Indeed, 2015 was an amazing year for those parties involved in rail equipment and in the affiliated industries. What started out as a downtrend in oil pricing moved to a full-on slowdown in commodity demand on a global scale. (Hopefully, if you thought WTI Crude would bottom out in December 2015 below $35/bbl, you’re reading this from your new palatial estate.) This led to a downturn in railcar loadings, railcar and locomotive demand and lease rates. It led to an increase in railroad velocity and a decrease in terminal dwell times, which softened demand and rates even further.
In January 2015, with WTI already on the slide (at just under $50/bbl), “The Financial Edge” discussed CBR, frac sand and future demand. The bubble in those assets continued to materialize, and a dark cloud remains headed into 2016. What was unexpected? The additional weakness in other commodity groups brought around by a weaker global economy and the softening export market tied to a stronger dollar.
Tank cars for hauling crude oil, projected to continue to be a market leader early in 2015, especially following the announcement by the DOT on the new tank railcar specification, have instead been marginalized by weak demand, oversupply and surging pipeline capacity in North Dakota.
In February and in Railway Age’s 2015 Guide to Equipment Leasing, I discussed the delays in finalizing the DOT specification changes and the importance of having the railroad industry on the front lines of safety as an advocate and educator, rather than as an industry viewed as defensive and insular. Today, those regulations remain stuck in the federal appeals court (and will be for some time to come), and the expected retrofit bonanza has not materialized.
Parties building tank cars for hauling crude (and other flammable and combustible products) are building them to a minimum DOT 117 standard. Due to a dropoff in loadings and improved car design, crude related derailments, or at least the ones of the fireball type, have decreased. However, the industry has not taken a position to represent its record of leadership in safety in as vocal a manner as possible. It is still tantamount for the industry to be its most vocal advocate. One thing learned in 2015 is that no other party will represent the railroads’ safety record.
I discussed used equipment values in September and November 2015. Like new car prices, used cars experienced a runup in pricing, indicating that demand will increase. In spite of downturns in rental rates and railcar demand, and an increase in the number of cars in storage, used car prices continue to float at lofty levels, anticipating growth in loadings over stagnancy. In addition, on Dec. 16, 2015 the Federal Reserve raised interest rates for the first time in a decade!
If the era of cheap money is beginning to end, higher rates will impact future railcar values and potential investors’ financing costs. The prices paid for used cars indicate an already bullish approach to residual values. Increasing residuals to offset higher capital costs seems unlikely. While 0.25% will not have much impact, an increase of 1% or more may start to shift the landscape on secondary market sales of assets and investment in new cars.
Last month, I addressed the public airing of the Canadian Pacific’s pursuit of the Norfolk Southern. Two months in, the battle rages on with shareholder meetings, open letters to each of the involved railroads and outside-chance threats of alternative buyers swooping in to raise the stakes.
As this hostile sprint becomes a long-distance grudge match, its seems clear that investors in NS are following NS management’s lead in indicating that the price, without regard to the regulatory and service issues associated with the bid (open access—what?!?!), is not nearly high enough. What’s interesting is the focus on the projected 2017 (and beyond) revenue growth that is key to the assumptions of NS’s value. The signal is clear: 2015 was a weak year; 2017 won’t be. NS and CP seem to agree on that.
Planning is well under way for Rail Equipment Finance 2016. This year’s keynote speakers have been announced and are drawing interest from around the industry. They are Steve Feilmeier, Executive Vice President and the Chief Financial Officer of Koch Industries, Inc. and Sarah House, a Vice President and Economist from Wells Fargo Bank. Both parties will energize the conference with their knowledge of their markets and the information they can provide.
Equipment issues, the regulatory environment, current and future lease rates and projections on railcar demand are topics to be discussed at this year’s REF conference. You can register at www.railequipmentfinance.com.
Got questions? Set them free at dnahass@railfin.com.