(Dow Jones) — A shortage of railcars bedeviling farmers, auto makers and oil drillers has become a windfall for some railcar manufacturers, lessors and finance companies.
“There's strong demand for a broad base of car types and there's not enough inventory,” said David Nahass, senior vice president at Railroad Financial Corp., a Chicago-based investment adviser. “As an operator or lessor in this environment, this is what you pray for.”
Monthly rates for tank cars, which transport liquids such as crude oil, have increased to $1,500 to $2,000 a car from about $500 in early 2011, before hydraulic fracturing ramped up in North Dakota's Bakken Shale oil field. Cars that haul sand for fracking are leasing for about $650 a month, up nearly 50{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} from the end of last year, according to leasing-industry analysts. Used grain hoppers–some of which are more than 30 years old–are leasing for about $400 a month, up 40{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} from a year ago. Some new hoppers are leasing for nearly twice that amount.
About 80{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} of the 1.5 million railcars in North America are leased to railroads and shippers, most under multiyear contracts.
North America railcar profit at lessor GATX Corp., which owns 108,000 cars, rose 49{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} in the first quarter from a year earlier. Trinity Industries Inc., which makes and leases railcars, reported that first-quarter profit in its leasing business nearly quadrupled. Investors Carl Icahn and Warren Buffett own companies that make and lease out railcars, and Wells Fargo Corp., CIT Group Inc. and General Electric Co. operate railcar-leasing units.
Railcars are considered good investments because their costs can be depreciated over several years, sheltering income from federal taxes, and they provide a predictable stream of income as long as the cars remain leased. Railcars can remain in service for at least 40 years and change hands frequently as one owner sells when prices are high and another buys to take advantage of depreciation benefits.
During the 2008 recession and its aftermath, car owners scrapped thousands of cars after customers decided not to renew leases. When demand picked up recently, car owners were short-handed, especially for grain hoppers and railcars that haul new automobiles.
The David J. Joseph Co. unit of steelmaker Nucor Corp. leased 300 grain cars to grain processors in January, after Canadian Pacific Railway Ltd. opted not renew its lease.
“You typically never place grain cars in leases in January. We got lucky, ” said Trey Savage, vice president of Joseph's railcar-leasing business. He said he had expected that the cars would sit idle until summer.
Frank DeCastro, North America transportation purchasing director for Belgian chemical maker Solvay SA, said he had been unable to find enough tank cars and covered hoppers as congested rails delayed deliveries. Solvay leases 4,000 railcars in North America to deliver peroxide, sulfuric acid, soda ash, sodium bicarbonate and other chemicals. “Tank cars are almost impossible to get,” he said.
A growing backlog has pushed deliveries of new tank cars into 2016 and deliveries for covered hoppers into next year, he said.
Orders for all types of new freight cars rose 62{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} in the first quarter from the fourth, according to the Railway Supply Institute trade group. Orders for covered hoppers–for hauling grain, sand, fertilizer, powdered cement and other bulk commodities–surged to 14,765 cars in the first quarter from fewer than 1,200 a year earlier.
Until those cars go on the market, lease rates and prices for older cars will likely remain strong. Following last year's bumper crops of corn and soybeans, 30-year-old grain cars are selling for about $24,000 apiece, up 15{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} to 20{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} from a year ago, according to analysts.
Prices could fall if demand flags and production of new cars continues to accelerate. A decade ago, rising demand for corn-based ethanol prompted a surge in tank-car production that led to a glut of cars. Lease rates sank to $300 a month.
“There's always the risk of overbuilding because historically, that's what the industry has done,” said Mr. Nahass, of Railroad Financial Corp. “The industry has always had just one gear.”
New regulations on tank cars in the U.S. and Canada to increase puncture-resistance will likely keep demand strong and avoid a glut, however. Canada set a three-year deadline to replace or retrofit about 65,000 tank cars that carry flammable materials. U.S. rail regulators are expected to adopt tougher standards this year.
Meanwhile, other cars are approaching the end of their service lives as demand continues to boil.
“We're getting calls all day, every day: 'You got any grain cars? You got any cement cars?' ” said Mr. Savage, of lessor David J. Joseph. “We have no idle cars.”
Source: Dow Jones
Posted by Haylie Shipp
