn, would likely squeeze credit available to small and medium busi- nesses in those same states. Looking Back In recent years, there was a sub- stantial increase in U.S. oil production resulting in an in- crease of crude oil transported by rail as well as supplies for oil fracking, such as sand and drilling equipment. The 52 nd weekly report by AAR shows in- creases of petroleum and petroleum products carload shipments by 12.7 percent from 2013 to 2014 and 11.6 percent increase of crushed stones, sand and gravel in the same period. Based on these events, the Railway Tie Association (RTA) published a tie forecast in the September/October 2014 issue of Crossties. That forecast was the result of alter- ing the econometric model to include fracking and crude by rail (CBR) wherever possible in the model's equations based on Department of Energy (EIA) U.S. oil production forecasts. The outcome was a model that predicted very high tie demand especially in 2015 and 2016. Since then, tie purchases have not picked up; the latest 12-month-ended December pur- chases are 7.3 percent below year-ago levels. Much of the drop in tie purchases is proba- bly due to limits on the supply side, which have been well chronicled. Nevertheless, this caused some head scratching and revisions to the econometric model. One equation (Class 1 purchases) was returned to its former state, with no CBR (crude by rail) variable present. Another equation was modified to include the effects of pipelines on CBR volume. The result of this second modification produced a better fit with the historical data. A second shock that created issues for the September/October forecast took the form of precipitous declines in crude oil prices; West Texas Intermediate fell from a peak of $107.95 in June to $46.06 on Jan. 12, a drop of 57 percent. Table 1 shows the forecasted oil prices for 2015 and 2016 that RTA worked with, as well as the forecast revisions in the following months. So far, the precipitous price decline has prompted oil companies to decommission a growing number of rigs. For example, Baker Hughes reports that the number of vertical rigs is down 9 percent in the last few months. ➤ C O V E R : M A R K E T O U T L O O K 2 0 1 5 The Good, The Bad & The Oily Table 1 Table 2 - Base Case Forecast iTek stries