Monday, November 09, 2009

Freight car market rebound? Not next year, says EPA

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Economic Planning Associates, in its most recent analysis of the domestic freight car market, says builders and component suppliers will have to tough it out until 2011 or later before the market begins to improve.

“In this environment, it is not surprising to note that there continues to be little, if any, interest in new equipment,” says EPA. “According to the latest survey of the carbuilders, third-quarter railcar orders amounted to a paltry 1,890 units, 1,438 of which were tank cars. Cumulative orders thus far in 2009 amounted to 6,458 cars, far lower than the 18,215 assemblies during the first three quarters. As a result of the stronger production runs as well as some cancellations of existing orders, backlogs have dropped from 31,921 at the beginning of this year to 19,343 units at the end of September. At the same time, we are still deeply concerned about the Greenbrier/GE portion of the backlogs. While we are aware that the deal extends over a seven-year period, the latest Greenbrier release on the status of this arrangement included the statement that Greenbrier considers GE to be in breach of contract. Whether this affects the timing of the deliveries or the cancellation of the remaining cars, still leaves us with the conclusion that a number of these cars in the backlogs will not be delivered in 2009 or even in 2010.

“Based on assemblies through September, extreme caution with regard to the GE-Greenbrier portion of existing backlogs, and a stabilizing U.S. economy, we look for deliveries of 22,650 cars this year and 15,750 cars in 2010. We expect next year’s deliveries to be the low water mark as demand for railcars begins steady upward annual advances thereafter. 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. 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 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.

“After two dismal years, we look for railcar deliveries to rebound moderately to 26,500 cars in 2011 and then expand annually to the level of 57,000 thousand units in 2014.”