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12/18/2024
The current market environment for rail equipment is very basic right now, almost boring if you think about it. Gone are the days when there were growth opportunities big enough for everyone to benefit from, if they chose to: ethanol, crude by rail, frac sand, pressure tank cars, plastic pellet cars, etc. Also gone are the big challenges equipment owners faced that had to be dealt with: new tank-car regulations, retrofits, falling coal car demand and frac sand implosion, just to name a few. Exciting times.
In fact, there haven’t been any big events or themes since 2020. For about a year or two, we had the COVID recession, which drove up a large equipment surplus, But that’s been dealt with. Other than that, the market has been kind of, well ... boring.
Not that things are bad. They’re not. For lessors, they’re actually pretty good — tight supplies, low availability, high renewal rates, fewer lease returns, fewer cars that lessors have to remarket, higher lease rates and lengthening terms. All typical of a tight market in need of additional supply. You get the picture.
But with an environment like this, you would think conditions would trigger an expanded build cycle. Shippers need cars. Lessors are out of inventory. Etcetera.
However, it hasn’t.
While deliveries are respectable, there are no signs of any significant improvements over the near or medium terms.
New car deliveries in 2024 will likely fall in the 41,000 to 43,000 range — my forecast from last December was 41,134 cars. For 2025, I’m forecasting 38,749 cars, a 5.8% year-over-year decline.
Beyond this, 2026 to 2030, the delivery forecast calls for an average of 40,516 cars per year, which will be an average annual increase of 4.5% over 2025, but still 1.2% below 2024.
The theme here is a build rate through 2030 that will be 11.5% below the long-term average of 45,444 cars over the last 25 years.
Compounding matters is the retirement rate. You can’t discuss new deliveries without considering retirements when assessing the future supply/demand balance and equipment availability. Over the 2025-2030 period, retirements are forecast to average 47,671 cars per year — at 18.5%, significantly higher than the corresponding average delivery rate over the same period. Numerous fleets have age related issues that are driving this trend.
The consequences of this outlook are clear: a slightly declining fleet, continued tight availability and market conditions favoring lessors.
The cost of new cars has declined this year, but not to a degree that will trigger incremental increases in the order rate. Interest rates are still high, as are material costs. The backlog to delivery ratio has fallen to 11 months and is likely to fall further.
Builders and component suppliers will be challenged for the foreseeable future, given the demand conditions with limited growth opportunities.
"For 2025, I’m forecasting 38,749 cars, a 5.8% year-over-year decline." — Richard Kloster
Shipper lessees face a different market environment. One of rising costs, limited equipment options, fear of returning a car today and not being able to find one tomorrow, and the list goes on.
Lessors will fare better in this type of market, where their limited assets are in demand, while new equipment supply entering the market is offset by a higher number of cars leaving the market through retirement, actually improving their overall position.
This is the environment the industry lives in today. What a difference a decade makes.
So, after reflecting on all of this, I guess this new set of challenges doesn’t look as boring as I originally thought. And while the industry won’t be going “Back to the Future” anytime soon, we will never, ever, see another cycle like that one again. We will definitely be going “Into the Future.”