Rail Theory Forecasts™ LLC

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North American Rail Car Market

North American
Freight Car Market

Progressive Railroading Magazine http://www.progressiverailroading.com/

Progressive Railroading Magazine, May 2008

It’s the same old (and cyclical) song: Car surpluses to plague builders, lessors at least through ‘09

Currently, there is one characteristic that is common to all rail-car fleets: surplus inventory. From intermodal wells to coal cars and ethanol tanks, excess cars are stressing the leasing industry and dampening new-equipment demand.

Since last fall, industry pundits have been trying to assess the magnitude of the problem and determine when a turnaround might occur. At the start of the year, it looked as if increasing coal and grain shipments might bring better fortune to at least some of the fleets -- even if the economy went into recession. However, when railroads began to run their trains faster during the winter months, all the intermodal, grain and coal cars that had been added since 2004 either will handle new traffic or exacerbate the surpluses.

How did we get here?
The slowdown in the train operation that began in late 2003 added a significant amount of artificial demand for unit-train and intermodal-service cars. The 10 percent decrease in average train speeds during 2004 and 2005 increased demand for new rail equipment by almost 3 percent of the total fleet of grain, coal and intermodal cars -- or 6,000, 8,000, 6,000 cars, respectively.

In early 2006, train speeds stopped falling and the artificial demand ceased, but with builder backlogs at the time stretching from 12 to18 months for almost all car types, leasing companies kept placing speculative orders in excess of current demand for another few quarters. Had train speeds not significantly improved, or if the economy had kept growing, the excess cars might not have become too big a problem. But average train speeds have jumped during the past several months, almost reaching the levels recorded before the decline began. So, in addition to the surplus cars that were created through speculation and by a softening economy, the cars added to meet the artificial demand of slow trains during the past few years must now be added to the problem.

No relief this year
For the grain and coal car fleets, the improving traffic levels, if sustained, will bring some relief to lessors and builders sooner than for other car types, but the surplus capacity will take more than a year to be absorbed to a point where there is any need for larger fleets. Last fall, some thought the turnaround for these fleets might occur before summer, but with the added cars that are now available for loading due to the faster trains, the turnaround may not occur until sometime in 2009.

The same might be said of the ethanol fleet. There would have been enough productive and rail-car transportation capacity to deliver 10 billion gallons of ethanol to the motoring public in 2008, but gasoline distributors neglected to build the facilities needed to receive the product along the coasts. There are only four U.S. terminals that can handle unit trains of ethanol tank cars from the Midwest; more are needed, and it’ll take a while to build them. Until they are, there’ll be a surplus of tank cars.

For doublestack well cars, the story is even less promising.

Intermodal traffic began to decline in the fall of 2006, and new-equipment demand effectively ended at that time -- this fleet is relatively new and does not yet require any replacement cars. The several thousand intermodal cars that have been built since then have only added to the several thousand cars rendered “surplus by declining traffic and faster trains. There are enough surplus intermodal wells to meet traffic demands for at least two years -- if and when loadings resume their historical growth rate of 6 percent per year.

Replacement demand will sustain moderate production levels for some car types, but rail-car builders and lessors likely will need to batten down the hatches for some rough quarters ahead. The surplus conditions that plagued the industry for a few years at the start of this decade might be back again.

Rail Theory Forecasts is a consulting company specializing in North American rail freight traffic and freight car demand forecasting. Publisher of the annual North American Freight Car Market

Rail Theory Forecasts (RFT) was founded in 2001 to advance the art and science of predicting future developments and trends in the railroad industry, especially with regard to the demand and supply of railcars. The basic premise which has guided the company’s efforts is that current developments can only be understood and evaluated within an historical context, and that forecasts and projections of future developments must be soundly based on the interplay of the factors that have most influenced past events