Obtaining an accurate read on the current freight car market is like trying to fine-tune a multiple-carburetor setup on a classic performance car. Adjust one setting, and another setting may be thrown off.
“Railcar orders are likely to remain well below 2015 and 2014 levels for the foreseeable future, but our recent [research] suggests that third-quarter inquiry and order activity may be fairly solid, given the challenging environment,” says Cowen and Company Analyst Matthew Elkott. “This could be largely attributable to three factors: grain cars; aggregate hoppers and gondolas, and potential opportunistic buying. On the grain front, the trifecta effect of high storage levels, strong North American crops and poor South American crop conditions could boost demand for grain shipment on rail and spur export activity from the U.S. and Canada. Demand for aggregate hoppers and gondolas should continue to stem from the construction sector and expected infrastructure projects associated with the [surface transportation] bill passed in December 2015, especially as a new Administration will likely strive to accelerate economic growth. Finally, as we are nearly two years into an industry down cycle, some financial investors and lessors may be close to calling bottom for equipment pricing, which could lead to some opportunistic buying of railcar assets.”
“Somewhat Better Than Expected”
The Railway Supply Institute American Railway Car Institute (ARCI) second-quarter 2016 freight car order, delivery and backlog statistics are “somewhat better than expected,” according to KeyBanc Capital Markets analyst Steve Barger.
Orders in the quarter increased sequentially to 7,555 cars from 6,646 in first-quarter 2016. Carbuilders delivered 15,655 railcars in the quarter, following first-quarter 2016’s delivery figure of 16,834. The backlog stood at 89,155 units, down 6.2% from the prior quarter’s 95,038, though still at historical highs. Industry book-to-bill came in at 0.5x, slightly better than the first quarter’s figure of 0.4x. In the quarter, respective book-to-bill for tank car and non-tank car activity was 0.7x and 0.4x, respectively, vs. 0.2x and 0.5x, respectively, in first-quarter 2016.
“We think the sequentially stronger book-to-bill for tank cars reflects a reversion to a replacement market with modest growth in some non-O&G car types,” Barger said.
Non-tank car orders totaled 4,363 units in the quarter vs. 5,729 n first-quarter 2016. Covered hoppers, which showed the largest concentration in orders, totaled 2,017 railcars, or about 27% of the total, below the prior quarter’s 51%, with medium-cube covered hoppers representing the majority of the orders at 1,286 cars, vs. 2,020 cars ordered in the first quarter. Orders for large-cube and small-cube covered hoppers were 708 and 23 cars, respectively, vs. 1,335 and 0, respectively in the first quarter. Orders for tank cars totaled 3,192 vs. 917 in the first quarter. Together, tank cars and covered hoppers accounted for more than 69% of total orders in the quarter vs. 64% in the prior quarter.
Second-quarter 2016’s deliveries of 15,655 break down into 4,318 tank cars and 11,337 non-tank cars. Though second-quarter 2016 tank car deliveries fell 27% sequentially, “we think current tank deliveries imply that the industry enjoys roughly 16 months of tank backlog visibility,” Barger noted. “On current deliveries, we think the backlog implies just under six quarters of theoretical production visibility. The tank car backlog decreased about 4% sequentially to 24,424 cars, while the non-tank car backlog moderated to 64,731, down from last quarter’s 69,488. We think the industry backlog continues to trend toward a more ‘normal’ distribution, with 27% tank cars, 20% small-cube covered hoppers, 18% medium-cube covered hoppers and 13% large-cube covered hoppers.”
“Additionally, we think the industry benefited from a net increase in a small-cube covered hopper backlog totaling 2,618 railcars,” Barger said. “We suspect this could be the result of negotiations with customers, whereby some cars are coming out of cancellation. The industry saw 5,793 cancellations in first-quarter 2016, 4,847 of which were for small-cube covered hoppers. Given that the industry numbers are likely somewhat better than expected, we think this order activity and backlog support our view that low-end 2017 consensus estimates for railcar OEMs Greenbrier and Trinity are likely too conservative.”
Energy By Rail Revival?
Can exports revive crude-by-rail and coal? Railway Age Contributing Editor Bruce Kelly offers the following analysis:
During a moment when much of the world was fixated on Presidential politics, two business stories of considerable importance to energy, transportation and the economy went largely unnoticed.
