EPA railcar overview: Short-term deliveries rising, with a “formidable” backlog

“In spite of a lackluster economy, second-quarter 2014 railcar orders of 33,912 units far outpaced deliveries of 16,056, raising mid-year backlogs to a formidable 99,782 cars and platforms,” EPA said in its most recent forecast. “Based on first half strength in orders, assemblies, and end-of-June backlogs, we have raised our short-term railcar deliveries estimate to 66,300 cars this year and 72,000 cars in 2015. Beginning in 2016, annual railcar assemblies will ease very moderately, at historically high levels, from 63,300 to 62,500 cars and platforms in 2019.

Tank cars remain dominant in terms of total railcar backlog share, but demand for other types of equipment “has increased significantly thus far in 2014,” EPA noted. “We are especially enthused by the strength in demand for all types of covered hoppers, mill gondolas, intermodal equipment, and Class F flat cars. However, the star of the railcar industry remains tank car equipment, primarily oil service cars. Demand for tank cars has escalated once again. After three relatively modest quarters, orders for tank cars surged to 10,629 units in the second quarter, taking backlogs to the mid-year level of 52,589 cars.”

Longer term, EPA is 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 crude oil, petroleum products, chemicals, and food and beverages will prop up haulings of a variety of liquid products and the demand for tank 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. However, the most dynamic element in the long term railcar environment will be tank cars to transport ever increasing volumes of oil and petroleum products.”

Based on its most recent information on the continued expansion in U.S. oil production and the need to upgrade tank car equipment, EPA anticipates further growth in demand for rolling stock. “Spurred by the use of hydraulic fracturing in shale rock deposits, U.S. oil production has jumped from 5.0 million barrels per day in 2008 to 7.4 million last year and is expected to average 8.5 million this year and 9.3 million next year, according to the Energy Information Administration, the analytical arm of the U.S. Department of Energy,” EPA said. “This boom, along with a rise in natural gas liquids production, has dramatically lowered petroleum imports. The share of U.S. liquid fuel consumption met by net imports, down from 60% in 2005 to 33% in 2013, is expected to fall to 22% in 2015, which would be the lowest since 1970. The U.S. and Canada are expected to account for most of the world’s projected growth in production of oil and other liquid fuel through 2015, while China and less developed countries will drive most of the growth in consumption, according to the EIA’s July forecast.

“Recently, after a 2.5% oil production increase in April, preliminary figures released by North Dakota put state oil production past the one million barrels of oil per day milestone. The milestone boosts North Dakota to an enviable position in the eyes of the industry. According to North Dakota’s Director of Mineral Resources, the state is now in the top 17% of crude oil producers around the world. Elevated production numbers from the Bakken fields are attributed to innovation and drilling advances. While rig count in the state has remained relatively stable at approximately 190 rigs, operators have increased efficiency, enabling more production.”

EPA believes that the U.S. Department of Transportation’s Notice of Proposed Rulemaking on so-called HHFTs (high-hazard flammable trains) that carry crude oil, ethanol, and other commodities “should also positively impact demand for oil carrying tank cars. Among other assertions, the proposed rule calls for older DOT 111 tank cars (pre CPC-1232 cars, the rail industry’s voluntary standard in effect since October 2011) used for the shipment of Packing Group I flammable liquids, including most Bakken crude oil, are to be retired within two years unless retrofitted to comply with updated standards. Due to the rapid expansion in oil production and the lack of any significant pipeline additions, the railroads will continue to benefit and we anticipate strong annual deliveries of oil-service tank cars throughout the forecast horizon.”

EPA is also seeing “significant strength in each of the covered hopper segments. High-cube covered hoppers recorded orders for 2,950 cars as plastic pellet and chemical demand expanded. With a rebound in grain hauling under way and reports of equipment shortages, first-half orders for mid-sized covered hoppers were strong. Due to the escalation in drilling activities, demand for small-cube equipment jumped in the first half and is poised to record strong delivery levels both this year and next.”

Looking at other car types, “mill gondolas exhibited strength in second-quarter orders, responding to a rebound in domestic steel shipments and strong growth in steel imports. Demand for three- and five-unit platform cars have picked up, and given the rising trend in intermodal traffic, we have raised our short-term forecast for intermodal equipment assemblies. We continue to be 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. 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.

“Even with an anticipated rebound in coal hauling this year, we remain cautious on the outlook for coal cars, primarily because we have heard that customers prefer to rebuild rather than purchase new equipment in the currently dismal coal environment. With a rebound in agricultural products and coal, the Class I railroads reported good revenues and profits in the first half. The roads also continue to make investments in track, facilities, and equipment. The solid income base of the railroads should serve to support railcar demand in the years to come.

“Auto sales were obviously impacted by the severe winter weather. After averaging 15.59 million annualized sales in the fourth quarter of last year, light vehicle sales dropped to 15.16 million in January and a 15.28 million in February. March sales rebounded to 16.33 million, April came in at 15.96 million, and May rebounded to 16.70 million units. The sales momentum continued into June as sales expanded to 16.92 million. We are factoring in some moderation in sales in the months ahead, and we continue to remain leery on the future course of auto sales through the next two years. Until the economy is on more solid footing, employment advances at a more significant pace, and consumer income growth increases, we expect quarterly auto sales to remain relatively flat at high levels during 2014 and 2015. After a 7.3% advance in auto sales to 15.49 million units last year, we expect far more modest growth to 16.06 million vehicles in 2014 and 16.45 million units in 2015. According to Ward’s Automotive Group, North American light vehicle production through May amounted to 7.29 million vehicles, 3.8% above the comparable period of 2013. U.S. production was up 3.9%, and Mexican output expanded 7.4% while Canadian production was off 1.6%. Based on our outlook for the U.S. economy and consumer demand for light vehicles, we expect modest North American production increases this year and next.

As anticipated, exports of corn, wheat, and soybeans picked up in the fourth quarter of last year and have continued to expand in the first half of this year. More important, the USDA anticipates further gains in our crop exports this year, which should boost grain movements. Based on increased production, consumption, and exports, we expect a rebound in grain haulings this year and next. After an 8.0% drop last year, we expect grain haulings to increase 10.6% this year and 2.4% in 2015.”