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Rail News Home Union Pacific Railroad

October 2010



Rail News: Union Pacific Railroad

Crossties: Suppliers cautiously optimistic about crosstie market's 2011 prospects



by Robert J. Derocher

Although he's encouraged about crosstie demand and production projections for the remainder of 2010, Brian McManus is somewhat skeptical about business prospects for 2011.

"I'm fairly confident we're going to have a good year ahead," says McManus, president and chief executive officer of Stella-Jones Inc., which supplies wood ties and owns wood-tie-related firms Burke-Parsons-Bowlby Corp. and Tangent Rail Corp. "But I wouldn't put the word 'very' in front of 'confident.' Let's just say that I'm cautiously optimistic."

Thanks to several improving rail industry indicators, talk of more federal transportation funding, the slowly recovering economy and a commitment by several Class Is to maintain infrastructure investments, many wood-tie suppliers are guardedly anticipating a gradual pickup in tie purchases for the remainder of 2010 and into 2011. That would be welcome news since the suppliers weathered up-and-down orders and production for much of this year.

However, they're wary of several factors that could quickly turn budding business into a discouraging downturn. Chief among them: a double-dip recession that could drive down rail traffic; potential transportation funding gridlock in Washington, D.C.; and the future allocation of billions of rail capital dollars to positive train control (PTC) implementation at the expense of tie purchases. Tight tie production, which led to short supplies and higher tie prices this summer, also is a concern.

Although wood-tie suppliers gladly will take gradually increasing demand while hoping for an eventual return to pre-recession purchase and production levels, they'll vigilantly monitor — and react to — any market changes. In turn, concrete-, steel- and composite-tie suppliers plan to keep tabs on rail industry developments to ensure their recent boost in orders will carry over into 2011.

Predicting business' future course can be a challenge, even for veteran forecasters at the Railway Tie Association (RTA). An association market report released in late September showed that wood-tie purchases in August climbed to 2 million units vs. July's 1.7 million units and August 2009's 1.9 million units. A month earlier, purchases declined 14.5 percent year over year and hit a low point of 18.1 million units on a rolling 12-month basis. In addition, August tie production of 1.6 million units bested July's 1.5 million units and reached the highest level since September 2009's 1.7 million units, according to the RTA.

Forecast in Flux

Revised association estimates for calendar-year 2010 peg wood-tie purchases — which account for the vast majority of tie orders — at about 19 million units, which would represent a 2 percent decline from early 2010 forecasts and a more than 5 percent dip from 2009's 20 million units. The revised number might even sink below 18.5 million ties, says RTA Executive Director Jim Gauntt.

"You're starting to see the railroads ordering more, but there's a lot of double-clutching there," he says. "You see the desire, but the footing is not very firm."

Wood-tie purchases have been erratic for most of 2010, falling in May, rising in June, tumbling sharply in July and then climbing again in August, according to RTA statistics. The uncertainty surrounding economic recovery continues to exert pressure on the market, keeping some purchases in check, says Gauntt.

Other uncertainties could hamper tie orders, as well. The upcoming November elections and possibility of further divides between Congress and the White House, particularly as it relates to federal rail funding, might influence tie purchases. In addition, a $500 billion surface transportation reauthorization bill — which could include a $50 billion transportation funding "advance" proposed by the Obama Administration last month — likely won't register much action before the potentially decisive elections and the much-talked-about extension of the expired short-line tax credit remains sidelined.

"Our regional, short-line and contractor business is still down significantly compared to where it was prior to the recession," says Jeff Broadfoot, national accounts sales manager for wood-tie supplier Thompson Industries Inc. and vice president of RTA. "We have not seen a move with these customers to increase spending very much yet. Most of them are still postponing capital projects until the economy improves even further, and also until the much-anticipated tax credit gets extended again."

