EPA revises freight car forecast downward for 2012, 2013

Economic Planning Associates, noting that demand for certain freight car types has weakened, has released figures reducing its forecast for 2012 by approximately 3,000 units. EPA said deliveries will rebound beginning in 2014.

“The recent two-year strength in railcar demand will pause during the next year and a half before rebounding in 2014,” said EPA’s Peter Toja. “On the surface, the 16,434 cars ordered in the second quarter was a strong improvement over the 12,473 cars ordered in this year’s opening quarter. A closer inspection of the data, however, indicates that demand for a variety of railcars has weakened. In this year’s second quarter, tank cars accounted for 83.5% of total orders. Excluding tank cars, railcar orders amounted to only 2,707 units, significantly below the previous quarter of 5,994 non-tank car orders.”

Toja said he is 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 that our GDP growth has slipped from 1.9% in the first quarter to 1.5% in the second 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. But, for the time being, a general weakening has occurred among a number of car types including coal cars, covered hoppers, Class F flat cars, and intermodal platforms.”

As a result, EPA has owered its second-half 2012 assembly rates for these cars. “Lower than previously anticipated 2012 deliveries for these car types will be slightly offset by stronger production of tank cars and mill gons,” Toja said. “Nonetheless, we have lowered our total railcar deliveries from 58,000 cars to 55,300 units this year.”

Assuming no further jolts to the economy from either U.S. Environmental Protection Agency regulations or the Obama Administration or external negative developments involving the financial environments abroad, Toja is predicting a stabilization in demand for most car types, with the exception of small-cube covered hoppers. “After strong deliveries last year and the first half of this year, demand for these hoppers weakened considerably in this year’s first half,” he noted. “As a result, our estimate of an easing in assemblies of small-cube equipment from 14,000 units this year to 5,000 units in 2013 will serve to drop total railcar deliveries from 55,300 cars this year to 45,800 cars in 2013.”

However, said Toja, “The railroads will continue to support demand for railcars. Even with a sluggish economy and a drop in first half commodity haulings, railroads managed to improve their financial performances this year. Among the railroads who have reported second quarter results, revenue and earnings rose for UP, CSX, and NS. All of these roads cited strong performances from their automotive, chemical, manufacturing, and motor vehicle business segments. At the same time, all the roads claimed that revenue growth would have been far stronger were it not for the weakness in coal.”

Among the various car types, Toja believes that coal cars have underperformed in recent years but should pick up in the future as coal export markets expand and replacement pressures intensify. “Exports continue to be a dominant factor in the coal environment,” he said. “Even as European economic growth slowed dramatically, coal exports increased 16.1% in the first four months of this year. We continue to anticipate strong growth in both metallurgical and steam coal exports. In addition to Asia, exports to Europe will continue to advance. On the domestic front, we expect coal consumption to continue to be under attack by the Environmental Protection Agency. Nonetheless, given the abundant amount of coal reserves in this country, the need to move away from unstable foreign sources for oil, and industry efforts to clean up existing coal technology, we look for coal to remain a vital energy source in the generation of electricity for many years to come.”

The automotive market has improved and light vehicle sales advanced 10.2% last year. In response, a significant number of auto carriers were ordered in the fourth quarter and in the first quarter of this year. “We expect this investment to be worthwhile since first-half North American light vehicle production was running 22.5% ahead of the previous year,” Toha said. “The housing and construction markets should continue to stabilize as we proceed through 2012 and into 2013. Manufacturing activities will continue expanding, albeit at a more moderate pace, leading to greater movements of metals, ores, fabricated products, and a variety of chemical and petroleum products. Export markets for corn and wheat are expected to rebound in 2013, weather permitting. 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,” Toja said. “Sharply higher energy prices are stimulating oil and gas exploratory activities, and a large number of the small-cube cars will be destined to 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 gons last year. In this year’s first half, while increased production from the Bakken Shale formation is promoting growth in small-cube covered hoppers and tank cars.”

Longer term, “far 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,” Toja said. “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. Continued expansion in demand for petroleum products, chemicals, and food and beverages will prop up 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 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.”

Economic Planning Associates is predicting railcar deliveries to rebound to 50,800 cars in 2013. After 2014, railcar assemblies “will gradually move up to 62,300 units in 2017.”