Canadian Pacific Rail predicting strong demand growth this year

Canadian Pacific Rail (CP) is emerging from a “pretty miserable first quarter” with an eye to returning its business to pre-recession levels, according to outgoing VP of Operations Ed Harris.

Harris spoke on a recent first-quarter earnings call, describing the negative impact of cold weather and record snowfall on the business.

“In all my years of railroading, I have to say this was the toughest winter I've ever experienced,” he said.

But hope seems to be on the horizon, with a surge in commodities prices, a theme being echoed by business leaders today across several industries and one that's likely to become a boon to CP. While rising input costs could ultimately hurt consumers in the shopping aisles, commodities producers are keen to increase output and take advantage of these high prices.

Vancouver-based Teck Mining for example, one of CP’s key customers, has provided guidance of increased production of one to six per cent over last year, with up to 24.5M metric tones of metallurgical coal passing through B.C. ports this year on its way to steel mills in Asia.

Because commodities represent the front end of the production supply chain, looking at elements of that supply chain, such as railroads, can be an excellent forecaster of macro business activity. CP expects potash and fertilizer shipments to return to levels seen prior to the economic downturn, with strong grain prices spurring renewed demand. Other areas of expected growth include lumber products and intermodal shipping. One area where volumes could be lighter is automobile shipments, with last month's earthquake in Japan causing significant supply chain disruptions for Canadian-based assembly facilities of Japanese automakers. Overall though, if using the railway as an indicator of future Canadian economic health, the prospects seem encouraging.

 “The next couple of months in the quarter look good, and it certainly looks like a robust second half,” CEO Frederic Green noted during the earnings call. “What's important and what drives my confidence is that the demand remains very strong, much stronger than I had anticipated even nine months ago.”

Railways in general have also lately become a favorite investment with some of finance’s biggest names, such as Berkshire Hathaway’s Warren Buffet, who acquired BNSF in 2010, and Bill Gates, who became the largest shareholder of Canadian National Railways (at 10 per cent) earlier this week.

With so many of Canada’s exports coming through Vancouver, the forecasted pickup in CP’s business should have a moderate benefit locally, with additional positive economic benefits at other key B.C. terminals in Prince Rupert and Kelowna.