Outlook 2016: Rail-car forecast

01.12.16 | Richard Kloster, for Progressive Railroading

People often say, “What a difference a year makes!” Well, in the world of rail cars, lately it’s been more like “What a difference a year and a half makes!”

Back in June 2014, the rail equipment market was dominated by the energy industry, which had a seemingly unending appetite for crude oil tank cars and frac sand covered hoppers. The demand for new rail cars to support the energy industry was still strong. Oil prices were at or above $100 per barrel (bbl). The Bakken-West Texas Intermediate (WTI) spread was above $15 per bbl. New rail-car orders were rising. Builders were increasing production rates, deliveries were growing and the backlog was just short of 100,000 cars. The tank-car fleet was almost 100 percent utilized. Lease rates, new car prices and margins were strong. And the rail equipment sector was being rewarded by Wall Street with favorable valuations and rising stock prices.

Things couldn’t have been better, right? Well, this is where the “What a difference …” part comes in.

Today, oil prices are below $50 per bbl, the Bakken-WTI spread is less than $6 per bbl, the tank-car fleet surplus is above 80,000 cars and fleet utilization is down to 77 percent. While the energy-related backlogs are still high, they are falling fast as new car orders have dropped like a rock. As they say, “The bubble has burst” " at least as it relates to the energy sector car types.

The question now is, “What will replace this new car delivery demand for 2016?” The answer, unfortunately, is “Not enough to make up the difference.” We expect new car deliveries to total about 81,000 cars in 2015. However, with the collapse of energy-related new car demand, our current FTR forecast for 2016 is only about 61,000 cars, a 24.6 percent decline compared with 2015’s projected total.

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