A nearly fivefold increase in steel prices is driving railcar owners to scrap older railcars, a trend that could continue into 2022, according to railcar manufacturer Greenbrier.
Jay Carter, strategic marketing manager for Greenbrier (NYSE: GBX) estimates that steel prices have risen in recent months from $400 per short ton to $1,900, prompting railcar owners to scrap outdated equipment to take advantage of higher scrap metal pricing.
The metal can be recycled to manufacture steel, either domestically or abroad.
In 2020, about 47,000 railcars were scrapped, and 2021 has already reached that mark, according to Carter. About 60,000-65,000 railcars altogether could be scrapped in 2021, Carter said at FTR’s virtual conference last week.
But inquiries to order railcars are also strengthening year-over-year even though higher steel prices could raise manufacturing costs as railcar owners weigh the need for new railcars against how much they’re willing to pay for them, according to Carter.
Those with more railcars in storage could be less inclined to be in the market, Carter said.
Indeed, the number of railcars in storage has fallen to below 400,000, which is more in line with normal levels. The number of railcars in storage peaked last July and August at around 525,000-plus cars. But railcar utilization has been increasing since then, with utilization rates rising for 14 consecutive months, Carter said.
Railcars coming out of storage may be for use on the network, or they could be destined for scrap: “You might not get these types of elevated scrap rates in the future,” Carter said.
While elevated steel prices are the dominant topic among railcar manufacturers, other factors weigh on the market as well.
In the longer term, passage of an infrastructure bill in Congress could boost demand for new railcars to haul aggregates, although it could also result in higher steel prices. Meanwhile, a $20 differential between West Texas Intermediate crude and Western Canada Select crude could increase crude-by-rail movements into the U.S. Gulf Coast.
Roughly 30,000 to 40,000 boxcars are also expected to reach the end of their life within the next 12 years, and while a one-for-one replacement is unlikely, more boxcars will need to be manufactured in the coming years, Carter said.
In the near term, higher natural gas prices could encourage more coal consumption, thereby increasing coal car utilization, both Carter and FTR consultant and host Todd Tranausky said.
Despite the headwinds that might hamper railcar orders, lower train speeds this year are encouraging more inquiries because more railcars are needed to support the same amount of traffic, Carter said. Railcar velocity through the end of August was down by 8% year-over-year amid rail volume gains, port congestion and labor shortages.