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Rail News Home Mechanical

December 2009

Part 1 : Rail Outlook: 2010 (Table of Contents)

Part 2 : Rail Outlook 2010: Inching toward a new normal

Part 3 : Class I outlook: A gradual recovery's in the offing, CEOs say

Part 4 : Short Lines: They'll eye the economy, potential 'regulatory tsunami'

Part 5 : Rail Cars: 15,000 cars in 2010

Part 6 : Transit outlook: High unemployment, low retail sales could make 2010 even more difficult than 2009

Part 7 : High-Speed Rail: States won't have to wait too much longer for federal funds

Rail News: Mechanical

Rail Cars: 15,000 cars in 2010

By Toby Kolstad

Forecasts for next year's new rail-car deliveries are a function of many factors, the most important of which are production trends and backlogs in the current year, and a Gross Domestic Product (GDP) forecast for the next. Last year, the negative GDP growth estimate for 2009 was right on target, but the fourth-quarter 2008 cancellation of 11,000 backlogged rail-car orders related to the ethanol industry was an unpleasant surprise. A revised forecast of 22,000 cars was issued to Rail Theory Forecast clients in late February and it now appears to have been right on target. This year, no major surprises are expected from the car builders, but guessing the GDP growth in 2010 is proving to be problematic.

It's Not Just The Economy

In October, the consensus among GDP forecasters was for a 2.5 percent improvement next year, but after the third-quarter financials were released, the projection was raised to 2.6 percent. If there is strong economic performance from the start, deliveries could reach 16,000 cars. But if the economy falters, as some think, after the Federal Reserve stops buying Treasury Notes and Federal Housing Administration mortgages next March, then deliveries could tumble to as low as 8,000 cars next year. Hence the dilemma facing rail-car builders and suppliers in anticipating next year's market, not to mention forecasters trying to get within 10 percent of the actual number.

Barring any surprises � such as the sudden cancellation of the tank and jumbo covered hopper orders last fall � we can project the delivery of a few car types even without a good estimate of economic growth in 2010. There were no intermodal car deliveries in 2009, as predicted, and none are expected in 2010; and as for other types of flat cars, deliveries should look like those in 2009, with just a few hundred cars produced. There are just too many surplus intermodal cars, lumber cars and multilevel flat cars. The same could be said of box cars and mill gons, although the surplus cars in these fleets are all very old, and orders for replacement equipment would be a real boon for some builders.

With the Obama Administration and congressional leaders so overwhelmingly against the coal industry, even a rapid rate of economic growth might not spur orders for new coal cars, and deliveries might not even reach half of this year's expected 6,000 car total. Utilities have cut back their use of coal by 15 percent this year, even though electrical output was reduced only 5 percent. Cheap natural gas and costly environmental regulations will work against coal again in 2010, and it might be a few more years, if ever, before demand climbs above 2006 production totals.

Tank-car demand will mirror developments in the economy. With strong growth, deliveries might reach 8,000 cars, but if the economy remains weak, production likely will stay below 6,000 cars. More than any other fleet, tank cars and the demand for same reflect the rational fleet management of the industry's oldest leasing companies. Replacement demand and the mandated need to retire pressurized cars built before 1989 that are used to ship toxic gases will keep deliveries above 5,000 cars even in the worst of times.

An Inflection Point?

The car type most likely to see renewed demand and increased deliveries? Grain-sized covered hoppers. The farm sector is expected to harvest a bumper crop in 2009, and as year end approaches, exports seemed to be rising to levels not seen in more than 12 months. If traffic picks up, deliveries would easily exceed the 3,000 car total expected for 2009. We expect demand and deliveries of other covered hopper car types to remain low in 2010, much like they were for most of this year.

Although as yet unfounded in actual numbers, a spirit of optimism has inclined this forecaster to project that deliveries in 2010 will only fall to 15,000 new cars, as opposed to previous estimates of 12,000 cars or less.

However, whether next year looks to be an inflection point for this business cycle has yet to be determined. Like last year's backlog cancellations, there may be some unpleasant economic surprises lurking around the corner that will spoil the economic recovery everyone wants so badly. Until they materialize, we'll just have to keep our fingers crossed and continue to hope for the best.

Toby Kolstad has been in the railroad industry for more than 30 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

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