Milling About

Wood-tie production issues and price-hike concerns, especially in the first half, have held down purchases, as well. A combination of unusually wet, wintry weather in the South and shrinking sawmill availability and capacity led to periodic raw material and finished tie shortages. As a result, prices went up, according to the RTA and several tie suppliers. Through 2010's first eight months, tie production was down 38 percent year over year, according to the RTA.

Particularly worrisome: a shortage of "financially willing and able" sawmills serving the tie market, says Gauntt. Some mills closed or scaled back tie-timber production because of the feeble economy and weak housing market.

"While we're trying to find new mills, we're committing to the mills we have," says Mike Pourney, president and CEO of wood-tie supplier Gross & Janes Co. "We're trying to encourage production with financial support, such as loans. We're the major source of financial capital for many of these mills."

Severe weather, sawmill problems and tepid demand have led to a 10 percent reduction in ties produced so far this year by Gross & Janes vs. 2009 volume, Pourney estimates.

However, PTC could have the biggest impact on wood-tie purchases. Railroads affected by the federal mandate — including all Class Is — collectively are expected to spend more than $1 billion this year to prep for PTC, and that amount is projected to increase each year through 2015, according to the RTA.

"Unless you have rate increases generating more revenue, that money [for PTC] is coming from somewhere else," Gauntt says. "The question is: What will be the impact on wood-tie spending?"

Despite more questions than answers about the tie market's near-term prospects, many wood-tie suppliers remain upbeat about business potential. The most current RTA forecast for 2011 anticipates a 2.6 percent increase in tie purchases, followed by a more dramatic 10 percent jump in 2012. Class Is will help lead those gains, says Gauntt.

"[Class Is] consciously made the decision that they were not going to fall behind on maintenance," he says.

Although Class I tie purchases are expected to drop about 5 percent this year vs. 2009's level, orders could have been much lower if the large roads had followed the course laid out in previous economic downturns and drastically reduced tie spending; instead, many of them took advantage of the traffic downturn to invest in significant tie replacement projects, according to the RTA.

"They are finally doing some much-needed capital projects they put off for the past two years," says Thompson Industries' Broadfoot. "While most of their new tie purchases are still for maintenance, we are seeing more ties going into capital projects."

Boatright Cos. Inc. has noted Class Is' capital spending persistence, as well — part of the reason the wood-tie supplier is building a new $40 million tie manufacturing plant in Clanton, Ala., in an industrial park served by one of its largest customers, CSX Transportation, says President and CEO Shane Boatright. The plant will be the company's second new manufacturing facility since Boatright Cos. acquired the former Seaman Timber Co. in 2008.

The supplier is projecting at least a 10 percent boost in sales revenue next year. New Federal Railroad Administration rules governing bridge inspections could have a big impact on business, says Boatright. The rule requires railroad track owners to adopt and follow specific procedures designed to ensure bridge safety and complete bridge maintenance, if necessary, including tie replacements.

"We have a bridge division and new orders are up significantly over last year," he says.

Boatright and other wood-tie suppliers also are registering some business benefits as Class Is and IIs land federal Transportation Investment Generating Economic Recovery (TIGER) grants to advance projects. Earlier this year, Genesee & Wyoming Inc. was awarded a TIGER grant and some of the dollars will help fund tie replacements in Mississippi, says Boatright.

"It's been great for us," he says. "We've been helping our customers successfully apply for and receive these grants."

However, some major transit-rail projects selected for federal stimulus funding won't begin to affect the tie market until 2011, says Tom Niederberger, vice president of marketing and sales for wood-tie supplier Koppers Inc.

"We anticipate a secondary bump in business when money is released for the proposed high-speed rail corridors," he says.

More Capacity, More Orders

Koppers also anticipates a bump in business next year because the company has added borate to its creosote treatment capabilities to extend wood-tie life.

Likewise, Thompson Industries is expecting a business uptick in 2011 because of production upgrades, as well as added capacity. The supplier recently completed a $2 million upgrade to its Russellville, Ark., plant to enable the facility to use borate/creosote dual treatment on more than 450,000 ties annually. In addition, a new siding will handle another 60-car unit train at the plant, says Thompson Industries' Broadfoot.

