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— by Toby Kolstad
The rail-car industry is not a growth industry by any definition of the term. For the past 50 years, annual deliveries have averaged between 50,000 and 60,000 cars — closer to the latter figure in the first 25 years, when cars were smaller and rail-car fleets larger, and closer to the former total during the past quarter century. In 2012, deliveries reached 59,000 cars, but this year, new-car builds are expected to fall to 49,000 units. Using a statistical methodology that is heavily weighted by past averages, Rail Theory Forecasts L.L.C.'s forecasts have been very close the past two years, projecting 58,500 for 2012 and 47,500 for 2013. Our early forecast for 2014, which is not yet based on the statistical models, is 61,500 deliveries.
Looking at just the total number of rail cars delivered, it would seem that rail-car builders were enjoying a rare period of stability. However, for the past 25 years, the industry has been cyclical, with production levels rising or falling depending on the economic conditions affecting rail operations. That makes the delivery totals from the past two years (and possibly next year's) seem too good to be true. But a peek at the total number of cars delivered reveals a troubling fact: 57 percent of this year's deliveries are tank cars and 80 percent of the backlogged orders in September were for tank cars. It would be remarkable if rail-car demand remained steady for car builders and their material and parts suppliers, but it may be possible.
For example, demand for intermodal cars should increase from the depressed level of this past year. Trailer and container loads have continued to increase since the Great Recession, and total loads are now well above pre-recession levels. The construction of 53-foot well cars in 2011 and 2012 kept utilization rates below levels that normally signal healthy demand for new equipment, but loads have finally caught up with the fleet size — new cars will be needed in the near future if intermodal traffic continues to grow. As a result, 2014 deliveries could exceed 6,000 units compared with the 1,300 expected in 2013.
Deliveries of covered hopper cars also should increase, given the demand for small-cube cars to handle frac sand and jumbo cars to move plastic pellets. Orders for both car types are the result of the boom in hydrofracking operations that is producing record amounts of natural gas and petroleum. The increased supply of relatively cheap natural gas has prompted chemical companies, especially fertilizer and plastic pellet producers, to ramp up operations in the United States, and these new plants will need new rail cars to move their output. Demand for grain cars, too, is expected to increase in 2014 and beyond as the United States recovers from the two bad harvests between 2011 and 2012, and regains international market share lost as a result of decreased farm production.
Finally, demand for new autorack flat cars should continue to be strong as the North American auto industry climbs back toward the annual sales volume of 19 million units it enjoyed for many years before the recession. Sales of automobiles and light trucks in 2013 are expected to approach that level and reach record volumes in coming years as the economies of Mexico, Canada and the United States steadily improve on the strength of the oil and gas boom.
As previously stated, 2013 tank-car production should exceed 28,000 units and car builders will continue to increase their delivery rates. If the industry produces 30,000 cars in 2014, the 2015 backlog still would exceed 20,000 units if no new orders are received in 2014, which is improbable. Builders could increase delivery rates and produce 32,000 cars in 2014, but orders for new tank cars are expected to decrease in coming quarters and the need to expand may diminish.
Ideally, orders of other car types will increase as those for tank cars decrease, and production levels in 2015 and beyond will stay close to their historical average. If not, the industry could be in for another cycle of boom and bust.
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.