Although going to a NASCAR race remains on my bucket list, it feels like the rail equipment sector has been in a race for the last 18 months and it's only going to get faster. The recession brought the industry to almost unprecedented lows in terms of freight volume, equipment demand, fleet surpluses and new car builds during 2009 and 2010. However, almost as quickly as the markets slowed, they roared back.
Since 1965, the rail equipment sector has gone through four major new car build cycles, each cut off by a recession. We're currently in the early stage of a new up-cycle, and although all cycles have unique characteristics, they fundamentally are reliant on freight demand and the condition of the existing fleets.
The railcar market has never before rebounded so fast only one year removed from its trough. Most significant is the very weak recovery after the 1980 recession, in which it took nearly a decade for the same level of recovery to occur that we are seeing from 2010 to 2011.
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One of the big differences between then and now is that the 1980s saw the introduction of a whole new competitive base with the deregulation of the trucking industry, which came just after the deregulation of the railroad industry. That position has now been somewhat reversed with the trucking industry seeing very tight capacity despite the weaker economic recovery.
In this next cycle, three factors will set the tone.
- Energy: The most visible is the affect the energy market is having on the industry's railcar fleet. Using new drilling technologies, crude oil and gas are being extracted from non-traditional geographies were rail has a strong competitive position. To move this new traffic significant investments are being made in new tank cars and covered hoppers. This area is expected to drive almost 25 percent of the new car deliveries over the next five years.
- Intermodal: The development of new domestic intermodal networks is forcing an adjustment in the fleet mix to accommodate a changing traffic base. Add in expected growth from an improving economy and intermodal cars will account for 15 percent of new car deliveries over the next five years.
- Retirements: The least visible, but potentially most significant, factor is the recession's effect on the retirement rate. High scrap steel prices and a surplus of equipment (that reached more than 35 percent of the fleet at its peak) drove fleet owners to scrap cars at almost three times the historical rate. Consequently, with improved freight volume, replacement demand will be the largest driver of new railcar demand during this cycle.