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TRANSPORTATION Freight rates are primed to fall and railcar leasing to climb

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Freight rates have been a thorn in most shippers' sides amid soaring fuel costs. Although fuel costs likely will remain far above prior-year levels, there are some signs of softening and freight rates appear to be primed for reductions.

Metals shippers who are interested in trimming their freight costs are in an improved position as a slowdown in freight movement is being seen across most transportation systems, analysts watching the sector say.

"Whenever you get a lot of rail shippers together you normally hear a lot of frustration," said Jay Roman, president of Escalation Consultants Inc., a Gaithersburg, Md.,-based company that advises both railroads and rail shippers on rate-negotiating strategies.

Most shippers head into negotiations with a purchasing background that has worked in buying commodities and other services where the marketplace is putting considerable downward pressure on costs, Roman said. "But when you come over into rail transportation, frequently you're dealing with monopolies or oligopolies where the marketplace doesn't put as much downward pressure. If you want to know how good or bad your rail rates are or if you want to improve your negotiations, you should know as much about your railroad as you possibly can."

Lackluster demand for domestic autos, consumer durables and equipment has cut railcar traffic, said Peter M. Toja, president of Economic Planning Associates Inc., a Smithtown, N.Y.,-based analysis firm specializing in railcars, commercial trucks and truck trailers.

Auto and metal hauling were down 13.7 percent and 8.8 percent, respectively, in the first quarter, Toja said. With fuel costs up and traffic slumping, railroads are encountering a difficult financial environment. But some rollback of fuel surcharges imposed earlier this year has started to come through, he said.

The collapse of the housing market has all but shut down demand for centerbeam shipping, while sluggish manufacturing activities are dampening demand for mill gondolas and bulk head flat cars, along with domestic container-hauling equipment, Toja said.

The trend toward shifting railcar fleets from railroads to leasing companies and users will continue, Toja and other analysts said. "The equipment leasing companies do purchase an awful lot of equipment, but they don't purchase unless they have a customer lined up," Toja said, adding that metals companies can increasingly drive new railcar demand. "The railroads themselves don't want to bother with equipment management anymore. Those days are long gone. They prefer to have the shippers own their own equipment."

Large numbers of aging railcars will need to be replaced soon, according to Richard M. Grossman, vice president of equipment for First Union Rail, Rosemont, Ill., a railcar finance and leasing unit of Wachovia Corp. However, rail volumes will shift to other transportation systems like trucks.

"The demand for most general-purpose cars has been generally softer since late last year," he said. "We have no stampede for the car builders and so shippers who need equipment, if they want to lease it or buy it, have good opportunities."

Most car types are currently in adequate supply, with reduced railcar volumes expected this year vs. last year, Grossman said, adding that reasonably stable volumes of railcars are expected during the next few years.


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