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September 2011
— by Julie Sneider, assistant editor
What a difference a year makes in the crosstie market. Thanks to increasing demand driven by Class I and short-line infrastructure projects, the market for ties has been thriving so far in 2011 compared with 2010, several tie suppliers say.
"Business is booming, and as a result, we are treating ties 24/7," said Jeffrey Broadfoot, national sales manager for wood-tie supplier Thompson Industries Inc. and president of the Railway Tie Association (RTA). "The Class Is in particular have accelerated their orders from last year, especially for borate/creosote dual-treated ties, which are installed in tracks located in the higher decay areas of the United States and Mexico."
However, one wood-tie supply challenge from 2010 has carried over: "somewhat reduced" raw material availability because of a decreased number of sawmills producing ties, Broadfoot said in an interview via email.
"With credit still very tight, many mills are unable or unwilling to put in large log inventories," he said. "Since crossties are a secondary product to their lumber operations, many mills are hesitant to make the investments necessary to produce crossties, especially when they are having a hard time selling their lumber."
Nevertheless, tie suppliers generally are optimistic about the market, a stark contrast to their views a year ago, when — at best — they were cautiously optimistic about 2011 prospects.
The market not only has been bolstered by increasing demand from Class Is — which continue to demonstrate a "remarkable commitment" to ongoing maintenance — but by short lines seeking ties for infrastructure projects spurred by the extension of the Section 45G tax credit through 2011, said RTA Executive Director Jim Gauntt. The tax credit enables regionals and short lines to claim a tax credit of 50 cents for every dollar spent on infrastructure improvements, up to a cap of $3,500 per mile of owned or leased track.
Because of the extension, many short lines and regionals are proceeding with projects they postponed for the past few years, said Broadfoot. The tax credit will prompt a significant increase in short-line tie demand by year's end, RTA projects.
"RTA has shown that in an average year when the tax credit is in full force, tie demand increases by an average of 750,000 or more ties," Gauntt said in an email. "The largest increase on record was around 1.4 million ties from this market segment. [This year] looks like it will be somewhere between these two figures."
Through 2011's first seven months, tie purchases rose 11 percent to 13 million units compared with the same period last year, while tie production of 12.6 million units climbed 46 percent, according to RTA statistics.
Meanwhile, RTA's 12-month rolling data as of July 31 showed purchases were growing at an annual rate of more than 16 percent and surpassed the 21 million mark, according to RTA's July 2011 market report. Production (at 21.1 million units) remained on a 14-month growth streak, rising at an annual rate of 32 percent.
Overall, the association's forecast for the rest of 2011 suggests the pace of tie purchases will slow a bit, reaching 20.2 million ties by year's end, said Gauntt.
At Thompson Industries, the tax-credit extension combined with the infrastructure projects undertaken by commuter railroads and contractors helped drive up Thompson Industries' sales, said Broadfoot, adding that the projects were funded in part by federal stimulus dollars or low-interest loans. Sales look "very strong" for the remainder of 2011 as a result of "pent-up demand" for wood and switch ties, he added.
"We have booked orders for the next several months and have plenty of opportunities for additional business," said Broadfoot. "We are on pace to treat well over 1.2 million wood crossties and crosstie equivalents by the end of this year, which brings us back to levels we were seeing prior to this last recession."
To accommodate the uptick in business, Thompson earlier this year upgraded and expanded its borate/creosote dual-treating operations and added 200 feet of siding at its Russellville, Ark., plant to accommodate longer Class I trains. The company now has the capacity to dual-treat 750,000 borate/creosote ties per year, Broadfoot said.
Other tie supply company executives echo Broadfoot's market observations and business outlook.
Stella-Jones Inc. expects tie demand to grow because of healthy freight traffic, said President and Chief Executive Officer Brian McManus in the company's first-quarter earnings statement.
"In response to an improving global economy, freight volumes are rising in North America. As a result, operators seeking optimal line efficiency are investing in their continental rail networks," he said.
While Class Is' demand for wood ties this year has been strong and consistent with 2010, sales from regionals, short lines and contractors have been increasing "significantly" for Koppers Inc., said Tom Niederberger, vice president of marketing and sales.
The regional/short-line/contractor market "has really improved versus the prior year due to the revenue gains from higher carloadings and from the continued impact of the short-line tax credit," he said.
Also up this year is untreated tie production, spurred in part by the weak lumber market and continuing lag in housing starts. Koppers' production is up 35 percent this year compared with 2010's production levels to date, Niederberger said.
However, demand for concrete ties supplied by Koppers' KSA joint venture remains at "historical lows," based on the market reach of the company's Portsmouth, Ohio, plant, which primarily serves CSX Transportation, Niederberger said.
Conversely, the plant's switch tie business has "rebounded nicely" this year, with demand increasing from trackwork suppliers, he said. The Ohio plant will provide CSXT switch ties for a route to be built around Orlando, Fla., as a result of the new SunRail commuter-rail project, said Niederberger.
Boatright Cos. Inc.'s Shane Boatright also attributes business growth to the Class Is' capital spending in 2011. The large railroads are purchasing the company's wood ties for various projects.
"So far this year, we are up about 10 percent over 2010," said Boatright, the company's president and CEO. "As far as the remainder of this year and going into 2012, I don't see [the Class Is] doing a whole lot of pulling back. I think they'll continue to invest in infrastructure — mainline as well as bridge projects."
