— by Toby Kolstad
I had not expected to see another car cycle in my forecasting career; I thought it would be several more years before rail-car production would decline again and that the dip after the Great Recession was the last I would have to forecast. Regardless of my personal expectations, rail-car production will fall in 2013 from the delivery total recorded in 2012, and if there is a recession next year, it could fall ever farther in 2014.
However, there is reason to hope that things will not be as bad as they appear, and that the nascent energy boom in the oil and gas industry will continue to grow and stimulate other sectors of the economy.
Our formal forecast of 58,500 cars for 2012 appears to be right on target. The early forecast of 51,500 was revised in late December 2011 to reflect the boom in tank-car orders received during third-quarter 2011.
Despite the continued strong demand for tank cars, we expect to see a drop in total deliveries to around 47,000 units in 2013 — unless there are significant economic improvements in fourth-quarter 2012.
The Energy Boom's Impact
Many of those 2013 deliveries will be tank cars, which continue to account for the bulk of the production. Tank cars accounted for more than 30 percent of the cars built this year and they will account for closer to 50 percent next year. In 2012, more than 17,000 tank cars, most destined to move crude oil from the Bakken Formation, will have been delivered; in 2013, the total should exceed 20,000 as the backlog of unfilled orders currently surpasses 46,000 cars and represents more than two year's production.
It's a good bet these cars will be needed for quite a while until new pipelines and refineries eventually make them redundant.
The energy boom also is making chemical and plastic production more attractive in the United States, and we expect deliveries of tank cars and plastic-pellet covered hoppers for these industries to increase in 2013. However, new orders for small-cube covered hoppers (to move industrial sand for oil and gas drilling operations) appear to have stopped since early last year, and most of this new fleet of cars already has been delivered.
Still In Recovery Mode?
Railroads also are enjoying significant growth in intermodal traffic, with weekly load levels now slightly in excess of their pre-recession peaks. But orders for new intermodal container wells have been rather meager — the backlog of unfilled orders was only 327 units at third quarter's end. Either TTX Co. fears another recession in 2013 or the company is trying to encourage railroads to use some of the surplus TTX 40-foot wells. Importers have been repackaging goods from their inbound 40-foot containers into 53-foot domestic containers, and intermodal wells for these boxes now are in short supply while 40-foot well cars sit in storage.
The precipitous collapse of the domestic coal market has almost ended deliveries of new aluminum coal cars, and deliveries of hybrid steel and aluminum cars for the export market also have slowed dramatically. If demand for exported coal continues to be strong in 2013, deliveries of the latter should pick up since the aging fleet of railroad-owned cars used to move these shipments needs to be replaced.
Except for cars associated with the energy boom, the 2013 production decline would be very small and would not be considered the start of a new production cycle. Orders for most rail-car types have not really recovered much from the lows of the last recession; production levels are not expected to fall significantly in 2013. There is even a chance that demand might pick up in early 2013 and lead to higher delivery counts next year for these cars types. The one-time production of new fleets — such as ethanol tank cars between 2005 and 2008, small covered hoppers for industrial sand in 2011 and 2012, and, now, crude oil tank cars — distort the overall picture of the true state of the rail-car industry.
Disregarding these cars types, one could say that we are still in the early stages of economic recovery, and my previous assumption of several years of continued growth are still valid.
Toby Kolstad has been in the railroad industry for more than 40 years, with stints at the Illinois Central Gulf Railroad, Denver & Rio Grande Western Railroad, a car builder and lessor. Currently a consultant on rail-car matters and president of Rail Theory Forecasts L.L.C., he can be emailed at Tkolstad@aol.com.
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