Despite murky interest rate environment, '23 should be a good year for the rail equipment market, finance and leasing execs say
2/13/2023
By Pat Foran, Editor
Despite a host of lingering economic unknowns, business in the North American rail equipment market will be — and already is, in some segments — better this year than it was last year, rail finance and leasing execs tell us.
Equipment demand is up, supply-chain pressures have eased and rates for some freight-car types are likely to rise, said respondents to a survey conducted as part of the information gathering for Progressive Railroading's 23nd annual Finance & Leasing Guide. The guide was published in the February 2023 print edition.
Not that industry execs don’t consider rising interest rates a headwind. Rail-industry-wide labor challenges also could throw a wrench into the works. But as of mid-January, this crowd generally was looking forward to a pretty decent 2023. Here's a sampling of their responses:
From a business perspective, will 2023 be better than 2022? Worse? Same? Why?
An American Industrial Transport Inc. (AITX) official: All early indications are that 2023 will be a better year than 2022. The signals are that both national rail-car utilization and freight shipping commodity loadings are both up. Thus, it would indicate good trends for rail-car leasing.
In addition, we are seeing a lot of shippers interested in full-service rail-car partnerships. With increased complexity across regulations, compliance, railroads, and rate volatility, many are seeking a one-stop shop to manage their fleet, repairs and maintenance, and regulatory compliance. Many of our partners want to focus on their business rather than having to also be expertise in rail-car equipment management.
Tina Beckberger, senior vice president of leasing, SMBC Rail Services LLC: Although carloadings show minimal growth year over year, strength in rail-car demand is expected to continue in 2023. Rail-car builds remain stable and supported by demographic changes in the North American fleet along with growth in certain sectors.
Joe Devoe, senior vice president, Helaba (Landesbank Hessen-Thüringen) New York Branch: [I’m] expecting business to be good despite increasing interest rates. New rail-car orders are strong, and deliveries also are expected to be the strong in 2023. Lease rates are increasing with the new interest rate environment, so portfolio cash flows are improving. Further, [I] expect continued M&A in the rail-car leasing space that will present bank financing opportunities especially in light of a challenging market for Rail ABS, presently.
Thomas Jackson, vice president of corporate marketing and general manager, The Greenbrier Cos.: We believe that industry will be stronger despite macroeconomic softening. The industry will delivery and repurpose more rail cars in 2023, than 2022, from pent up demand and easing supply chains.
Julie Mink, president, Tealinc Ltd.: Every year in the transportation business is challenging. It’s what we make of the opportunities that defines the year when we look back. Looking forward we see much the same out of the railroad performance until the end of summer at which point the railroads should have sufficient (trained) crews, power, and a plan to revitalize their physical plant. It takes a lot of effort to make the significant turnarounds required in the service arena to recapture gains lost. Domestically, we’ll see the need for rail cars continue to grow as this demand increases and shippers get more comfortable with the reliability of service. We’re looking forward to a slight uptick in “goodness” and expect 2023 to be challenging yet more rewarding than the past few years.
Hugh Nicholson, executive vice president of marketing, sales and quality, National Steel Car Ltd.: We expect business to be better in 2023 due to increased demand.
William Rennicke, partner, OliverWyman: Roughly the same [as 2022], but slightly better. Markets are beginning to be clearer as post-COVID issues dissipate.
Russ Warren, managing director, EdgePoint Capital Advisors LLC: About the same; slight [improvement].
What is the key issue facing the rail finance/leasing sector in 2023? Why?
AITX official: One issue that is being addressed is upgrading the rail tank car fleet to DOT-117 standards for cars carrying Class 3 flammable liquids, in accordance with the 2015 FAST Act. There is a phase-out deadline in mid 2023, whereas all DOT-111 and CPC-1232 tank cars are prohibited from carrying ethanol.
Overall, the industry is in good shape to address this regulation, but it remains a key issue for fleet managers to upgrade their fleets and source inventory for rail tank cars carrying Class 3 flammable liquids.
Again, this is a proof-point of the importance of full-service partners who can proactively anticipate the full scope of regulatory shifts in tank car compliance which in 2023 will occur alongside existing tank qualification requirements on the rail-car repair side.
Beckberger: Service metrics remain challenging, inflationary pressures, higher interest rate environment, and potential recessionary concerns could impact demand and put downward pressure on freight loadings.
Devoe: Uncertain interest rate environment and general negative economic outlook. Further, [I] expect continued reduction in intermodal traffic into 2023, with China COVID issues and general economic softness that was formerly a solid contributor to rail traffic growth. Of course, Ukraine uncertainty offers both downside and upside potential depending on the rail market sub-sectors impacted.
Jackson: Elevated interest rates are a headwind for customers, but we expect the inflationary pressures to ease and lower sequentially in 2023 from the highs of 2022.
Mink: The key issue facing the rail finance/leasing sector is supply of rail cars and rising interest rates. Historically high scrap prices, large portfolio sales and rising interest rates challenge any organization in the rail-car leasing sector to make a profit.
Nicholson: Supply chain issues, including labor challenges, are expected to continue in 2023 and may limit the overall market. Increased interest rates could be a key issue in 2023.
Rennicke: Dealing with underperforming assets. Coal trends, frac sand and other commodities are dragging down broad sets of assets. Dealing with impairment and premature obsolescence will be an issue.
Warren: Possible U.S. recession may postpone the return to pre-pandemic shipping volumes, at least for most of 2023. An open item is whether shippers will move business from truck back to rail soon.
