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October 2014
— by Julie Sneider, associate editor
Although railroads' need for crossties has remained fairly steady over the past year, crosstie suppliers and producers have had a hard time keeping up with demand due to a shortage of wood.
For the most part, the crosstie story for 2014's first half was a continuation of 2013, when tie production started heading south "by fairly significant amounts," according to Railway Tie Association (RTA) Executive Director Jim Gauntt. A host of factors combined to throw off the market, including excessively wet weather, competition for hardwoods used in housing and other industries, rising wood prices and higher demand for exports.
The prolonged winter of 2014 also didn't help loggers harvest enough trees. Combined, the fall of 2013 and winter of 2014 put a crimp in the crosstie production schedule. North American crosstie production declined 8.7 percent to 13 million units and purchases fell 3.7 percent to 16 million units during 2014's first eight months compared with the same period in 2013, according to an RTA report issued in late September.
But, 12-month rolling data through August showed purchases were climbing at a 4 percent annual rate, while production was declining at a 9.6 percent clip, according to RTA.
Gauntt and tie suppliers now are finally seeing a light at the end of the tunnel. As the weather warmed in late spring 2014 and railroads started paying more for wood to be competitive with what other markets are paying for lumber products, the crosstie market has started showing signs of stability. Although production hasn't yet returned to the pace necessary to meet railroads' demand for ties, "we're not seeing any further losses of production due to [competition from] other products," Gauntt said.
"I think we've seen the lowest end of the production cycle and we're looking for things to start improving," he said. And indeed, RTA's monthly reports reflected the shift starting in June, when wood-tie production soared 104.5 percent year over year, then rose 4.4 percent in July and inched up 1.7 percent in August. (RTA's reports cover only wood ties, which represent about 94 percent of the market for overall tie purchases.)
And despite some lingering wood supply issues, the demand for ties is expected to remain strong, as railroads continue to implement robust capital expenditure programs that include tie and track replacement, refurbishment or expansion to accommodate heavier traffic, tie suppliers interviewed for this article said.
One more recent demand-driving factor is the phenomenal growth of crude by rail — a trend that RTA now includes as part of its forecast calculation process — and other rail traffic related to shale drilling and the energy industry. As the RTA noted earlier this year in its Crossties magazine: "New track is being constructed to serve gas and oil well development. Growing volumes of sand, pipe and chemicals are being shipped to drilling rigs. Crude oil and petroleum shipments are expanding rapidly."
Gauntt expects railroads' infrastructure programs to continue at a healthy pace, a conclusion he draws from RTA's forecast models, which predict about a 4 percent increase in demand for 2014, followed by 3.5 percent in 2015 and 2.5 percent in 2016. The reduced supply levels might make it a challenge to meet the purchase level forecasted for 2014, but RTA members "believe the demand is going to be there and they are under the gun to get things where they need to be," Gauntt said.
The 2014 demand forecast model indicates about 24.5 million ties, "and we'll be in the 24 million and 24.5 million range in what will actually be purchased," Gauntt said, adding: "If that's the case and the model holds true, that means there is unfulfilled demand and that will carry forward" into next year — on top of projected 3.5 percent gain.
"We know in cycles like this it sometimes takes us a year or two to get things back to equilibrium," Gauntt said. "So, the push is on and the industry will respond. The question is how long that response time will take."
Interviews with individual tie and treatment companies confirmed the RTA's forecast. For example, demand has been strong for wood-tie producer Koppers Inc. for the past several years, but the shortage of raw materials over the past 12 months have negatively affected business, John Giallonardo, senior sales manager for the company's North American operations, said in an email.
"This issue is not unique to Koppers and has had a significant impact on the entire industry," he said.
Specifically, the rebounding U.S. housing market and related segments such as flooring, the resurgent export market, and the production of board roads and crane mats for the energy industry all have taken a hefty bite out of a log supply that otherwise could be used to cut ties. Plus, those competitive forces have put "tremendous pressure" on raw material pricing, Giallonardo said. Nevertheless, the crosstie market continues to be "extremely vibrant across all segments," he said. Koppers officials believe the lumber market is stabilizing and crosstie production is picking up.
