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Rail News: Mechanical

Lease rate, purchase outlook looks promising for some freight cars, Longbow Research says


Freight-car lease rates continue to strengthen, particularly for tank cars, covered hoppers and mill gondolas related to scrap steel, according to Longbow Research’s latest survey of rail-car lessors.

Rates for 30,000-gallon tank cars (used to transport oil and ethanol) now have exceeded prior peak rates by 10 percent to 15 percent and are approaching the 23,500-gallon cars. Utilization has steadied at 96 percent, the survey shows.

However, lease rates still are below normal for coal cars due to cheap natural gas, a warm winter that has kept utilities’ stockpiles high and U.S. Environmental Protection Agency regulations, Longbow Research analysts said in a survey analysis. Although coal exports could rise in 2012, they will not offset the weakness from lighter thermal demand, the largest impact of which will fall on eastern coal, they said.

“We expect fundamentals to further deteriorate as the market for coal has continued to weaken over recent weeks. Contacts have indicated there are a good number of cars coming off lease this year, which will likely hamper lease rates and draw up the supply of available used cars for sale,” Longbow Research analysts said.

Meanwhile, car purchase plans were strong among respondents, with 64 percent expressing an intention to buy new cars in 2012 — a three-year high, the survey shows.

“We expect purchasing sentiment to continue to focus on covered hoppers and tank cars, as the latter type is already sold out for the year,” Longbow Research analysts said.

However, the car replacement outlook is overly aggressive given current fundamentals, especially for coal cars, they said.

“We acknowledge the coal-carrying rail-car fleet in the eastern U.S. is old and replacement by the eastern rails will continue. As many coal industry experts have noted, eastern production volumes are declining, which results in a need for fewer steel-bodied coal cars and potentially further cuts to our estimates, the analysts said. “That said, indications from CSX and NS have pointed to replacing a similar number of cars each year.”

Many other car buyers will be primarily focused on aluminum-bodied cars for the export market out west, with demand for steel- and hybrid-bodied coal cars largely driven by replacement, they added.

Another headwind for 2012: the expiration of 2011 bonus depreciation, which pulled some coal car demand forward since replacement drives the lion’s share of demand for those cars, Longbow Research analysts said.

Contact Progressive Railroading editorial staff.

More News from 2/13/2012