Friday, February 01, 2013

Tank car production bolsters railcar orders

Written by  William C. Vantuono, Editor-in-Chief
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Economic Planning Associates, in its most recent freight car building report, said it expects orders this year to dip to just above 50,000, down from 2012’s 58,900, then rebound strongly in 2014 and experience steady growth through 2018.

“In 2014, we look for railcar deliveries to rebound to 59,800 cars. After 2014, annual railcar assemblies will move up from 63,500 in 2015 to 66,500 units in 2018,” EPA said.

“The most dynamic element in the long term railcar environment will be tank cars to transport ever increasing volumes of oil and petroleum products,” EPA noted. “There was an expansion in demand for a variety of covered hoppers, mill gondolas, and Class F flat cars in the fourth quarter of 2012. Still, tank cars remain the dominant force in overall equipment demand. In the second quarter of last year, tank cars accounted for 83.5% of total orders. Even with improvements among a variety of other railcars, tank car orders comprised 58.3% of total orders in the third quarter and 61.8% of the orders in the fourth quarter. It is quite obvious that the growth in tank car demand is centered in the movement of crude oil, particularly from Bakken Shale Formation in the Dakotas.”

According to the Energy Information Administration (EIA), U.S. total crude oil production averaged 6.4 million barrels per day in 2012, an increase of 0.8 million from the previous year. Projected domestic crude oil production will increase to 7.3 million barrels per day in 2013 and 7.9 million barrels per day in 2014, which would mark the highest annual average level of domestic production since 1998.

“While we are pleasantly surprised by the modest expansion in demand for other car types, we remain cautious,” EPA said. “We are concerned about the underwhelming growth of the economy as manufacturers, oil and gas producers, and coal companies struggle with the increasing number of government regulations that are dampening our economic potential. We have noticed our GDP growth slipped into negative territory in the fourth quarter. Hopefully, our economy can eventually embark on a stronger path of growth that will improve railroad traffic, revenue, and investments, leading to continued healthy growth in railcar demand.

“Assuming no further jolts to our economy from U.S. Environmental Protection Agency regulations or the Administration or external negative developments involving the financial environments abroad, we look for a stabilization in demand for most car types with the exceptions of small cube covered hoppers and coal cars. After strong deliveries in 2011 and the first half of 2012, demand for these hoppers weakened considerably in the second half. As a result, our estimate of an easing in assemblies of small cube equipment from 13,781 units last year to 5,000 units in 2013, as well as the pronounced weakening in coal car demand, will serve to drop total railcar deliveries from 58,900 cars last year to 50,500 cars in 2013.

“On a brighter note, the railroads continue to score financial gains even as a weakening economy dampens demand for a variety of products. We have reviewed fourth quarter and full year 2012 results for all the railroads that have reported to date, and they all cited declines in coal and grain movements as depressing financial results. However, most of them glowingly report increased operating efficiencies and strong growth in oil, chemical, automotive, and intermodal movements. Nonetheless, the extremely weak grain and coal environments in 2012 have overcome strong growth in segments such as petroleum, motor vehicles, aggregates, and lumber.

“Due to the large volume of coal and grain movements relative to total commodity haulings, rail commodity movements dropped 3.1% last year. Nonetheless, the railroads are indicating strong capital spending plans for 2013 as they prepare for continued growth in oil, chemical, light vehicle, and intermodal movements. And, the investments will be well founded as we witness future growth in these categories. Coal movements continue to be depressed by a sluggish economy, low natural gas prices, and a hostile Environmental Protection Agency.

“In spite of the abundance of coal in the U.S. and industry efforts to clean up the mining and combustion sectors of the industry, the EPA continues to press for even more stringent regulations against the production and consumption of coal. And, coal haulings are reflecting the dismal background. Last year, coal movements dropped 10.8% and we look for a further decline of 5.0% this year. While we had endorsed a ‘wait and see’ posture in future EPA regulations, it is apparent that the government is set to ‘go green’ and squeeze the coal industry. The fact that other nations on this globe are burning our coal and releasing far greater pollutants in the atmosphere appears to be of no concern to the Administration.

“Under these circumstances, we have once again lowered our sights on coal car deliveries. However, we do anticipate some modest growth in investments for export coal equipment and replacements within very aged fleets. Light vehicle sales were a bright spot in the consumer environment in 2012. Auto sales ran well ahead of year ago levels throughout 2012. The first quarter annual sales rates of 14.15 million vehicles combined with the second quarter rate of 14.10 million units were 13.7% ahead of the first half of 2011. The third quarter selling rate of 14.46 million units was 14.6% higher than the previous year, while the fourth quarter, which encompassed a bounce back from Super Storm Sandy, came in at 15.0 million units, 11.4% higher than the previous year. Of equal importance is the fact that U.S. assemblies of light vehicles in 2012 were 19.0% above the previous year. In addition, Canadian production expanded 15.3%, while Mexican output rose 12.3%. The North American production gains led to stronger motor vehicle haulings and demand for auto related rail equipment.

“The covered hopper market remains viable. After this year, stronger production of ethanol from corn as well as a rebound in chemicals and plastics activities will stimulate 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 will be destined for 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 in 2011 and 2012 while increased production from the Bakken Shale Formation is promoting growth in small cube covered hoppers and tank cars. Longer term, we are hopeful that 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 continue to advance, 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 should lead to some limited 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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