REF 2020: “Stark” Contrasts in the Global Supply Chain

• On trade disruption: Global supply chains are in transition, and there is movement toward smaller trading partners to fill the gaps. This is impacting Asia and Europe. On the positive side, this may make the COVID-19 (Corona) Virus impact not as severe as it could have been due to changes in supply chains from the trade war. On the negative side, “near-shoring” does not appear to be taking hold, because smaller trading partners do not have the infrastructure to handle all of the shift in supply chain demands. The market is shifting toward moving more TEUs through East and Gulf Coast ports. This is having a noticeable impact on rail intermodal business.





• On crude oil: Falling oil prices “leads you down a rabbit hole.” They indicate concerns of slowing global growth. If so, there would be less pressure for domestic production. As well a lower pricing point also puts pressure on domestic producers’ pocketbooks. For fracking, there is a move toward “local brown sand” to save money. However, slowing global growth, or lower prices for domestic oil, may lead to less domestic crude oil production. This means that less sand and crude oil will need to be moved by rail.



• On USMCA (United States-Mexico-Canada Agreement) opportunities for rail: Ratification created business certainty in the market. Companies are now willing to move forward with investment in Mexico that had been previously put on hold. Growth opportunities include finished autos and parts, refined petroleum products, and bulk commodities and grain.





• Short-term outlook: Where will additional rail freight come from? We know that, roughly, the next two months will remain weak due to global supply chain disruptions. However, there is an “upside opportunity surge,” since supply chain disruption will run down inventories that will need to be replenished, with a base demand will need to be backfilled that could lead to a surge in freight demand by late 2Q2020. The downside risk is that if the Coronavirus is not contained by mid-summer and there is no bounce back, global demand weakens further.

Download Eric Starks’ full REF 2020 presentation:

FTR_EricStarks_2020_RailEquipmentFinanceDownload

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