Freight car backlog grows by 10%

The latest freight car market analysis from Economic Planning Associates shows that the carbuilding backlog grew about 10% in the second quarter of 2011, compared to the previous quarter

“In spite of a slowing economy, the railcar market continues to improve,” EPA said. “First-quarter orders of 36,903 units were followed by second quarter orders of 16,900 cars and intermodal platforms. Thus, even with an evaporation of 900 cars from the backlogs, and a 38.7% hike in assemblies, total industry backlogs rose from 51,900 units at the end of March to 57,300 units at the end of June. This mid-year backlog level is 2.5 times higher than the beginning year level and represents 5.4 quarters of deliveries at current production rates.”

EPA’s outlook is optimistic: “Carbuilders can expect further orders as we proceed through this year and into 2012. Already in the third quarter, a major leasing company (CIT Rail Resources) has ordered 5,000 tank cars and hoppers from a number of builders. At the same time, CSX increased capital spending by $200 million to accommodate the growing coal export market by investing in facilities, locomotives, and additional freight cars.”

In its previous report, EPA said it was “concerned about the availability of parts and components.” That appears to have changed, because carbuilders “were able to ramp up production almost 40% without any problems.” Also, “we have allowed for continued high levels of assemblies in the second half of this year to arrive at our 2011 deliveries estimate,” EPA said. “While the slowing economy might dampen demand for some car types, we remain optimistic about further gains in railcar orders and deliveries.”

Based on current backlogs and anticipated further gains in demand for a variety of railcars, EPA has forecast 37,900 cars to be delivered this year, followed by an increase to 48,300 units in 2012. Beyond 2012, EPA is projecting deliveries to climb to 51,500 units in 2013 and 62,500 units in 2016.

Such gains, EPA said, will be attributable to several factors:

• “Far stronger economic activities will provide support for certain railcar assemblies, while an improvement in the financial environment, high gasoline prices, and strong government backing will stimulate greater demand for ethanol and DDG cars,” EPA said. “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 the demand for tank cars.

• “Domestic demand for coal continues to struggle while exports are advancing at a rapid clip. We are expecting some rebound in coal’s market share of electricity generation during the remainder of this year, although the sluggish nature of the economic recovery does not indicate much of rise in electricity generation in the quarters ahead. Nonetheless, any increase in electricity generation, along with a modest rebound in coal’s share of electric power output, should result in not only a pickup in coal consumption, but also in production. As of March of this year, coal stocks held by the utilities amounted to 167.0 million tons, significantly below the 177.8 million tons of inventories in March 2010. 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.

• “On a brighter side, coal exports are booming. Due to the nuclear disaster in Japan, the European reaction to a potential nuclear meltdown in Europe, and flooding in Australia that is impacting their coal exports, demand for U.S. metallurgical and steam coal is rising. Through April of this year, U.S. coal exports amounted to 35.5 million tons, 40.9% above the comparable period of 2010. Should this momentum continue through the rest of this year, we will be reaching annual export levels not seen since 1990. Foreign demand for our coal will intensify as steel producers in Asia and South America 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.

• “The covered hopper market remains vibrant. 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 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.

• “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.

• “Light vehicle sales and production activities are improving, and we should eventually see a rebound in demand for auto parts boxcars and autorack cars, especially for replacements in the extremely aged box car fleet.

• “At the same time, interest in mill gons and steel coil cars rebounded in the second quarter. During the first four months of this year, domestic steel shipments were running 7.8% above the comparable period of last year, while first half steel mill product imports were 24.8% ahead of last year’s first half.”

“The fact that the major railroads continue to report strong revenue and profit performances due to commodities traffic growth also will benefit the railcar industry,Æ EPA concluded. “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. And, we expect railroad traffic to continue advancing over the foreseeable future, which will justify these investments. Due to the sluggish performance of coal, we look for commodity haulings to increase 2.2% 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 1.4%.”