August 11, 2023

Pending rail car retirements, high scrap rates tighten equipment market


Despite lingering macroeconomic uncertainties, rail equipment manufacturers are upbeat about the rest of 2023 and early 2024 based on factors that appear to be supporting the market for rail car leasing and the production of rail cars or rail equipment, according to comments from various company executives during the recent second-quarter earnings season.

Those factors include the anticipated retirement of different types of rail cars and high scrapping rates for rail cars. Inquiries to lease rail cars are also occurring across different types of cars, such as boxcars and flat cars, with no single commodity or segment driving demand, executives said.

Another factor contributing to the tight rail car leasing market is improved network velocity.

“We’ve said for a while that this is … a supply-led recovery in the rail car market,” Paul Titterton, president of GATX’s Rail North America division, told investors during GATX’s (NYSE: GATX) second-quarter 2023 earnings call on July 25. The rail car lessor and manufacturer reported second-quarter 2023 net income of $63.3 million, or $1.74 per diluted share, compared with net income of $2.6 million, or 7 cents per diluted share, in the second quarter of 2022.

“The past up cycles we’ve seen have been very demand-driven. We saw the ethanol boom, we saw the crude boom, the frac sand boom. This tight rail car market is different than the cycles we’ve seen recently in the sense that this really is all about tightness of supply,” Titterton said. “And again, the factors — just to repeat myself — it’s really rail velocity, it’s new car prices and the availability of new cars, and then it’s high scrap rates that we saw, particularly when steel pricing was a little bit higher than it was today.”

Trinity Industries estimates that 250,000 rail cars altogether will have to be retired in the next five years.

“I really think that this cycle, everyone’s being disciplined. There’s not a lot of speculative orders, and that’s why the tightness is remaining and that’s a good thing. Not only from a manufacturing standpoint but from a leasing standpoint, it’s really good,” said Trinity President and CEO Jean Savage during her company’s second-quarter 2023 earnings call on Aug. 1. 

Trinity (NYSE: TRN) had reported net earnings of $19.3 million, or 23 cents per adjusted diluted share, in the second quarter of 2023, compared with net earnings of $11.7 million, or 14 cents per adjusted diluted share, in the second quarter of 2022.

Although overall U.S. rail volumes are down by 5% year to date from the beginning of 2023 to the week ending Aug. 5, according to the Association of American Railroads that decline has been led mainly by a 10% drop in intermodal traffic. Carload traffic, in contrast, is flat to higher year over year, with cumulative volume at about 6.9 million carloads year to date. 

While volumes for some commodities, such as grain, forest products and chemicals, are down year over year, other commodities, such as metals and motor vehicles and parts, are seeing volume gains.

In other words, market dynamics for rail car leasing and rail equipment manufacturing seem to be less about current volumes and more about pending rail car retirements, higher scrapping levels and other factors.

Higher rail car fleet utilization rates — Trinity’s fleet utilization rate was 97.9% for the second quarter — and strong future lease rate differentials “are good predictors for rising lease rates in the future,” Savage said. Trinity also expects higher revenues for the second half of the year amid increased deliveries, rising lease rates and continued improvement on operating margins, she said. Trinity’s fleet utilization rates for the first quarter of 2023 and the second quarter of 2022 were 98.2% and 97.2%, respectively.

GATX’s second-quarter 2023 fleet utilization rate for its North American segment was 99.3%, which was in line with the first quarter of 2023 and flat to lower from the 99.4% for the second quarter of 2022.

“There’s not one single commodity driving this demand. It is actually supply-driven. So when we’re looking across the board, we’re still seeing good orders,” Savage told investors during Trinity’s earnings call. She also said tank cars are an area where order inquiries are “lighter.”

“If you look at the biggest downside, it’s intermodal. Luckily, we don’t have any intermodal in our fleet for our lease fleet. And yes, we’ve built some but it’s not a major car type that we build,” Savage said.

Even companies that don’t lease rail cars are seeing supportive market dynamics for the second half of the year and into 2024.

“As we look at key metrics across our freight business, we remain encouraged by the underlying business momentum and our robust pipeline of opportunities across geographies. North America carloads continue to be down in the quarter and locomotive parkings moved up slightly as we exited the second quarter, but [it’s] better than we had anticipated as customers prioritize service and fluidity,” Wabtec President and CEO Rafael Santana said in prepared remarks to investors during Wabtec’s second-quarter 2023 earnings call on July 27. 

The Pittsburgh-headquartered rail technology and rail equipment developer reported adjusted diluted earnings per share of $1.41 in the second quarter of 2023, up 14.6% from a year ago. 

Ahead of its late July earnings call, Wabtec (NYSE: WAB) made a slew of announcements regarding its battery-electric locomotives and its locomotive modernization technology: a deal with Canadian railway CN to modernize 60 locomotives, a partnership with Brazilian mining company Vale to conduct an alternative fuels study and provide three Wabtec battery-electric locomotives, and other deals with companies in Indonesia, Australia, Germany and Austria.

“We’re continuing to work actively with customers, both in North America and internationally,” Santana told investors on the call. “There is demand out there to further expand the use of the technology … . Fuel continues to, of course, be a significant element of cost for our customers. … It’s not demand around one specific customer or one specific segment. I think we have an opportunity to apply that battery concept also in conjunction with, what we call, not just a hybrid product, but hybrid systems as well.”

Meanwhile, rail car producer FreightCar America said its rail car manufacturing facility in Castaños, Mexico, is nearly complete. The company expects to produce 4,000 to 5,000 cars per year after the facility is fully completed, according to Jim Meyer, president and CEO of FreightCar America.

“After approximately four years of construction, three of those years in which we were simultaneously producing rail cars, we are finally nearing completion of the vertically integrated manufacturing campus in Castaños. And just think about this for a minute, while in the midst of extremely challenging business conditions and a three-years-long global pandemic: The FreightCar America team envisioned and undertook to complete a state-of-the-art manufacturing campus in Mexico, brought it online, on time, transferred all U.S. rail car manufacturing operations to Mexico and is now generating the best manufacturing margins in the business — and I might add by a substantial amount,” Meyer said on the Tuesday earnings call.

Meyer also said FreightCar America had fully exited from the leasing part of its business and sold its remaining lease fleet of just over 400 cars. The Chicago-headquartered company also named Nick Randall as chief operating officer in the second quarter.

FreightCar America (NASDAQ: RAIL) reported a net loss of $18.9 million and an adjusted net income of $2.7 million for the second quarter of 2023, compared with net income of $14.5 million in the second quarter of 2022.

Subscribe to FreightWaves’ e-newsletters and get the latest insights on freight right in your inbox.

Click here for more FreightWaves articles by Joanna Marsh.


The second annual F3: Future of Freight Festival will be held in Chattanooga, “The Scenic City,” this November. F3 combines innovation and entertainment — featuring live demos, industry experts discussing freight market trends for 2024, afternoon networking events, and Grammy Award-winning musicians performing in the evenings amidst the cool Appalachian fall weather.

Source link
In this article:
Share on social media: