EPA: Railcar deliveries to hit 27,000 in 2011

As the U.S. economy emerges from a deep recession, the railroads’ fortunes are improving, and along with them, that of freight car builders, according to the latest Railcar Overview from Economic Planning Associates.

“Demand for railcars is gathering momentum,” says EPA’s Peter Toja (pictured), citing climbing orders and backlogs, and projected Class I railroad capital budget increases. “Led by strength in covered hoppers and intermodal platforms, orders in the final quarter of 2010 amounted to 10,853 units, a level not seen since the second quarter of 2008. And, even though assemblies jumped from 3,706 units in the third quarter to 7,333 units in the fourth, year-end 2010 backlogs stood at 22,658 cars and platforms, the highest level since the first quarter of 2009.”

“While demand for certain car types, most notably coal cars and mill gondolas, were relatively quiet in the fourth quarter, we anticipate improving orders for these car types this year and next,” Toja points out. That’s because, in an expanding economy, there will be higher levels of electricity generation and coal consumption, and increased demand for steel products, reflecting strength in manufacturing. “With inventories much leaner than in 2009 and the first half of 2010, we expect stronger movements of coal to the power generators this year and next,” Toja says. “Even better news is that the coal export markets are booming once again. Through September 2010, exports totaled 60.9 million tons, 46.8% ahead of the first nine months of 2009. The surge in exports has led to major upgrades to facilities at Hampton Roads (Norfolk Southern) as European demand for both our steam and metallurgical coal picks up further momentum.”

Mill gon orders should improve over the next two years, Toja says. “Through November 2010, domestic steel shipments were running 40.5% above the 2009 pace, while steel imports through November were 49% higher than the comparable period of 2009. We expect further growth in steel movements this year and next.”

Growth is not limited to coal cars and mill gons. “The covered hopper market is vibrant,” Toja stresses. “Stronger production of ethanol from corn as well as a rebound in chemicals and plastics activities are stimulating demand for hi-cube equipment, while increased export volumes and greater domestic grain consumption are stimulating 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 for oil and gas field service companies as well as other sectors of construction.”

As well, the automotive market is rapidly rebounding. “ Light vehicle sales and production activities are improving, and we should eventually see a rebound in demand for auto parts boxcars and autorack cars,” Toja notes.

A major contributing factor to freight car production is robust Class I capital spending programs. “The railroads’ fortunes are improving, and they are actively pursuing investments in rolling stock,” Toja emphasizes. “The railroads continue to benefit from the cost cutting programs of recent years, as well as the rebound in commodity haulings last year. Reports from NS, CSX, and Kansas City Southern all indicate major improvements in revenues and profits. The broad-based nature of the recovery is apparent from railroad reports of traffic gains in all major customer markets, even coal in the fourth quarter of last year. The most impressive factor in these reports is that the railroads are not content to sit back and enjoy the current strength in revenue and profits, but are willing to invest funds to continue to improve not only operating ratios but also to improve customer service.”

Toja points to plans by CSX and NS to increase capital spending over 2010 levels. CSX will spend 11% more this year, while the NS will increase investment 19%. Significant is that investments “will be spread over track and facilities, locomotives, and freight cars,” he says. “And, we expect railroad traffic to continuing growing over the foreseeable future—which will justify these investments. After a 7.3% advance last year, we look for commodity haulings to increase 2.5% this year. The 2011 momentum will carry over into 2012, at which time, commodity haulings will increase 2.0%. From 2013 through 2016, annual growth in carloadings will moderate from 1.6% to 1.3%.

“We also look for the railroads to remain active in the intermodal sector. With manufacturing activities on the rise and railroads actively pursuing intermodal business, we expect a 5.2% increase in intermodal traffic this year, followed by a 5.1% gain in 2012. From 2013 through 2016, annual growth will ease moderately from 5.0% to 3.9%.”

Based on current backlogs and anticipation of continued growth in commodity haulings, EPA is projecting railcar deliveries of 27,000 units this year, a whopping 63.4% increase over 2010. Continued traffic growth, combined with “significant replacement pressures,” will boost 2012 deliveries to 33,500 cars and platforms in 2012.

The longer-term freight car market looks solid, Toja says, and for a variety of reasons: “Far stronger economic activities will provide support for certain railcar assemblies, while an improvement in the financial environment, higher gasoline prices, and strong government backing will 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 haulings of a variety of liquid products, and [as a result,] demand for tank cars.

“Stricter air emission standards will promote the use of lower-sulphur, lower-BTU-value western coal, leading to greater volumes of coal traveling longer distances. This in turn, will lead to replacement of older, smaller, steel-bodied coal cars with larger-volume aluminum gondolas and hoppers. At the same time, eastern coal fleet requirements could stimulate some demand for technologically advanced steel and hybrid (aluminum/stainless steel) coal cars. Growing worldwide nutritional needs and expanding exports will place pressure on existing grain service cars 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.”

All this is expected to accelerate railcar demand, and increase deliveries to 42,800 units in 2013, a number that will steadily grow to 58,000 units in 2016.