EPA: Freight car backlog

In spite of a struggling economy, “the railcar market continues to astonish on the upside,” Economic Planning Associates says in its latest quarterly report. “Third quarter orders of 20,165 units far outpaced deliveries of 12,519 cars, bringing end of September backlogs to 65,044, significantly higher than opening year backlogs of 22,658 cars. Thus, even with the acceleration in third quarter production, existing backlogs still represent 5.2 quarters of deliveries. As a result, carbuilders will begin the fourth quarter with a formidable level of cars in their backlogs.”

Based on current backlogs and anticipated further gains in demand for a variety of railcars, EPA is projecting assemblies of 40,400 cars this year, followed by an increase to 51,300 units next year. Longer term, EPA is projecting an acceleration in railcar demand that will take deliveries from 54,300 units in 2013 to 63,500 units in 2016.

“A closer inspection of the third-quarter orders indicates that railcar demand was broad based, with significant strength in tank cars and small cube covered hoppers,” EPA said. “Mid-sized covered hoppers, coal cars, and intermodal platforms also recorded good levels of orders. Mill gons are beginning to respond to growth in industrial production and steel mill shipments. Third-quarter orders for 460 mill gons brought end-of-September backlogs to 2,050 cars.

“And, we believe that orders during the next year or so will continue to advance, albeit at a more moderate pace. Replacement pressures have intensified among a number of car types such as boxcars and various covered hoppers. At the same time, the shift to aluminum bodied coal cars will stimulate demand while strict regulation of hazardous materials being transported on tank cars will boost demand for newer pressurized tank cars. The generous depreciation provisions of the tax code in place this year will also facilitate the decision to purchase new equipment. In addition, the railroads will also provide support to new equipment demand during the foreseeable future.

“In spite of a weakening economy which has softened both commodity and intermodal haulings in the third quarter, railroads continued to score impressive financial gains. The roads are attributing record quarterly levels of revenues and profits based on some modest volume growth, increased revenue per unit, and operating efficiencies. UP reported that third quarter operating revenues climbed 1.6% to an all-time quarterly record $5.1 billion and operating income rose 13% to a record $1.6 billion. Each of UP’s six business groups registered freight revenue growth and four of them posted volume gains. Likewise, CSX saw operating income rise 6% to an all-time high $878 million while net earnings rose 12% to a record $464 million. Due to price increases, KCS also reported strong third quarter financial results.

“In spite of the slowing in traffic, the roads continue to invest in locomotives, facilities, and rolling stock. In recent months, ambitious efforts are underway to expand and improve intermodal services.

“The domestic coal situation has not changed much since our last report. At mid-year, electricity generation was running only 0.3% above the 2010 pace. And, with the Federal government continuing to increase regulations concerning the mining and burning of coal, consumption through June of this year was 4.8% below the comparable period of last year.

“At the same time, utilities continue to draw down their coal inventories. As of June, inventories amounted to 166.0 million tons, far below the 181.1 million tons on hand in June 2010. While the draw down could be justified by lower burn rates, any rebound in electricity generation and coal consumption would boost inventories in the future. Exports continue to expand at a strong pace. In addition to Asia, exports to Europe are advancing at a healthy clip. And, a senior Chinese official with the China Coal Industry Association stated on September 15 that China may soon lower value added tax and port charges to encourage coal imports which are sorely needed for China’s expanding economy. The official went on to say that China will import some 150 million metric tons this year, followed by annual increases in both 2012 and 2013.

“Longer term, foreign demand for our coal will intensify as steel producers in Asia and South American continue to drive demand for metallurgical coal while Japanese and European countries look to move away from nuclear to coal fired facilities for power generation.

“Longer term, we remain constructive on the outlook for coal demand and rail movements, especially as the Administration and the Department of Energy recognize the need to ease the onerous burden of EPA regulations. We expect further major investments by the western roads as coal traffic expands not only for domestic consumption by electric utilities but also for the export markets. With the continued revival in coal exports straining capacity in the east, we also expect investments in eastern facilities and equipment.

“The housing and construction markets should stabilize as we proceed through the year while a modest annual advance in light vehicles demand and production will induce growth in movements of motor vehicles and parts, manufacturing activities will continue expanding, albeit, at a more moderate pace, leading to greater movements of metals, ores, fabricated products, and a variety of chemical and petroleum products. Export markets for corn and wheat are at high levels while domestic use of corn (including ethanol production) is expanding.

“The covered hopper market remains vibrant. Stronger production of ethanol from corn as well as a rebound in chemicals and plastics activities is stimulating demand for hi-cube equipment while increased export volumes and greater domestic grain consumption bolster demand for midsized cars. Sharply higher energy prices are stimulating oil and gas exploratory activities and a large number of the small cube cars are destined to oil and gas field service companies as well as other sectors of construction. Light vehicle sales and production activities are improving and we should eventually see a rebound in demand for auto parts box cars and autorack cars.

“At the same time, interest in mill gons and steel coil cars rebounded in the second quarter. During the first eight months of this year domestic steel shipments were running 8.0% above the comparable period of last year while steel mill product imports through August were 20.8% ahead of last year’s first half.

“The fact that the major roads continue to report strong revenue and profit performances in spite of sluggish traffic growth also will benefit the rail car industry. We expect the roads to continue to invest in order to accommodate anticipated commodity haulings growth. This will involve expenditures for facilities, power, and rolling stock.

“Longer term, far stronger economic activities will provide support for certain rail car assemblies while an improvement in the financial environment, high gasoline prices, and strong government backing stimulate greater demand for ethanol and DDG cars. Replacement pressures and technological advances as well as legislative measures will also play a role in promoting the demand for a variety of railcars.

“Construction activities are expected to return to higher levels, which should support movements of aggregates and structural steel products. Continued expansion in demand for petroleum products, chemicals, and food and beverages will prop up the haulings of a variety of liquid products and the demand for tank cars.

“Stricter air emission standards will promote the use of lower sulphur western coal, which is also lower BTU value coal, leading to greater volumes of coal traveling longer distances. This in turn, will lead to replacements of older, smaller, steel bodied coal cars with the larger volume aluminum gondolas and hoppers of today and tomorrow. At the same time, eastern coal fleet requirements could stimulate some demand for technologically advanced steel and hybrid coal cars.

“Growing worldwide nutritional needs and expanding exports will pressure the current grain service cars as we proceed through the longer term while long neglected segments such as equipment to haul waste, aggregates, and limestone show signs of revival and should add to the railcar delivery mix in the years to come.