"Through the cooperative efforts of our sawmill partners and railroad customers, Koppers is poised to finish strong in 2014 and we should see revenue move north in 2015," Giallonardo said.
Other wood-tie producers expressed frustration with the soggy weather conditions of 2013 and 2014, but also remained optimistic about the market's near- and long-term prospects.
"2014 is continuing to be a challenging year as far as being able to procure enough ties to meet the demand," said Gross & Janes Co. President and Chief Executive Officer Michael Pourney. "For us, that means we are carefully watching expenses and operations in all the plants. Our procurement in certain regions is down over last year and the year before."
Despite supply and production barriers, Pourney is upbeat. All indications are that railroads' demand for ties will stay positive this year and into 2015 and 2016, he said.
Moreover, Gross & Janes is focused on providing "value-added service" to its customers by offering borate pre-treated crossties, which are marketed under the Tuff-Tie™ name. The company pre-treats green crossties with borate using a non-pressurized process before it dries and ships ties to customers for creosote treatment. The process eliminates the cost of a pressurized application of borate at the time of the creosote application, according to the company's website.
In mid-August, Gross & Janes began operating a new borate-treatment facility — its second — in southern Arkansas, Pourney said.
Stella-Jones Inc. also has dealt with the raw material supply shortage while tie demand remains "very strong," according to Vice President George Caric. The company had "fairly good inventories" going into 2014, but has depleted those supplies.
Stella-Jones has seen a favorable uptick in its supply in recent months, however. Company officials have worked hard to convert more mills to serve the tie-cutting side of the market.
"We've been telling the [mill operators] about the strength of the railroads and that they'll be buying ties for years to come," Caric said.
In response to Stella-Jones' success in the treated-wood products realm, the company has been equipping its facilities to treat ties with borate solutions prior to the creosote application process. During the year, Stella-Jones opened a new bridge line at its Russellville, Ark., treating plant that expanded bridge timber and crossing offerings to customers in the West.
In addition, the company in May acquired the wood-treating facilities of Boatright Railroad Products Inc., whose plants in Montevallo and Clanton, Ala., manufacture, sell and distribute creosote and borate-treated crossties, as well as switch ties, tie plugs and bridge timbers, to railroads and railroad contractors.
Meanwhile, railroads' environmental and economic sustainability goals have opened up sales opportunities for Arch Wood Protection Inc.'s wood preservative products. Five years ago, Arch Wood entered the rail-tie business in response to railroads' interest in using environmentally sensitive bridge ties in the Pacific Northwest, according to Arch Wood Industrial Products Specialist Tim Carey.
"The customers were looking for something that would allow them to avoid putting creosote-treated ties over streams," he said. "Our product is cleaner and doesn't have an odor."
The company's ammoniacal copper zinc arsenate product — sold under the Chemonite® name — incorporates borates so that ties can be treated in one step rather than two. The process results in a crosstie with economical and environmental benefits, Carey said.
Sales took a bit of a hit this past year, when production dropped due to the log shortage, Carey acknowledged. Nevertheless, Arch Wood officials believe tie demand will remain healthy as railroads upgrade infrastructure to accommodate crude-by-rail traffic, as well as the movement of frac sand and other materials needed to support the shale-gas drilling business, he said.
Nisus Corp. also is capitalizing on using borates as a two-step process for pre-treating green ties prior to air-seasoning. Three Class Is now use Nisus' two-step treatment that uses a disodium octaborate tetrahydrate (DOT) borate wood preservative under the Cellutreat® brand that acts as an insecticide and fungicide, according to Nisus President and Chief Executive Officer Kevin Kirkland.
The product is designed to help eliminate decay or stack burn during the air treatment process, prevent termite infestation, and improve the performance of creosote ties or those later treated by the company's copper naphthenate product sold under the name QNAP®. The latter can be used as part of a dual-treatment or stand-alone process to protect the tie's exterior.
"We are seeing a steady level of replacement of crossties, but we are seeing a significant increase in our process for bridge timbers," said Kirkland. "One reason is that treating with the DOT and copper naphthenate not only gets us a longer-lasting bridge timber, but the environmental impact of copper naphthenate over other treatment processes is significant."