Class Is aren't the only ones investing in their infrastructure; Boatright recently completed a $9 million upgrade to its tie plant in Montevallo, Ala., where the company installed new borate and creosote cylinders used to treat wood ties. In addition, construction continues on the company's new $40 million tie manufacturing plant in Chilton County, Ala., that's slated for completion in 2012.
"We want to increase our volume to [the Class Is], and that's why we will continue to reinvest in ourselves," Boatright said.
Meanwhile, a dry spring and early summer in some key southern lumber states are primary factors in Gross & Janes Co.'s "fairly strong" wood-tie production so far in 2011, said President and CEO Mike Pourney.
"The weather has cooperated," he said. "If it gets too wet, the loggers can't get in to get the logs out, which will cause a decrease in our production."
Gross & Janes' wood-tie production has rebounded, achieving a 15 percent year-over-year gain after falling about 10 percent in 2010.
"Ties are coming in at a fairly good rate," Pourney said. "In this business, a lot of it is out of our control — the weather, primarily. But things are shaping up to enable the loggers and saw mills to get a sufficient amount of lumber."
The story behind sawmill operations and other aspects of the tie industry now is available in a new quarterly report offered on Gross & Janes' website, www.grossjanes.com. Introduced in the first quarter, the report examines issues such as timber harvesting, sawmill operations, and product drying, treating and shipping. The report also includes information on the availability of logs, regional forestry trends and other factors that affect tie production.
The report will keep customers informed of quarterly market conditions, Pourney said.
So far, market conditions have been favorable for tie supplier Rocla Concrete Tie Inc. The company has logged "significant increases" in business this year compared with 2010, with most of the gain attributed to Class Is' capex projects, said Sales Manager Brett Urquhart. For example, BNSF Railway Co. and Union Pacific Railroad are tackling more infrastructure projects, he added.
"Rocla has seen increases in our tie volumes of approximately 20 percent between 2010 and 2011," said Urquhart. "We believe that the Class I railroads have begun to invest in new projects again, and the whole industry is seeing similar increases."
A "very strong" overall market for concrete ties has CXT Inc.'s plants in Spokane, Wash., and Tucson, Ariz., humming at 100 percent capacity, said Mark Hammons, national sales manager for the concrete-tie supplier, which is a subsidiary of L.B. Foster Co.
CXT's higher-than-initially-anticipated production at the two plants was not the result of closing a Nebraska plant, but from some customers shifting from wood ties to concrete ties for certain projects, he said.
Earlier this year, the company closed a Grand Island, Neb., plant that primarily served UP because the contract with the Class I expired and the railroad chose not to renew it, said Hammons.
"We don't compete so much with the other concrete tie manufacturers; we compete with the wood-tie market," he said.
However, track installation projects in the pipeline that CXT officials expected to impact tie production in the second and third quarters now are anticipated to do so in early 2012, Hammons said.
"We feel confident that we will sustain our production levels into the first quarter [of 2012] and, looking into the second, third and fourth quarters, I think the economy will pick up," he said. "There is a lot of [federal stimulus funding for rail projects] in the United States that has not been spent yet but will be spent in the next few years. There is a lot of work [to come] that we think will benefit concrete ties."
Meanwhile, Axion International President and Chief Executive Officer Steve Silverman believes there is growing acceptance of composite ties in the railroad industry, which is driving business.
"For Axion, things are shaping up very nicely," he said. "Our active sales pipeline continues to grow on a pretty regular basis."
Founded in 2007, Axion produces railroad ties from 100 percent recycled plastic. Composite ties can fill a niche in the market, Silverman believes.
"We have a certain use in the marketplace where there are high levels of moisture, or heavy axle load, or special applications where we fit nicely," he said. "Our goal is to use our products and our technology to solve problems for our customers."
Silverman is "optimistic and excited about the broadness" of Axion's customer base, which is growing worldwide. For example, Axion announced in July it received its first order to supply ties to a railroad operator in a major South American city.
Axion's revenue also has been increasing this year: The firm generated revenue of $1.3 million in the second quarter compared with $446,000 a year earlier.
As revenue and the customer base continue to grow, the firm aims to increase manufacturing capacity in strategic locations within customers' own geographic areas and "as close to the recycling waste stream" as possible, Silverman said.
One recent example: In mid-August, Axion signed a manufacturing agreement with Coll Materials, a post-industrial, post-consumer plastic recycling company, which will provide Axion expanded manufacturing capacity at Coll's plant in Waco, Texas.
But the trump card for a strong tie market in 2012 is the economy, said Koppers' Niederberger.
"Barring any major changes to current conditions, we expect demand in 2012 to compare favorably with 2011," he said. "We have heard no rumblings from our customer base about any contraction for 2012. If pricing for raw materials remain relatively stable and the economy continues on the same current path, demand for ties should be there."
Thompson Industries' Broadfoot is a bit more cautious about 2012. Demand for treated wood ties will continue to grow, but not at the same pace as 2011, he predicts.
"Carloadings were off in July [after] they had been rising all year long, which may indicate a slowdown in the economy," Broadfoot said. "With that said, some of the larger capital projects may take a back burner as the year progresses, and the railroads will enter into a wait-and-see mode. We, too, will just have to wait and see."
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