For railcar buyers, it’s time to pull the trigger, soon
Findings from Cowen and Company’s recent rail equipment webinar show that locomotive upgrades remain strong, as traffic growth continues. Growing demands for the newly built wagons are expected to gradually begin to translate into orders, despite the steel premium. Lessors are well positioned as freight demand increases, railcar supply declines and new construction falls short of replacement levels this year.
Scrapping has increased so much that cars are lining up in overwhelmed junkyards, according to one of our panelists. This dynamic seems unlikely to abate anytime soon. Meanwhile, rail traffic data released by the Class I show continued strong year-over-year growth in week 19, ranging from 20% for Canadian Pacific to 44% for Kansas City Southern, with Union Pacific up 29%, CSX up 34% and Norfolk. South up 32%). The demands for newly constructed railcars continue to increase, particularly for intermodal apartments, boxcars, steel pods and grain hoppers. A shortage of some of these types of cars cannot be ruled out in the coming quarters, according to the same panelist, who pointed out that the equipment is just one of many freight capacity issues.
While some car buyers may continue to delay large short-term manufacturing orders to avoid commodity price premiums, our manufacturing panelist seemed to agree that the industry’s stock car population , down about 30% since midsummer, is not longer enough to fully support growing demand. As such, we believe more buyers will need to start pulling the trigger for larger orders. We model incremental increases for the remainder of the year and through 2022.
Several trends favor wagon rental companies:
- Strength of underlying demand.
- Additional scrap revenue due to rising steel prices.
- Production under-replaced this year, in part due to steel premium and supply chain disruptions (we model industry deliveries of 31,000 units in 2021, followed by 39,000 units in 2022).
These factors should more than offset headwinds from rising equipment purchase costs and still subdued demand for tank cars, which account for about half of the fleet of some key operational donors.
Renewable diesel and gasoline could represent new growth opportunities for rail in the years to come. This would be positive for the tank car fleet, which has not yet experienced a recovery in demand for materials.
See our reports, Follow-up and reaction to our May 7 note on the railcar industry, and Because enigma: in the midst of growing demand, look who is “cleaning up” the spectacle.