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Steel industry demand for rail cars poised to pop

Keywords: Tags  Rail cars, American Railcar Industry, Jim Cowan,

After several very lean years, North American demand for rail freight cars is expected to boom this year and continue on that course for the next few years, according to rail car manufacturers, railroads and major shippers. At the same time, rail car design advances will increase the amount of steel used in each one, especially in new high-pressure tank cars.

The entire U.S. rail car industry delivered just 16,500 cars last year, the lowest level since 1987, according to Jim Cowan, president and chief executive officer of American Railcar Industries Inc. (ARI), St. Charles, Mo., noting that normal production averages 45,000 cars per year to replace those retired, which are mostly scrapped.

With only 16,500 cars delivered last year and just 22,000 in 2009, there is clearly pent-up demand in the system, Cowen said. "Most freight cars can last 50 years, and the decision point to scrap and replace usually comes at about 40 years. There are several variables in the equation, including scrap prices and shipper demand for rail capacity. There is a point where there is a pull from the scrap value of an older car. Now that we are up to $400 a ton for scrap, there is starting to be a pull, but it is not like back in 2008 when the market went crazy."

ARI at the end of February completed delivery of 240 new taconite cars for Canadian National Railway Co.’s Mesabi & Iron Range subsidiary in Minnesota, replacing a 50-year-old design.

Grain hoppers also are evolving, especially those for the fast-growing export market for dry distilled grain, which is a residue of ethanol manufacturing, Cowan said. It is a coarse powder used for animal feed, but it is tricky to handle because it clumps if it gets damp.

The overall trend is toward rail cars that are larger and able to carry more. For almost all commodities, the cars reach maximum capacity before they reach maximum weight, so the emphasis is on volume and ease of loading and unloading more than weight-handling capability. That bodes well for steel demand in the market.

"We are looking at rail car manufacturing numbers for this year closer to 40,000," said Eric Starks, president of Nashville, Ind.-based Freight Transportation Research Associates. "Orders are already picking up. From the 16,535 North American deliveries we recorded in 2010, we forecast 40,000 to 43,000 in 2011 and more than 70,000 in 2012. Those are huge jumps, but the demand is there."

The industry expects to deliver around 30,000 rail cars this year and about 50,000 in 2012, according to one industry source who is a member of the North American Freight Car Association, noting that the projected new builds could reach 60,000 in 2013 and remain above that level through 2015. The industry averaged 53,000 new cars annually from 1995 through 2009.

A new freight car contains 18 to 20 tons of steel—structural, sheet, plate and bar—so the steel requirements in an average year would be around 1 million tons annually. Aluminum tonnage consumption would be about 180,000 tons, with the only major demand for aluminum being for coal cars.

The projected breakout of car types each year for the post-2013 period is about 20,000 covered hoppers (for grain, sand and plastic pellets), 13,000 tank cars, 12,000 double-stack container cars, 8,000 gondolas (primarily for coal and a smaller amount for scrap and steel), 7,000 open-top hoppers (coal and aggregates), 3,000 conventional flat cars (steel, automotive and lumber) and 2,500 box cars.

The million-dollar question "is whether rail car makers and their suppliers are able to meet the demand. Some casting components are already in short supply," Starks said, noting that it opens an important window for domestic foundries but only for a brief period. "There is a short-term opportunity for North American suppliers. We are definitely advising our clients—suppliers and manufacturers—to have those conversations now. New long-term relationships could be forged, but the market is very unpredictable."

Chinese infrastructure spending is the driver, he said. When that market is soft, major fabricators look for other markets and goods tend to end up on North American shores at compelling prices. When Chinese demand is high, that tends to be the market of choice for major suppliers, and smaller foundries in North America don’t have to contend with significant imports. India also has a huge railroad infrastructure, it was noted.

In terms of whole cars, "prices have been high enough to push people to scrap cars. In general, we expect conditions will remain that way and encourage scrapping," Starks said.

One industry source estimates that as many as 80,000 cars were scrapped in 2010; at an average of 20 tons per car, that would yield 1.6 million tons of steel scrap.