Bridge crews have commented that "they like using a bridge tie treated with copper naphthenate because it's a much cleaner, safer and easier product to work with than what they've been used to in the past," Kirkland added.
But like other companies in the tie business, Nisus's primary challenge over the past year has been wood supply.
"We are seeing the shortage of ties easing up somewhat during the second half of this year and we anticipate that continuing through 2015," Kirkland said.
Suppliers of concrete ties haven't had to deal with the supply and production difficulties that wood-tie suppliers have faced over the past 18 months. In some cases, the wood shortage has actually helped concrete-tie sales.
"Because of the wood [supply] situation, a lot of railroads are looking at concrete more than they have in the past, so we're starting to see that trend," said Scott Craig, general manager at KSA, Koppers' concrete-tie division.
Craig expects 2014's remaining months to be busier than the year's first half. One major project in store for KSA is the Charlotte Area Transit System's planned extension of its LYNX Blue Line light-rail project, for which KSA will provide crossties. As of September he anticipated the company would start on that project in a month or two. Next year is shaping up to be an even stronger year for concrete ties, he added.
Also contributing to the growing interest in concrete ties: the wear-and-tear that heavy crude-by-rail traffic has on rail infrastructure. That's certainly been the case at Rocla Concrete Tie Inc., whose plants in Pueblo, Colo., and Amarillo, Texas, are nearing capacity at about 1 million ties per year, according to Brett Urquhart, vice president- business development.
"So far for 2014 and our backlog into 2015, we've seen the Class Is' numbers peak significantly," said Urquhart. "There's been a lot of attention focused on crude-by-rail projects, so the Class Is are trying to improve safety and their track structure. They've been investing a lot in concrete ties, in particular, because of the added safety benefits and structure that concrete tends to give to them."
The energy industry's growing use of rail transportation prompted Rocla to work with a Class I customer and fastener suppliers to develop a new yard tie suited for heavy-haul loads in a less-demanding environment and industrial track.
"We've only had the product type on the market for 18 months and we've already seen a good impact on all the oil-and-gas loops that are being built to add capacity for those commodities," Urquhart said.
Another recent development: Rocla entered Mexico's railroad market, opening a manufacturing plant this year in San Jose Iturbide to serve the expanding freight corridors between the United States and Mexico. Situated on 12 acres north of Queretaro and along Kansas City Southern de México S.A. de C.V.'s mainline, the facility can produce up to 300,000 concrete ties annually. Rocla has an option to double that capacity, if need be. The first concrete ties were delivered from the facility in April.
Although the U.S. market for concrete ties is strong, demand for concrete ties in Mexico is stronger, according to Urquhart. Concrete is the preferred tie type for mainline use in Mexico, so having a facility there "allows us to supply ties to all the railroads in that area," he said.
Additionally, Mexico's government is looking to expand passenger-rail service, which would further enhance business opportunities for Rocla, Urquhart said.
Officials at L.B. Foster Co., which produces CXT Inc. concrete ties, have observed "extremely strong" demand for ties from all market segments so far this year. They expect that trend to continue at least through year's end and into 2015, said CXT President Steve Burgess. Driving that demand are track repair projects, track refurbishment and new construction, particularly in the north-central United States, where rail lines are being used for hauling frac sand, Burgess said.
All that activity has challenged CXT's capacity levels, especially at its Spokane, Wash., plant. In response, the company has upgraded facilities where necessary and stepped up production capabilities, including operating on seven-day schedules instead of five. Also, the company is evaluating automated equipment that could result in a faster turnaround time for customer orders.
Looking ahead, L.B. Foster officials are concerned about when Congress will consider long-term reauthorization of the federal surface transportation law, as well as proposed legislation to extend the short-line infrastructure tax credit, which expired in December 2013.
"The short-line tax credit in particular plays a large part in our business," said Mark Hammons, general manager of technical sales.
Still, Hammons said transit-rail projects proposed for the United States and Canada "have been very encouraging" in terms of crosstie marketplace potential.
"It does seem very robust moving forward," Hammons said of crosstie demand. "We don't see a large drop-off in the future.
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