Freight cars: “Demand for equipment is recovering”

Economic Planning Associates has upped its freight car production estimate for 2011 from 19,800 units to 22,500 units, with more-substantial growth beginning in 2012, according to its just-released analysis. “After three dismal years, we look for railcar deliveries to advance moderately to 32,800 cars in 2012 and then expand annually to the level of 59,000 units in 2015,” EPA said. Following is EPA’s Oct. 30, 2010 overview:

“On the heels of rebounding traffic in both commodity haulings and intermodal movements, demand for rail equipment is recovering. Equally important, equipment demand is broadening as orders are being placed for previously neglected categories such as small cube covered hoppers, intermodal platforms and cars, grain service hoppers, and hi cube covered hoppers. Some of the other recently quiet categories are drawing interest as one road announced fourth quarter orders for mill gons and coil cars while another road indicated a forthcoming investment in its coal car fleet.

“While deliveries have increased in both the second and third quarters, backlogs have jumped from 10,462 cars at the beginning of the year to 19,267 units at the end of September. The backlogs as well as our anticipation of future growth in traffic should keep short and medium term assemblies of assorted cars moving up gradually. The improvements in railroad traffic volumes, revenues, and profitability continues to gain momentum. Citing revenue gains across the board in all market sectors, the railroads are also looking to invest in facilities and equipment to accommodate future expansions of traffic as well as to upgrade fleets to better service customers. During the third quarter, the roads specifically addressed the needs to invest in equipment to service lumber and wood products, iron ore, steel, and coal. We suspect that investments are also being planned in other equipment types although we have not seen any media releases on other types of equipment.

“The sluggish nature of the economic recovery has probably dampened the recovery in rail haulings. Still, through the first 39 weeks of this year, commodity haulings were running 7.2% above the comparable period of 2009 while intermodal movements were running 14.7% ahead of the same period of 2009. We believe that the investments by the railroads will be well founded as traffic continues to expand during the end of this year and throughout 2011. Agricultural exports are rising, ethanol production is accelerating, the housing markets are stabilizing, light vehicle sales are expanding, manufacturing activities have revived, and a stronger economy will stimulate greater production of electricity. These activities will prompt the haulings of grain, ethanol and distiller grain, lumber, motor vehicles and parts, metals and products, chemicals, plastics, and coal. And, these improvements will extend into 2011 and beyond. After last year’s collapse, we expect commodity loadings to advance 5.3% this year and 2.9% in 2011. From 2012 through 2015, annual growth in car loadings will moderate from 1.8% to 1.4%. Demand for intermodal services is rebounding strongly this year. After an 8.4% year over year advance in the first quarter, intermodal movements jumped 17.5% in the second quarter, followed by an equally robust 18.0% hike in the third quarter.

“With production activities on the rise, merchandise trade expanding, and railroads pursuing intermodal traffic, we expect a 10.3% rebound in intermodal movements this year, followed by a 5.5% hike in 2011 and a 5.2% jump in 2012. From 2013 through 2015, intermodal traffic gains will be in the range of 3.5-5.0% per year. Based on the rebound in rail traffic and the willingness of the roads to invest in equipment, we remain cautiously optimistic on the near term environment for railcars. While we are aware of the 14 months of consecutive declines in stored cars as reported by the AAR, we still believe that a certain amount of idle capacity will continue to dampen equipment demand.

“Given the assemblies to date, current backlogs, and the builders’ conservative approach to managing the backlogs, we continue to expect deliveries of 13,500 cars this year. The cautious attitude of the builders is best exemplified by the fact that third quarter backlogs of 19,267 still represented 5.2 quarters of assemblies at current production rates. Nonetheless, based on the recent strength in certain car types such as small cube covered hoppers and intermodal platforms, we have modestly raised our 2011 deliveries estimate from 19,800 units to 22,500 units. Beginning in 2012, 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 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. Rising home values and moderate interest rates after 2011 will stimulate additions and alterations to existing homes while the do-it-yourself market will continue to expand. Both developments will rejuvenate growth in haulings of lumber and wood 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 gons 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. The extremely low levels of deliveries this year and next will serve to intensify the pressure to replace aged equipment in various fleets during the longer term forecast horizon.”