Kansas City Southern Expects Rough 2016 for Rail Industry
May 24 2016 - 9:20AM
Dow Jones News
Shipping crude oil is going to become an increasingly
unpredictable business for railroads, as refiners have now
demonstrated they will turn to the cheapest source for oil—no
matter its location.
"And when prices and spreads—more importantly spreads—are wide
enough to support moving crude by rail, they will want to have
those options," Patrick J. Ottensmeyer, incoming chief executive at
Kansas City Southern, said in an interview.
Crude-by-rail helped fuel a boom in the rail industry through
2014, as U.S. domestic producers drilled more wells in areas with
few pipelines to carry it to market. As a result, an enormous
amount has been invested in facilities to transport crude-by-rail
in Canada, North Dakota, Texas and the receiving terminals along
the U.S. Gulf Coast, an area Kansas City Southern serves, Mr.
Ottensmeyer says.
But since then, volumes have plummeted along with the price of
oil. In the first quarter, crude-by-rail shipments fell 44%
compared with the same quarter a year ago, according to the
Association of American Railroads.
The willingness of refiners to switch back and forth from
international to domestic sources "is going to introduce more
volatility than some of our other businesses have," Mr. Ottensmeyer
said.
Canadian Pacific Railway Ltd. CEO Hunter Harrison in April
declared the long-term prospects for crude-by-rail "virtually
over," but said it would come back to some degree.
Mr. Ottensmeyer said that low energy prices are expected to
provide growth in other areas along the Gulf Coast, however. The
plummeting price of natural gas is resulting in new plastics plants
and other facilities to tap that resource, he said.
In addition, autos and other imports out of Mexico are expected
to increasingly become a growth engine. A number of car companies
are building out capacity in Mexico, and Kansas City Southern is
the only major U.S. freight railroad with a network into that
country.
Some of that production will come online and help offset weaker
volumes in industries like coal.
"We feel like next year could be a turning point. This year is
going to be a scramble," he said. "Everything seems to be stagnant
to slow right now."
Mr. Ottensmeyer will succeed current Chief Executive David L.
Starling on July 1.
Write to Laura Stevens at laura.stevens@wsj.com
(END) Dow Jones Newswires
May 24, 2016 09:05 ET (13:05 GMT)
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