Tuesday, August 04, 2009

EPA: 2Q freight car production results “not surprising”

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Economic Planning Associates on Tuesday released its second-quarter 2009 freight car analysis, and, based on production figures obtained from the Railway Supply Institute American Railway Car Institute Committee, the freight car market won’t begin to pick up until 2011.


“With some 20% of the various fleets on the sidelines, the recession in full force, a sharp decline in railcar loadings, and the constrained financial environment, the outlook for railcar deliveries this year and next continues to dim,” EPA said. “Our economy will remain under duress for the next two quarters. Considering the weakened state of the economic and railroad environments, the second quarter survey results from the ARCI were not surprising. After 2,374 units were ordered in the first quarter, the latest survey shows that only 2,165 cars were ordered in the second quarter. As a result, first-half assemblies of 14,120 cars served to drop net backlogs from 31,921 units at the beginning of the year to 21,558 cars at the end of June.”


EPA added that it remains “deeply concerned” about the Greenbrier-GE Capital portion of freight car backlogs. Pending litigation between the two companies over their seven-year deal and the possible cancellation of remaining railcars in the original order may be affecting delivery numbers and timing. “Hopefully, recent reports on the prospects of improving financial health at GE Capital will translate into new car purchases during the latter part of our forecast horizon.”


There are, however, a few hopeful signs: “Much to the credit of the railroads, in spite of steep year-over- year declines in haulings and revenues, reported earnings from companies such as CSX, BNSF, UP, and CN were at relatively decent levels as the railroads continued to cut costs and improve efficiency. . . . Should we be correct in an economic rebound later this year extending into 2010 and beyond, we expect commodity haulings to advance 2.4% both next year and in 2011. From 2012 through 2014, annual growth in carloadings will moderate from 1.6% to 1.2%. . . . We expect the weakness in intermodal traffic to continue into the fourth quarter before a modest recovery begins in 2010. . . . [S]ome stabilization and a possible modest improvement will set the stage for an annual rebound of 4.5% in 2010.”


“Based on second-quarter ARCI data, first-half assemblies, and the extreme caution warranted by the Greenbrier-GE portion of mid-year backlogs, we have moderately lowered our short term forecasts,” EPA said. “We currently expect deliveries of 24,800 cars this year and 14,750 cars in 2010. Beginning in 2011, far stronger economic activities will provide support for certain railcar assemblies while an improvement in the financial environment and higher gasoline prices stimulate 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 2010 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.”


There’s an environmental factor at play, as well: “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 larger-volume aluminum gondolas and hoppers. At the same time, eastern coal fleet requirements could stimulate some demand for technologically advanced steel and hybrid coal cars. Growing worldwide nutritional needs 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.”


Over the next five years, “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,” said EPA. “After two dismal years, we look for railcar deliveries to rebound moderately to 27,500 cars in 2011 and then expand annually to the level of 57,000 units in 2014.”

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