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Light traffic on North American railroads has sidetracked the railcar market.
Railcar manufacturers, financiers and equipment-leasing companies feasted on high demand to move coal, oil and other commodities from 2012 until last year. Then commodity prices crashed and output slumped.
“We have too many cars chasing too little freight,” said Kristine Kubacki, a transportation analyst for CLSA Americas.
A fifth of the continent’s 1.6 million railcars are parked in storage yards or along lonesome stretches of rural track. A quarter fewer new cars were delivered in the first nine months of 2016 compared with a year earlier. Lease rates for some cars have fallen by more than half.
Like other equipment markets, the railcar business is susceptible to booms and busts. But this glut is expected to last longer than previous slumps. The power industry is shifting to fueling its generators with natural gas delivered by pipeline instead of coal carried by rail. More oil from North Dakota’s Bakken region is also being sent via pipeline, lessening demand for tank cars.
“There’s nothing to replace those commodity loadings,” said David Nahass, senior vice president of rail-equipment investment adviser Railroad Financial Corp. in Chicago.
Lease rates for tank cars used to haul liquids such as crude oil have fallen to under $500 a month from around $1,000 a year and a half ago. Railcar leases have shrunk to as short as a year from six to eight years a couple of years ago, railcar-market analysts said. Owners are willing to lease out cars for less time at lower rates to make whatever money they can.
“If you can get more than it costs to store cars, you’re going to take it,” said Gary Vontz, president of National Railcar Leasing LLC, a railcar brokerage in Kansas City.
The slumping market has been tough on railcar manufacturers. Oregon-based Greenbrier Cos. trimmed its workforce by 12% as its order backlog shrank by a third for its fiscal year ended Aug. 31. At rival Trinity Industries Inc., third-quarter revenue from the Texas company’s rail business declined by more than a third from a year earlier, while operating profit from rail plunged 54%.
Some of the most overabundant car types were built for the boom in hydraulic-fracture drilling for oil and natural gas. The number of small cars used to transport a fine sand used in that process doubled between 2009 and 2014 to about 120,000 cars. Analysts say that is about 20,000 too many while oil and gas prices stay low.
“When you see a run-up in the fleet size like that, you know there’s going to be a problem,” said Chuck Brown, vice president of sales and marketing for Andersons Inc., an Ohio-based grain processor that leases out railcars.
‘When you see a run-up in the fleet size like that, you know there’s going to be a problem.’
Mr. Brown said the company sold some sand cars before the market collapsed and has continued to sell cars from its 23,200-railcar fleet. But it and other fleet owners also are adding some used cars, especially those already under lease.
Fleet operators are hunting for bargains in anticipation of an eventual rebound in the railcar market.
Chicago-based leasing company GATX Inc., which owns nearly 105,000 railcars, sold 668 cars during the third quarter bringing its total for the year to about 1,800.
“We think we’ll continue to see good demand,” GATX finance chief Robert Lyons said in October. “Interest rates are very low. Buyers are looking for yield. Our assets from that standpoint remain very attractive.”
PNC Financial Services Group Inc. has been building a fleet after receiving regulatory clearance this summer to become a provider of operating leases.
Rich Doherty, president of PNC’s equipment-finance business, said the company is buying car types that remain in demand even if commodity markets are taking a hit.
“You don’t want to get caught up in trends,” he said. “Our strategy is to buy cars that have long-term utility and what they carry cannot be displaced.”