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By Pat Foran, editor
Rail finance and leasing execs think 2018 will be better than 2017 was, economy wise and business wise.
They're happy about U.S. tax reform, although a few wonder how it'll impact rail asset buying and leasing — and, perhaps, M&A activity within the supply segment.
Some are fretting a little about what they consider to be an oversupply of a few rail-car types.
Others are concerned (as ever) about asset valuations and rail-car lease rates.
Mostly, though, North American railroad finance and leasing officials are bullish about the year ahead, if what they told us during the information gathering for our 18th annual Finance & Leasing Guide is an indication. The guide was published in our February issue.
Here's a sampling of what rail finance and leasing folks told us (via responses to survey questions and during telephone conversations) last month:
Better. Economic activity appears to be strengthening, lease rates firming/improving, financial market liquidity remains robust. Signs point to improved deliveries and continued general economic activity improvement which will raise GDP and through this rail equipment and maintenance-of way investments.
Better: Rising economy will drive increased rail traffic. Shortage of drivers affecting road transport will continue. Not all commodities will benefit but manufactured goods, containers and construction materials will benefit most.
Better. General economic improvements and expected impact of tax reforms.
Better — the economy is improving, truck rates are increasing and trends are becoming more visible.
2018 is expected to be better than 2017 due to increased inquiry levels, the potential for an expanded infrastructure fund and 100 percent deprecation as a result of the recent U.S. tax reform.
We expect 2018 to surpass our record-setting 2017. The mid-size merger and acquisition market should continue strong, with low interest rates, strong desire of strategic buyers to grow top and bottom lines, and many owners recognizing that favorable macro factors make this is a very good time to sell. In the rail and supply industry, different segments will experience different drivers, but many will be positive. The talked-about infrastructure impetus will boost railroad construction and transit-related products and services.
As a rolling stock leasing company, rail management services provider and consulting company, we anticipate that overall 2018 will be a better year than 2017. As multiple industries see a demand to move more product further to market, and truck issues (including the driver shortage) push more logistics teams to utilize rail, we anticipate seeing more rail cars moved out of storage and moved into service. We anticipate a short lull in the sand market as companies investigate “brown sand,” but we anticipate by late 2018, the heat will be on again and shippers will be demanding additional small-cube covered hoppers. We believe that with the need to focus on highways, bridges and other infrastructure needs in 2018, we anticipate stone, sand and aggregates, and the steel and scrap industries to benefit — all of which should encourage rail-car utilization for open-top hoppers and gondolas.
We are seeing a rise in rail-car needs. We are also going to expand our leasing portfolio with more cars and people. Dow is 25,000. Economy is doing great and getting better.
I believe 2018 will be better in regards to increased car loads.
We are already seeing 2018 starting out strong.
Overall rail-car loadings in 2018 should continue the modest growth trend seen in 2017. Several macroeconomic indicators point to moderate expansion in multiple sectors.
Slightly better, as replacement cycles on many car types will occur due to pent-up demand.
Slightly improved: a better economic environment. However, current oversupply of existing equipment will likely dampen new car construction. Railroads will benefit from trucker legislation (electronic logs), but truckers will extend radius of efficiency with new technology. Changes in tax law (1st write-off of new equipment) are likely to have unintended consequences not yet known.
It will be the somewhat the same because of tepid rail freight growth. We are finding that there is a replacement need for rail cars — however, manufacturers and large banks have built too many.
I think the U.S. tax law change and how it will affect the lease-vs.-buy decision for rail-car users is a key topic for 2018 — and how it'll affect that decision will not be clear for some time. Sand car future with Permian Sand deposits is also a concern.
There is still an oversupply of some car types, which is keeping rates at lower levels than historically seen. But with increased demand and higher carloadings, we hopefully have seen the bottom, and that the replacement of older inefficient cars will begin at higher rates.
As a rail-car operating lessor, transportation consultant and management services provider, we believe the key issue facing the rail finance/leasing sector in 2018 will be the same as it was in 2017: asset overvaluation by many new market entry participants who aren’t familiar with rail’s idiosyncrasies and are anticipating a quick return. We anticipate more and more clients will be looking for better ways to manage their rail fleet assets, and look to experienced industry veterans who can provide customer service and solutions to on-going logistics issues.
Oversupply of rail cars for grain, plastic pellets, coal and tanks.
Lease rates are still under pressure.
Wrecks at PTC. Those cost money and add to an economy that if it takes a downturn, assets will get parked.
ROI — lease rates are not improving at the same pace as [rail-car] builds.
The surplus of MOW equipment in the market has been an issue for us the last few years and it continues to drive low utilization numbers.
Railroads having enough trained and qualified people to handle business growth.
Finding good people may be a temporary limit to growth.
Rising cost of debt. It's not too fast, but rates will be increasing this year and next.
Apart from the traditional demand drivers, the uncertainty of the impact of disruptive technologies to investors in 30-plus-year assets creates a new level of risk and valuation uncertainty.