U.S. crude sourced primarily in the Gulf States has been shipping overseas since January, moving from storage tanks to seaport primarily via pipeline. These exports took advantage of a nearly $2.00 discount on West Texas Intermediate crude vs. European Brent crude. Meanwhile, the April start-up of oil exports from the Bakken shale formation signals a potential resurgence for CBR, assuming market behavior continues its slow trek back into favorable territory. Rail still represents a viable means, and in some cases the only means, for transporting Bakken and other central-U.S. or Canadian crude to refineries and ship terminals on the East, West and Gulf coasts.
The business is there, but it must be won. CBR for domestic consumption is currently down by roughly one-third from its late-2014 peak, but there’s potential for CBR to regain lost ground, now that the whole world has become a marketplace for U.S. crude. Among the factors for railroads to consider: how and where can CBR tap into an oil export market most effectively, and with line capacity more available now due to declines in other traffic, how to price for export crude movements competitively yet profitably.
Within the North American market, U.S. imports of crude and petroleum products from Mexico have dwindled, from 1.6 million barrels in 2006 to virtually zero in 2016, according to the U.S. Energy Information Administration. However, U.S. exports to Mexico have risen steadily during the same period, reaching more than 27 million barrels in March.
In addition to the current export of U.S. crude to Canadian refineries, there is opportunity for U.S. crude to move through Canadian ports to reach Asia. Efforts to build new coal and crude export terminals in Washington and Oregon face environmental opposition, which is why low-sulfur Powder River Basin coal has been rolling toward the export dock at Roberts Bank, B.C., at a rate of roughly two trains per day.
A proposed export coal terminal at Surrey Docks, B.C., was granted approval by Port Metro Vancouver in November 2015. The project’s amended plan calls for direct transload from unit trains into ocean-going ships. If built, Surrey Docks would eventually have capacity to unload approximately one trainload of PRB coal per day, according to BNSF. Construction is being held up by new legal challenges, as well as the need for permitting on air quality and wastewater discharge.
Even if capacity increases for exporting PRB coal to Asia, the reliability of that market—China in particular—remains in question. Reports on China’s coal consumption continue to paint conflicting pictures, some saying that China’s coal imports have increased and new coal-fired power plants continue to be built, while others say China is easing away from coal and placing emphasis on gas-fired plants, solar and wind. An increase in China’s demand for crude has been observed, which could translate to export rail traffic. Canada’s export of CBR into the U.S. continues, though volume is down, from 176,000 barrels per day during December 2014 to less than 90,000 bpd in August 2015. That figure rebounded slightly to 107,000 bpd in December 2015. Failure to start the Energy East and Keystone XL pipelines has preserved the need for railroads to transport a share of Canada’s crude southward, even in these times of depressed prices.
The EIA explained that production facilities in Canada’s oil sands, even if operating currently at a loss, “are designed to operate over a period of 30 to 40 years and can withstand volatility in crude oil prices.” The cost of shutting down an oil sands facility, according to the EIA, “is estimated to be in the range of $500 million to $1 billion, which may exceed the operating losses a producer might experience in the short term.”
If the numbers add up favorably for moving crude and coal by rail to export, there will still be an uphill battle against opponents of such fuels, even though many recognize their current value to the economy. A survey of 1,200 residents in the Pacific Northwest conducted in 2014 found that a slight majority supported CBR. However, less than half of the participants said they had actually paid much attention to CBR.
Natural gas, which has been touted as the cheaper and cleaner alternative to coal, is being targeted by some environmental groups. Sierra Club Climate Policy Director John Coequyt told Railway Age, “The world is moving away from fossil fuels, and that’s necessarily going to include the rail industry, which needs to look now toward electrification and other zero-carbon modes.”
For the near term, railroads are perfectly poised to accommodate growth in energy exports. Long-term, the idea that railroads could someday lose that business and be forced to electrify might sound improbable, until you consider the fact that a federal mandate has already forced rail companies to invest billions of dollars toward another perceived necessity: PTC.
BNSF Vice President Corporate Relations Zak Andersen submits a view probably shared by many in the rail industry: “Opposition to certain commodities has always existed, but the permitting process has been twisted into a tool to stop projects where the commodity is disliked. There is always someone who will not like a certain commodity. At some point, it impedes the ability of the railroad to grow, and by extension, commerce. In a trade-dependent state, trying to decide what will and won’t move, independent of market forces, just won’t work in the long run.”
From Railway Age magazine.