At the Railway Age “Energy by Rail” (EBR) conference, attendees were given a “What’s next?” point of view on the future of the transportation of coal, crude, LNG and other midstream products by rail, spearheaded by Matt Rose.
As a part of the EBR conference, I was privileged to moderate a discussion regarding the future of railcars carrying energy products. My panel members were Donald Crouteau, Vertex Rail; Patrick Mazzanti, Railroad Appraisal Associates; Robert Pickel, National Steel Car; and James Rader, The Greenbrier Companies. The current state of the new railcar market is well documented and it was a pleasure to have three manufacturers available to answer questions at one time.
Croteau answered a question that is on everyone’s mind, notably: How do you expect to compete and gain market share in a declining market? His response?
Vertex is not afraid of a cyclical market, and our primary investor (CRRC) is a global company that manufactures more than 100,000 railcars per year worldwide. He emphasized the long-term commitment being made by Vertex.
When asked about the current state of the manufacturing market for cars in energy service, all three builders were honest about the current weak state of the market. Expectations for 2017’s car build ranged around 40,000 units, but heads nodded when Mazzanti indicated that the 2017 build year was likely to be approximately 30,000 units. The builders indicated that, of the primary energy related commodities, frac sand (proppant) was most likely to recover, and that the fate of crude by rail (CBR) was primarily going to be tied to moves to, as Pickel noted, California (where there is little pipeline capacity) and to whatever offtake product pipelines are unable to move. When will the downturn reverse? Not before 2019 was the general consensus.
The manufacturers acknowledged that the expected retrofit boom for tank cars has not materialized, with Rader noting that capacity put in place to retrofit non-compliant tank cars has not delivered a return on investment. All parties on the panel echoed the potential for a spike in demand for regulation-compliant tank cars and by association retrofit tank cars as the rail industry approaches the 2021 date by which all tank cars for crude must meet the new guidelines (DOT 111 legacy cars are already being phased out of service in the U.S. and especially in Canada).
In addressing questions about the price of a railcar today vs. the price at the peak of the cyclical railcar boom (roughly late 2014), the manufacturers gently addressed the concept of a free market. As one would expect, the manufacturers are not interested in adopting the role of industry policeman, telling customers not to place orders for fear of creating a glut of unnecessary railcars and curtailing price. Appropriately so, there were no apologies given for the prices paid in the heat of the market.
The panel was asked what railcar types might step up to replace demand for coal cars, and as a follow-up, whether the loss of coal car manufacturing should reset expectations for the number of railcars to be built annually. On the first question, the panelists named a scattershot of car types (eg., flatcars and aggregate cars) and replacement demand (especially grain covered hoppers) that could provide some offset to coal car manufacturing. Surprisingly, the builders did not particularly feel that a theoretical annual average railcar total of 40,000 cars was likely to move much, even with the loss of coal car orders.
In answer to the question of what would drive demand for new railcars in the current economic environment, the answers were in line with expectations: higher energy prices (especially crude oil), an increase in loadings, a decrease in system velocity and companies accelerating replacement of older railcars (acknowledging low scrap prices are hindering the replacement cycle).
When asked about consolidation of railcar builders as the industry continues to move through this cyclical downturn, panelists did not take a position on its potential. The panelists noted that capacity in railcar manufacturing could be increased and decreased. As a result, consolidating manufacturing capacity through merger or acquisition would not provide an incremental benefit. There was some suggestion that the economic downturn may stress some builders, but overall from the panelists there was no indication of a need or a forecasting of plans for consolidation.
A wide-ranging, open and honest discussion on the state of railcar manufacturing: Look for a repeat at Energy by Rail 2017.
Got questions? Set them free at dnahass@railfin.com.