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Rail Heading into Busy 2012

Despite a spotty economy the railroad industry experienced strong growth in 2011. The recovery of rail traffic and shippers’ views of rail as the most cost effective and sustainable mode of transportation drove railcar build orders of 89,073 in 2011, reports BMO Capital Markets.

The rapid acceleration in railcar orders at the beginning of 2011 created a backlog of 64,575 units going into 2012. This represents 3.9 quarters of deliveries at current production rates. As a result, manufacturers are beginning 2012 with formidable backlogs and an expectation of further growth as we proceed through 2012 and into 2013. BMO expects backlogs to drop off slightly by the end of 2012 as deliveries are made and the rate of new orders begins to normalize. Although orders are not expected to reach 2011 record levels, they should still remain well above 2008-2010 levels. Railcar assemblies in 2012 are projected to be between 50,000 and 60,000.

What’s in Demand?

The ethanol boom, which reached its height in 2006, drove healthy growth in tank car demand in the past. Since ethanol-related demand has normalized, tank car production has remained robust as a result of drilling activities in unconventional energy plays. Pipeline capacity shortages in these areas has lead to increased demand for oil-over-rail. Additionally, a significant need for frac sand in these energy markets has driven recent covered hopper demand.

Despite a relatively flat coal production year, the need to replace aged steel-bodied equipment boosted coal car orders last year. Future North American coal car demand should rise due to expanding coal exports, but may be offset slightly by declines in future domestic coal consumption, driven in part by record low natural gas prices.

A revival in demand for box cars, intermodal platforms and mill gondolas is also expected. Additionally, slow but steady demand should continue for grain cars. Demand for centerbeam cars continues to be weak, coinciding with construction market performance, which is expected to see mild growth through 2012.

Out of the Mothballs

Consistent with an improving economic environment, the number of railcars in storage has declined significantly from the peak. From July 2009 through December 2011, around 240,000 net cars were removed from storage with around 130,000 ending up in the scrap yard. 62,000 cars were installed during this time period causing the fleet to decline by 68,000 cars.

Many railroads and leasing companies have delayed maintenance / repair on cars put in storage, but as cars are placed back online rail maintenance costs will likely rise. With around 19% of the fleet in storage as of early February, it remains unclear to what degree cars in longer-term storage will be scrapped and replaced by newer models. If these cars in storage avoid the scrap yard, maintenance spend is likely to increase to prepare them for service.

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