Meanwhile, Gross & Janes has kept all three of its wood-tie production plants open despite some workforce cuts, says Pourney. Despite a trying 2010 so far, the supplier is anticipating a 15 percent business boost in 2011.

Stella-Jones is projecting that next year will be a good one, too. The supplier expects to continue reaping returns on this year's acquisition of Tangent Rail, which already added more than $42 million to second-quarter sales and contributed to an overall 4 percent sales gain vs. 2009, says Stella-Jones' McManus.

"The acquisition has helped us capture a bit more marketshare," he says. "We're going to fully realize the synergies with Tangent next year."

Tied to Rail Traffic

For all tie suppliers to realize their business potential in 2011, they'll need the most vital of all rail measures — traffic — to continue posting notable year-over-year gains. Through 2010's first 36 weeks, North American freight-rail carloads rose 9.9 percent and intermodal loads increased 15.1 percent compared with volumes from the same 2009 period, according to Association of American Railroads (AAR) data. In addition, railroads brought more than 10,000 rail cars out of storage in August, AAR data shows.

"We think [freight and passenger] traffic in this country is on an upswing," says Mark Hammons, national sales manager for L.B. Foster Co., the parent company of concrete-tie supplier CXT Inc. "There is still a push going on to take trucks off the road. Things are looking much better than last year."

CXT expects 2010 tie production to increase as much as 30 percent year over year as delayed rail projects continue to advance because of increasing traffic demand, says Hammons.

The supplier already has obtained concrete-tie orders for a light-rail project in Calgary, Alberta, a high-speed rail corridor in Illinois, and port expansion projects in Long Beach, Calif., Portland, Ore., and Vancouver, British Columbia. The company also has landed orders from Caltrain, CN and Union Pacific Railroad.

Rocla Concrete Tie Inc. expects to benefit from an increasing number of rail projects that have started in 2010 rather than 2011, says Sales Manager Brett Urquhart. Federal funds have helped spur track upgrade projects involving concrete ties in the Northeast, boosting production at Rocla's Bear, Del., plant, he says. In addition, high-speed rail funding will help advance projects into next year, although some high-speed rail work still is in its infancy, Urquhart says.

Class I intermodal projects have been — and will continue to be — a business driver for North American Railway Steel Tie Corp. (NARSTCO), says VP of Marketing and Sales John Fox. The steel-tie supplier boosted 2010 production because of major projects at intermodal yards in Joliet, Ill. (UP), and North Baltimore, Ohio (CSXT).

And next year looks promising because of similar intermodal expansions planned by Norfolk Southern Railway and other Class Is, Fox says. NARSTCO is projecting a 20 percent increase in business for all of 2010 and another 20 percent gain in 2011.

Bracing for Impact

A composite-tie supplier has similarly high expectations for the rest of this year and beyond. Axion International Inc. plans to make an impact in the tie market by producing and marketing recycled structure composite (RSC) ties produced from recycled plastic.

The company, which launched its railroad business in 2009, late last month announced it won a $250,000 order to provide RSCs to an undisclosed Class I.

"The new order, and more importantly, the letter of intent Axion received, signals that the new generation of composite ties has overcome the obstacles earlier generations created," says Axion Marketing Director Jason Baum, referring to railroads' previous quality concerns about ties produced from plastic or recycled materials.

"Overcoming obstacles" will be tie suppliers' mantra for the foreseeable future. Although the tie forecast appears mostly sunny heading toward 2011, uncertainties surrounding federal funding and legislation, PTC spending and raw material supplies likely will continue to cloud the market.

Ultimately, the market’s direction will hinge on railroads’ trust in the economy and their willingness to allocate more dollars for maintenance-of-way work — and, by extension, tie purchases — in the short term.

Robert J. Derocher is a Loudonville, N.Y.-based free-lance writer.



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