(The following story by John D. Boyd appeared on The Journal of Commerce website on July 5, 2010.)
WASHINGTON, D.C. A large part of North Americas railcar surplus is literally melting away.
Enticed by rising scrap metal prices, equipment lessors, railroads and shippers permanently retired nearly a third of parked or underused freight cars over the past year, according to industry consultant and analyst FTR Associates.
Most of those cars were decades old, accruing storage costs, and may have sat idle for years before shipment demand might rise enough to require service. As scrap metal prices rise amid a global economic recovery, owners are seizing on the opportunity.
A good portion of the surplus reduction is attributable to high retirements, which have been more than double historic levels, FTR said in a comprehensive new report on the rail equipment fleet.
Owners have retired about 90,000 railcars, representing 31 percent of the 287,000 cars activated or otherwise taken off the surplus list, since the rail industry hit its lowest point of the recession in the second quarter of 2009, FTR said.
There still are 391,000 railcars in surplus, FTR estimates, most of them stored on rail sidings, vacant lots or in corners of railyards across the continent. And a lot more of them will head for the recycling smelters before the shakeout is done. Annual scrappage traditionally amounts to 2 to 3 percent of the entire railcar fleet of some 1.5 million units, according to Richard J. Kloster, who heads Advanced Rail Equipment Solutions and is FTRs senior consultant for railcar forecasting. Retirements mainly focused on cars that reached the end of their 40-year life and were not being refurbished to run an extra 10 years.
The recession changed that. Although freight demand is recovering, its still sharply lower than two years ago. That, along with a move to more efficient types of some cars and buoyant scrap prices, encouraged owners to take equipment out of action for good. The retirement rate went to 4.6 percent in 2009 and will hit 5.7 percent in 2010, Kloster told The Journal of Commerce.
That trend already sent 72,000 cars to the scrap yards last year, he said, and another 85,000 are headed for retirement this year. All major railcar types are having accelerated scrap rates from normal and ahead of their normal useful life, Kloster said.
Retirements are led by boxcars for forest products and covered grain hoppers, but include uncovered coal hoppers, tank cars, gondolas and even several types of intermodal cars.
In late spring 2009, more than 500,000 railcars were parked and another 150,000 or so were running at less than normal load capacity. While railroads and other equipment owners have since cut the surplus more than 40 percent, FTRs report shows the economic recovery is just one reason why. Retirement is also a major factor and its growing.
Meanwhile, deliveries of new equipment are projected to fall again this year to 13,404 units, from 21,682 in 2009 and a prior five-year average pace of 62,500
Eric Starks, FTRs president, told the National Association of Rail Shippers conference in May he was shifting from his normally cautious outlook to predict a sustained freight recovery that probably would be stronger than many shippers expect.
Thats clearly the case for the intermodal market, where a strong rebound has tightened container and train capacity dramatically. Intermodal loadings across the continent in mid-June were up 5 percent from mid-May and nearly 8 percent from April, to reach their highest point of the recovery.
But bulk railcar shipments at major North American railroads peaked at 387,283 new loads in the week ending April 24, and have bounced around in a lower range since.
Some analysts also think intermodal and logistics business could cool soon. John Larkin of Stifel Nicolaus cautioned clients last week there are signs demand is stumbling, and that chinks in the armor have already appeared in (the second quarter) may give more credence to our concerns for the rest of this year.
FTR expects the onslaught on the equipment surplus to slow next year, but retirements will make up a larger share as scrapping outpaces the number of older railcars returning to service. It looks for 61,000 railcars to be retired in 2011, 73 percent of the overall surplus decline. For 2012, FTR projects owners will retire 55,000 cars, 85 percent of the improvement in the surplus number.
