Monday, May 03, 2010

The economy is picking up. How much longer for freight car production?

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The most recent freight car building forecast from Economic Planning Associates calls for assemblies of 16,000 units this year, based on current backlogs, first quarter assemblies, and anticipation of modest orders for covered hoppers, tank cars, and coal cars. Next year will see a modest improvement to 21,500 units, though EPA says this is a very low number “even with continued improvements in economic activities” due to “the oversupply of railcars.”


Noting that the ongoing economic recovery has turned a three-year slide in rail freight traffic into a rebound year, EPA says that it “was pleasantly surprised by the jump in railcar orders in the first quarter of this year, amid reports of significant levels of idle equipment at the end of last year. The 5,078 cars ordered in the opening quarter of 2010 represent the highest quarterly level since the third quarter of 2008. New equipment demand was confined to three car types—coal and related product service cars, covered hoppers, and tank cars. While we are enthusiastic that the AAR is reporting increasing utilization of previously idled cars, we believe that the coal service cars are not a reflection of the need to expand fleet capacity, but rather the replacement of aged equipment.”


Going into more detail, EPA says that “ethanol production has been accelerating for a number of months, and previously idled cars are being pressed into service. Given the large increase in ethanol production in recent months, it is no surprise that the orders for hi-cube covered hoppers were for DDG (distillers' dried grain) service. And, we suspect that a number of the tank cars ordered are for ethanol service.”


The carbuilding pace will begin to pick up in 2012, says EPA: “Far stronger economic activities will provide support for a variety of certain railcar assemblies. The extremely low levels of deliveries this year and next will serve to intensify the pressure to replace aging equipment in various fleets during the longer-term forecast horizon. After three dismal years, we look for railcar deliveries to advance moderately to 33,500 cars in 2012 and then expand annually to the level of almost 60,000 units in 2015.”


“From this point on,” says EPA, “we are enthusiastic about the outlook for commodity and intermodal haulings but are cautious with regard to new equipment demand in the short term due to the still-large amount of idle capacity in the rail system. Still, the improvements in major commodities markets will once again stimulate demand for rail equipment during the longer-term forecast horizon. Agricultural exports are rising, ethanol production is accelerating, the housing market is improving, light vehicle sales are expanding, manufacturing activities have been revived, and a stronger economy will stimulate greater production of electricity. These activities will improve  haulings of grain, ethanol and distiller grain, lumber, motor vehicles and parts, metals and products, chemicals, plastics, and coal. These improvements will extend into 2011 and beyond.”

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