Wednesday, February 01, 2012

Freight car market continues upward climb

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Freight car builders and component suppliers have good reason to look at 2012 and beyond with renewed optimism and real confidence. That’s because, according to the most recent figures released by Economic Planning Associates, carbuilders received orders for no fewer than 89,073 cars and intermodal platforms, the highest annual level since EPA began tracking the market in 1980.

The sluggish national economy had virtually no effect on the freight car market. “Demand for rail equipment continues to impress, in spite of last year’s sluggish economy,” EPA said. Based on current backlogs and anticipated further gains in demand for a variety of railcars, EPA expects assemblies of 58,000 cars in 2012, followed by an increase to 61,500 units next year. After 2013, EPA expects railcar demand “to stabilize at high annual levels. From 2014 through 2017, railcar deliveries will range from 62,000 to 64,300 units each year.”

Even with a rapid acceleration in railcar assemblies in the fourth quarter, backlogs of 64,575 units still represented 3.9 quarters of deliveries at current production rates. “Thus, the carbuilders are beginning 2012 with formidable backlogs and the expectation of further growth in demand as we proceed through 2012 and into 2013,” EPA said.

Following is EPA’s analysis of the market and why its strength has not diminished: “Demand for new equipment is led by the energy sectors. Drilling activities in the oil and gas fields have induced a significant need for frac sand which is transported by small cube covered hoppers. At the same time, the lack of a pipeline from the Bakken Shale formation has prompted greater demand for tank cars to transport the oil. And, the roads will be hard pressed to move the ever increasing amount of oil production as we proceed over the next few years.

“Tank car demand has also been bolstered by continued strength in ethanol production. Demand for hi cube covered hoppers to transport the animal feed by product of dry distiller grains has also benefited from the growth in ethanol.

“In spite of a relatively flat year in coal production, the need to replace aged steel bodied equipment led to good levels of coal car orders last year. And, based on reports from the eastern railroads, significant replacements of existing coal car fleets will continue through the foreseeable future.

“In addition to the energy sectors, we are also noting a revival in demand for boxcars, intermodal platforms, mill gondolas, and Class F cars, while orders for grain cars remain steady at relatively high levels.

“And the railroads will continue to support demand for new rolling stock. In spite of a
sub-par economic environment, railroads scored impressive gains in 2011. Citing increased traffic volumes, increased revenues per unit of transported product, and improved operating efficiencies, most roads reported record revenue and profits last year. More important, capital expenditures are slated to rise in 2012, which will involve increased infrastructure and equipment outlays.

“Norfolk Southern reported record fourth-quarter results that included a 19% increase in net income and a 17% increase in operating revenues. For the year, net income jumped 28% to a record $1.9 billion, compared to the 2010 level of $1.5 billion as general merchandise, coal, and intermodal revenue expanded vigorously. And, the road is looking to expand capital outlays 12% this year to accommodate further traffic growth. Of specific interest was the report that NS will spend $346 million for freight cars, including new and rebodied coal cars, intermodal containers and chassis, and merchandise cars.

“CSX also reported strong revenue and profits and indicated that the capital spending budget was expanded to $2.25 billion for 2012, targeting infrastructure and rolling stock acquisitions. Kansas City Southern also set several revenue and volume records last year.

“Among the various car types, we believe that coal cars have underperformed in recent years but should pick up in the future as coal export markets expand and replacement pressures intensify. Exports continue to be a dominant factor in the coal environment. Through September of 2011, coal exports were running 45.9% above the comparable period of 2010. We continue to anticipate strong growth in both metallurgical and steam coal exports. In addition to Asia, exports to Europe will continue to advance at a healthy pace.

“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. Leading the way in foreign demand will be China. China is planning to expand its coal fired capacity from 646,000 megawatts in 2010 to 1.03 billion megawatts in 2020 according to the latest five-year plan. This will result in annual capital investment of $100 billion. It will include $10 billion per year for air pollution control equipment. Coal fired generation investment in China will exceed that of gas, nuclear, solar, or wind according to international power generation experts. India and a number of other Asian countries will be investing far more in coal fired power generation than in alternatives.

“On the domestic front, we expect coal consumption to continue to be under attack by the Environmental Protection Agency. Nonetheless, given the abundant amount of coal reserves in this country, the need to move away from unstable foreign sources for oil, and industry efforts to clean up existing coal technology, we look for coal to remain a vital energy source in the generation of electricity for many years to come.

“Based on the weak start and the ongoing sluggish nature of our economic recovery, coal haulings advanced only 0.3% last year. Even with continued gains in the average size of coal cars, the pressing need to burn greater amounts of lower sulphur and lower BTU value western coal will result in increasing volumes of coal being transported over longer distances. With inventories in better balance, somewhat stronger economic activities, and continued expansion of exports, we expect coal loadings to advance 1.0% this year, before embarking on a stronger path of haulings longer term. After growth of 1.2% next year, coal haulings will gradually move up to a 1.6% annual advance by 2017.

“The automotive market has improved, and light vehicle sales advanced 10.2% last year. In response, a significant number of auto carriers were ordered in the fourth quarter. We expect this investment to be worthwhile since we anticipate auto sales growth of 4.8% this year and 3.0% next year.

“The housing and construction markets should stabilize as we proceed through 2012 and into 2013. 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.

The strength in manufacturing activities and the rebound in steel demand revived orders for GB gons last year while increased production from the Bakken Shale formation is promoting rapid growth in small-cube covered hoppers and tank cars.

Longer term, 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 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 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 will 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.

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