CHICAGO, ILLINOIS, U.S. — Investing in new hopper cars and running longer trains are among the key initiatives that have helped solidify the grain franchise at Canadian Pacific Railway Ltd., said Nadeem S. Velani, executive vice-president and chief financial officer.
Speaking to analysts on June 5 as part of the Deutsche Bank Global Industrials and Materials Summit in Chicago, Velani described how the Calgary, Alberta, Canada-based railway is dealing with weakness in the United States while capitalizing on strength in Canada.
“Canadian grain, and grain as a whole, is the largest component of our business, about 25% of what we move, and so we’ve been doing this a long time,” Velani said. “And Canadian grain, in particular, we have a couple of key initiatives. So we’ve been investing in new hopper cars. This will be a ($500 million) investment over three to four years. And so I think we have 1,100 of those cars on the network today.
“We’ve also announced a number of initiatives with customers to look at building our 8,500-foot (High Efficiency Product) model. And if you combine those two initiatives, it allows us to kind of potentially move up to 40% more grain per train. So that’s hugely beneficial to mix, hugely beneficial to capacity for the Canadian farmers. It helps us on the maintenance cost, on fuel costs. It allows us to move more with less. So it’s a very strong story.”
In terms of U.S. grain movement, Velani said activity has been slow and “very tariff-based.”
“You get uncertainty in the market, and you get this pent-up demand,” he said. “So there’s a lot of inventory that’s built up. It’s been impacted as well in the near term with flooding issues and remains to be seen how much of that inventory can still be moved. But we’ve taken an approach to that market that it will move at some point, and we’ve raised rates. We’ve increased rate on our tariffs with the intent of you can’t hold that capacity for a market for so long. At some point, you need to move. And when it moves, you need to be able to handle it and accommodate it. So that does bear some costs. So with that in mind, we’ve increased rates since the beginning of the year on U.S. grain.”
In Canada, overall grain yields have improved, which has allowed for more grain to be moved by CP as well as its competitors. Velani said the strength of the CP franchise is its grain business, and the company considers itself to be a “very strong competitor.”
“We have strong relationships with our grain customers, and I think our model of increasing capacity, increasing fluidity, doing what we say we’re going to do from a service point of view is helping us maintain share,” he said. “And so we are very confident in our ability to — and the strength of our grain franchise.”