In any given year, as much as 70 percent of the newly built cars are simply replacements for scrapped cars, industry sources said. Given the record low production numbers over the past few years and record high scrap numbers, the U.S. rail car fleet as a whole is burning the candle at both ends. The implication is that even without any major economic expansion, demand for rail cars of all types—and the steel to build them—will be above average for the next several years, according to shippers and carriers.

One moderating element is that prices for hot-rolled steel have risen, Starks said. "But from a manufacturing standpoint, the car makers have been able to pass along their higher cost of materials to their customers. If the economy has any kind of legs, the cost of materials in this sector is not a factor because at the end of the day people have to have rail cars. If they have to pay more for them, maybe somebody gets in trouble. But if there are no cars to ship goods, somebody gets fired."

The redesign of new cars adds a little more steel in most cases, Starks confirmed, but noted that there are significant differences in car types among the additional units being produced. A high-pressure tank car, for example, consumes about three times as much steel as does as a chassis for intermodal containers.

"We have been seeing strength in covered hopper cars for sand, cement and grain. There is very strong demand for small-cube hoppers for sand used in hydraulic fracturing for oil and gas production. The next market to get hot is likely to be cement later this year or early next year," he said.

"Now is the time for mills and foundries to be having discussions with rail car maker customers and prospects. The North American supply chain for steel used to be very tightly knit. Not any more. But with the demand forecast, six to 12 months from now might be too late," Starks said, noting that most rail car makers tend to use a small group of main suppliers.

Greenbrier Cos. is among the largest rail car manufacturers in the world. On top of all the economic drivers for rail car demand, there also is a tactical financial point: There is 100-percent depreciation for capital investment this year—double the usual rate—as part of the federal economic stimulus package, according to Bill Bourque, vice president of marketing at Greenbrier, but applies only to assets of which the buyer takes actual physical delivery—orders booked, even paid for, don’t qualify. "That has stimulated quite a bit of interest, perhaps even pulling a bit from 2012, which we may pay for down the road," he said.

However, given the reversion-to-the-mean production numbers expected this year and over-the-moon projections for the next few years, most market watchers say that in this case the future can well afford to pay the present in this case.

"We project more than 30,000 cars will be delivered by all North American manufacturers this year," Bourque said. "In response, we have reopened our Gunderson plant in Portland, Ore., as well as our facility east of Mexico City." All of Greenbrier’s facilities make a mix of cars, but they use only steel. "We don’t do aluminum coal cars."

In December, Greenbrier said it had received orders for 2,000 covered hopper cars of various types with an aggregate value of approximately $135 million scheduled to be delivered principally this year. The orders were in addition to previously disclosed orders received in September and October for 3,200 rail cars with an aggregate value of approximately $200 million. The company’s backlog at the end of August last year was 5,300 rail cars valued at $420 million.

Underscoring the market assessment by Starks, Bourque confirmed that demand is strong for sand and cement hoppers. "There is an ongoing movement for shorter cars with greater overall capacity," he said. "We have found that the ends of the longer cars tend not to get filled on loading. The old standard hopper was 61 feet long and held 4,750 cubic feet. Today’s standard covered hopper is just 56 feet long but holds 5,200 cubic feet. The strong trend is to put as much capacity as possible into the shortest length possible to increase the density of the train."

While a 9.5-percent increase in capacity with an 8.2-percent reduction in length is an impressive accomplishment, the double-stack container chassis provides a 100-percent increase in capacity. Greenbrier is the top North American producer of lowbed double-stack container chassis and recently entered the tank car market, but only for low-pressure cars. "We do not make high-pressure tank cars in the U.S. as of now, but in Europe we are one of the largest producers of pressure cars for ammonia, LPG (liquefied petroleum gas) and so forth," Bourque said.

While he didn’t say whether Greenbrier was planning to enter the high-pressure car market in North America, industry sources indicated that such a move is highly likely to compete against the likes of Trinity Industries Inc., Dallas, and Union Tank Car Co., Chicago.

