Commentary: Railroad freight car orders depressed through 2021

Or are the railroads to be buoyed by evidence that some of the ports, like Los Angeles, are seeing a second-half surge in imported container cargo — much of which later moves by train to the Midwest and to Eastern states?

The economic metrics that we historically depend upon for planning next year’s business outlook remain clouded.

Forecasts that assume that the immunization vaccines will rally consumer confidence disregard the timeline for how long the vaccinations will take to reach most of the population. They also seem to be ignoring the surging post-Thanksgiving hospitalization and death statistics into late December 2020.  

There is clearly still a great deal of uncertainty ahead.

Meanwhile trucking Class 8 trailer purchases have recovered in large part. Is that new-orders pattern going to happen soon for the railroads? Some are optimistic. This rail economist is more negative. 

Contrasting outlooks

There are two different outlooks for rail freight. The severity of a recovery timeline therefore is up for discussion.

A railroad rule of thumb for such intelligence is the capital investment authorized by management’s outlook.

As our starting point, during much of 2019, most experts calculated that car orders would wind back down to the longer-range fleet replacement figure of about 45,000 units a year.

That is well below the 70,000-plus range seen in some recent years.

That expectation was quickly reduced during the first and second quarters this year to only about 20,000 new orders during all of 2020.

Is 2021 to be a recovery year? If so, by how much?

Two companies I researched have somewhat different outlooks. Both are reputable firms. Let us consider some of their differences.

Cowen & Co. has gone on record with Railway Age as to its outlook into 2021.

Traffic growth

The Cowen & Co. experts assume decelerating rail traffic declines in the second half of 2020 and an anticipated 6%-7% growth during 2021. They believe that new car orders could thus increase to more than 36,000 units during 2021.

Cars released from storage

Since cars in technical storage will continue to be placed back into North American service, they project an improving utilization rate for the entire UMLER car fleet.  Here is the pattern this year as back in July of 2020 there were ~526,000 railcars in storage. That is now approaching 428,000 storage units in December.

PSR promised benefits

There is also the possibility that as the so-called precision scheduled railroading (PSR) business model continues, it could produce two different results. One would see further selected low-margin traffic losses. The opposite influence could see an actual improvement in the fleet utilization.

Ironically, both PSR changes could reduce new car order demand.

No one is quite sure how to predict which pattern will result from the PSR model.

Selected car/commodity growth surge

Grain exports from both Canada and the United States are significantly increasing. So is selected container traffic. At some point, the pace of that growth is going to require new deliveries of cars.

One 3-year outlook

Sticking with the Cowen’s intelligence, here is how the new car orders might look. That is of course assuming the assumptions all play out as expected.

2020 to 2022 range of new railroad car orders by one source:

Graph prepared by Jim Blaze using The Cowen Insight: OEM Earnings, Railcar Demand by Matt Elkott, transportation OEM analyst, Cowen and Co. Published by Railway Age.

There is a caveat. Cowen says that it is “cautious into the fiscal 1Q21.”

It recognizes the possibilities of continuing major pandemic-related setbacks to global economies.

Second opinion

FTR Freight Intelligence is also a recognized source about the freight car market. Its technical opinion is exhibited in a detailed slide deck internet ENGAGE forum held this month. 

One driving forecast element it focused on is the pattern of industrial production. Railroaders always pay attention to this dataset.

Considering the same checklist of items as does The Cowen group, FTR’s experts predict that there is no immediate recovery in sight for the industrial production segment of the U.S. economy. 

FTR’s logic concludes as in the following graph that perhaps fewer than 23,000 cars will be delivered during 2021.

A good sign

Thinking independently, a good news indicator will be when the railroads and private car fleet owners (lessors) start placing large new orders.

How big?

An order of 1,500 or more new intermodal cars would be a sign of a significant level of confidence.

Get the total number up to about 30,000 or more new 2021 car orders? Yes, that would be an optimistic recovery signal.

What’s your outlook as 2020 ends?

 Acknowledgments

Always try to diversify your competitive intelligence sources. These are my suggestions.

Cowen & Co. and its OEM transportation analyst, Matt Elkott

The FTR Freight Intelligence team includes Todd Tranausky, Avey Vise, Eric Starks and others.

Railroad Financial Corp. and David Nahass’ team, including Will Geiger

Ron Sucik and Larry Gross as two competing intermodal equipment experts

The Economists section at the AAR in Washington, D.C.

ABH Consulting Senior Transportation Analyst Tony Hatch

Richard Kloster, founder of Integrity Rail Partners

Yes, there are others, recognized in previous columns.