It's the same old, cyclical song:
Car surpluses to plague builders, lessors at least through '09

By Toby Kolstad

Currently, there is one characteristic that is common to all rail-car fleets: surplus inventory. From intermodal wells to coal cars and ethanol tanks, excess cars are stressing the leasing industry and dampening new-equipment demand.

Since last fall, industry pundits have been trying to assess the magnitude of the problem and determine when a turnaround might occur. At the start of the year, it looked as if increasing coal and grain shipments might bring better fortune to at least some of the fleets — even if the economy went into recession. However, when railroads began to run their trains faster during the winter months, all the intermodal, grain and coal cars that had been added since 2004 exacerbated the surpluses.

HOW DID WE GET HERE?

The slowdown in the train operation that began in late 2003 added a significant amount of artificial demand for unit-train and intermodal-service cars. The 10 percent decrease in average train speeds during 2004 and 2005 increased demand for new rail equipment by almost 3 percent of the total fleet of grain, coal and intermodal cars — or 6,000, 8,000 and 6,000 cars, respectively.

In early 2006, train speeds stopped falling and the artificial demand ceased, but with builder backlogs at the time stretching from 12 to 18 months for almost all car types, leasing companies kept placing speculative orders in excess of current demand for another few quarters. Had train speeds not significantly improved, or if the economy had kept growing, the excess cars might not have become too big a problem. But average train speeds have jumped during the past several months, almost reaching the levels recorded before the decline began.

So, in addition to the surplus cars that were created through speculation and by a softening economy, the cars added to meet the artificial demand of slow trains during the past few years must now be added to the problem.

NO RELIEF THIS YEAR

For the grain and coal car fleets, improving traffic levels, if sustained, will bring some relief to lessors and builders sooner than for other car types. But it will take more than a year for the surplus capacity to be absorbed to a point where there is any need for larger fleets.

Last fall, some thought the turnaround for these fleets might occur before summer, but with the added cars that are now available for loading due to faster trains, the turnaround may not occur until sometime in 2009.

The same might be said of the ethanol fleet. There would have been enough production and rail-car transportation capacity to deliver 10 billion gallons of ethanol to the motoring public in 2008, but gasoline distributors neglected to build the facilities needed to receive the product along the coasts. There are only four U.S. terminals that can handle unit trains of ethanol tank cars from the Midwest; more are needed, and it’ll take a while to build them. Until then, there’ll be a surplus of tank cars.

INTERMODAL’S DECLINE

For doublestack well cars, the story is even less promising. Intermodal traffic began to decline in fall 2006, and new-equipment demand effectively ended at that time — this fleet is relatively new and does not yet require any replacement cars.

The several thousand intermodal cars that have been built since then have only added to the several thousand cars rendered surplus by declining traffic and faster trains. There are enough surplus intermodal wells to meet traffic demands for at least two years — if and when loadings resume their historical growth rate of 6 percent per year.

Replacement demand will sustain moderate production levels for some car types, but rail-car builders and lessors likely will need to batten down the hatches for some rough quarters ahead. The surplus conditions that plagued the industry for a few years at the start of this decade might be back again.

Toby Kolstad has been in the railroad industry for more than 30 years, with stints at Illinois Central Gulf Railroad, Denver & Rio Grande Western Railroad, a car builder and lessor. Currently a consultant on rail-car matters and president of Rail Theory Forecasts L.L.C.