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Railcar Whisper

Railcar Whisper
 

Research Question: Are low energy prices causing an oversupply in the railcar market or will new safety regulations increase railcar orders?

Report Available: June 17, 2015

 

Blueshift’s initial research shows railcar manufacturers continue to score large orders, although most deals have originated from non-energy related buyers. Tank car orders have slowed as a result of low energy prices and some believe the market has now become oversupplied. This might change as railcar owners must decide whether to scrap old tank cars and buy replacements or retrofit existing cars in response to new DOT regulations.

 

Observations

  1. In 2014, the railcar industry delivered 67,000 new railcars and estimates for 2015 suggest 90,000 railcar deliveries. GBX saw a 75% increase in orders year-over-year in its most recent quarter. TRN sits on a $6.8 billion backlog. However, tank car orders have fallen to 4,470 in the quarter ending March 31, down 70% sequentially from 14,964 tank cars ordered during the fourth quarter.
  2. Although significant backlogs still exist among railcar manufacturers, new orders may be faltering due to low oil prices. Tank car lease rates began plummeting last winter; in January, rates were just $1300 per car down from $2450 a year earlier. GBX admitted to one cancellation request and TRN would not comment on cancellations or customer allowances; however both companies claim orders are non-cancelable. In addition to low oil prices, lower grain traffic and massive improvements to the railway infrastructure in the Upper Midwest has improved congestion. Creating longer trains had been a strategy to overcome railway congestion.
  3. The oil service industry is using much more sand in its fraccing operations, which will require more train cars to ship sand. If and when oil prices climb toward $80 per barrel, more sand hoppers and oil tank cars will be on the tracks. New DOT rules now require tanks cars to adhere to a new set of standards, including a thicker shell and advanced braking system. Tank car owners have until 2017 for most tank cars to either be replaced or retrofitted.
  4. Blueshift’s June 20, 2014 railcar report found that railcar demand was continuing to grow with no oversupply foreseen within the next five years. Sources expected 35,000 or more tank car orders per year. Pent up demand for non-tank cars, especially hoppers for sand, pellets, and grain existed in the market. Government regulations threatened to take up to 35,000 tank cars out of the system and had already caused tank cars price to rise by 80% over the previous three years.

 

Will a railcar oversupply issue end its manufacturers’ grueling pace sooner than anticipated? Or will the government’s new tank car standards and any rebound in oil price offset any oversupply? To gain insight on the railcar industry, Blueshift will gather data and issue a market research report from independent sources in the following areas: Railcar manufacturers, rail supply chain, railcar leasing business, oil shippers, dry goods shippers,and industry specialists.

Companies: Greenbrier (GBX), American Railcar Industries (ARII), Trinity Industries (TRN), Burlington Northern (BNI), GATX (GMT), Norfolk Southern Corporation (NSC), CSX Corp. (CSX), FreightCar America (RAIL)

 

To see other ideas Blueshift Research is currently working on, please click here.