The Federal Railroad Administration (FRA), part of the U.S. Transportation Department, in January 2009 issued interim rules for tank cars hauling materials that are toxic inhalation hazards (TIH), also known as poison inhalation hazards. The rules were promulgated in the aftermath of several deadly accidents in 2004 and 2005 in which tank cars released chlorine after derailing. The fatalities were a shock to both chemical shippers and railroads, which had achieved a safety rate of just 11 punctures in 2 million shipments, according to Frank Reiner, president of the Arlington, Va.-based Chlorine Institute.

The new rules increased the thickness of the tank shell to a full inch from roughly three-quarters of an inch, and a design pressure to 600 pounds per square inch from 500 psi. Along with head shields of the same-thickness steel and a more robust frame and fittings, the new standards increase the total weight of steel in the new cars by 14,000 pounds apiece, or some 20 to 25 percent. The steel hasn’t changed, though; even in new cars, the specification remains TC-128, which is equivalent to ASTM A-612.

Although the rules were promulgated more than two years ago, the effects are only just starting to be felt in the rail car manufacturing sector because the older 500-pound cars have been grandfathered and so can live out their normal service life. "We have only seen about 8-percent turnover in the TIH fleet," Reiner said. That is in line with normal replacement, so there has been no rush to replace the approximately 15,000 TIH cars in service. Of those, about 40 percent haul chlorine, while another 40 percent haul anhydrous ammonia. The total North American tank car fleet stands at about 300,000 units.

The improved 600-pound cars have been given a mandated service life of just 20 years, Reiner said, because the 600-pound design is a "compromise car. People are waiting for the final final rules before they make any wholesale replacements."

Cars built before July 1974 have a regulatory life of 40 years, which means they will all have to be replaced in the next three years. Cars built after that time have a regulatory life of 50 years. In practice, TIH cars usually last only about 30 years, but the interim 20-year rule is creating a sticking point in fleet replacement, Reiner said. "We asked for at least 25 years from the issue of the final rule, and instead we got 20 years from the date of construction."

Regulators acknowledge that there is some confusion in the industry about when the "final final" rules will be issued, but that comes in large part from the desire by all to have the best science behind the new rules.

William Schoonover, staff director in the Hazardous Materials division of the Office of Railroad Safety at the FRA, said that regulators, shippers, carriers and rail car producers all want the best science and the most effective regulation, but that takes time. The interim, or compromise, rules were issued in January 2009 to enable old or damaged cars to be replaced during the multiyear process of drafting new rules. To make the compromise rules legal and enforceable, they had to be called "final"—but both regulators and industry knew from the start they were a bridge.

On the complex issue of car service life, Schoonover said that the interim rules do indeed encourage replacement of cars. "The 20-year rule we put in place is an incentive to buy better cars. We don’t want to put in place a rule that makes people replace their whole fleets. The interim rule locks the existing fleets, so all cars built after the middle of March 2009 have to comply with the current standards," he said. When the final rules come out in 2013 or later, there will be a six- to seven-year phase-out plan for the cars built after 1974 and before 2009.

Schoonover stressed that testing and evaluation is moving quickly, but there is a great deal of ground to cover. "The research process will take at least another year, possibly as much as two, so that puts us at the end of 2013 before we take the next step," he said.

One pleasant surprise is that "the steel tested performed better than anticipated. We are now trying to figure out how and why. We are looking into the steelmaking process," Schoonover said. Specifically, the puncture resistance of TC-128 steel at minus 150 degrees Fahrenheit was greater than expected. That said, "we are also looking at new steels. We are not assuming that TC-128 is necessarily the steel of the future. We are open to new solutions, especially in technologically advanced design of steel or production methods. Much of the improvement we have seen with today’s cars is due to steel manufacturers’ strong quality control."

Schoonover said that other materials don’t figure largely in the research, but new designs do, including such ideas as corrugated interlayers for absorbing energy in a crash. The FRA has even conducted joint development with the Naval Surface Warfare Center and the Army’s Aberdeen Proving Grounds.

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