During earnings season, railcar manufacturers will discuss the size of their railcar backlog. What are backlogs and why are they important? This AskWaves article will look at this topic.
What is a railcar backlog?
A backlog is simply the orders for railcars that leasing companies, railroads and private businesses such as chemical companies and banks place with railcar manufacturers that have not yet been delivered by the manufacturers.
As a manufacturer delivers an order of railcars, the backlog shrinks.
However, industry observers look at the size of railcar manufacturers’ backlogs because those backlogs can reflect market dynamics. The railcar market is known for being cyclical, meaning that the backlog size can vary depending on demand, the availability of existing railcars, replacement schedules — railcars have a recommended lifespan — and new regulations that can affect the timing of when cars might need to be replaced. Railcar manufacturers also seek to develop cars that have new features that might meet a railcar owner’s needs.
The backlogs can show where the railcar market is in the supply-and-demand cycle, according to Lee Verhey, director of regulatory and industry affairs for the Railway Supply Institute.
“If there’s demand for new cars, then backlogs go up based on capacity,” Verhey said. For instance, the boom in crude-by-rail several years ago also resulted in an increase in tank car orders, according to Verhey.
Backlogs also help a railcar manufacturer manage its business, Verhey said. A company might have the ability to build 20,000 cars over a six-month period, but the company might space out when it fulfills a railcar order as a way to help keep the business afloat.
“You’re not going to shut your whole operation down because, for the most part, most of these companies are publicly traded companies and you don’t ever want to shut your own manufacturing operation down if you can help it because it’s so hard” to ramp production back up, Verhey said. “You’d have to hire employees and you’d lose the expertise.”
He continued: “Even though you may have higher capacity for production, you will adjust your production to always have some measure of backlog because if you eat up all of your backlog, then you’re hand to mouth and you’re going to have a huge financial loss. And so, it’s a juggling act. It’s a balancing act to make sure that you can balance production with your operations and costs.”
Indeed, the timing for a railcar manufacturer to fulfill a railcar order might take into account the broader market’s needs. During the crude oil boom several years ago, demand for tank cars outpaced the ability to produce and deliver them. Manufacturers that had more capacity to deliver those tank cars sooner could fetch higher prices for those cars.
Typically, a manufacturer’s lead times go down when capacity is there but demand is not greater than capacity, Verhey said.
“The timetable is still controlled by the manufacturer,” he said. A manufacturer might throttle down operations, or it might shutter facilities or parts of a facility in order to reduce its capacity.”
Manufacturers “adjust capacity based on market demand,” Verhey said.