Summary
There were only 2,165 orders for new railcars during the second quarter, while deliveries totaled 6,463 cars according to the ARCI. Both numbers were 20% less than the totals reported for the first quarter and appear to support both a forecast of 22,000 deliveries in 2009 and a much lower production rate for 2010. Beyond 2010, the future is a lot cloudier than some forecasters will admit, especially those projecting a return to pre-recession production levels within a few years.
Analysis
Most forecasters agree that it is wishful thinking to envision the economy rebounding in a “V” shaped recovery to pre-recession levels by 2011. Recessions caused by banking problems have historically been longer and taken more time for recovery than recessions caused by production overtaking supply. The consensus among economists is that the recovery will be long and slow, with GDP growth staying below 2% for at least a few years. Under that scenario, it is difficult to see a rebound in the railcar industry for the foreseeable future.
However, there are a few non-economic factors that are further complicating the outlook for railcars. The current push to eliminate “dirty coal” is having a terrible effect on railroad coal traffic and the demand for railcars that carry coal. Demand for electricity is down 4.7%, but coal fired power was cut 12.2% by the utility industry for the first four months of the year according to the DOE’s EIA. In 2008, over 9 gigabytes of new wind power came online, and at least 6 gigawatts are expected in 2009 despite the downturn in demand and the funding problems facing this new industry. It may develop that coal production peaked in the US and will decrease in the future.
Another factor is the increased focus on electric automobiles. These cars have not yet been fully developed, but many Americans are waiting to buy one rather than invest in a gas guzzling car. And invest is the appropriate word for automobiles these days, with average prices representing a larger percentage of the average income that in the past when consumers purchased cars and wore them out rather quickly. The automobile industry drove a lot of railcar demand, from multilevel auto transport cars to tank cars for the chemicals and gondola cars for the steel products used to build the automobiles. Auto sales will remain low until this issue is resolve.
Lastly is the growing but silent force of protectionism that may stifle foreign trade, both imports and exports. Populists in all countries are pandering to the worker class who just want jobs and will reward politicians whom they think are listening to their demands.Toby Kolstad consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
