Railcar leasing rates are predicated on several factors. While all of them influence railcar leasing rates, three key variables really set the pricing stage:
- Railcar Utilization: How many trips per month can a railcar make and alternatively how much product can be delivered with that railcar in a month
- Railcar Supply: How many existing and new railcar builds are and will be available, when will they be available and what will that do to capacity?
- Railcar Demand: How much product needs to be moved in specific railcars thus creating a shipper demand for that specific railcar?
Railcar utilization, characterized as the number of loaded trips a railcar makes in a month or year, is the single most influential item in the entire spectrum of what one can call railcar availability. If the detailed part of the individual components of a cycle (loading time or time at a shipper location; loaded trip time; unload time or time at a receiver location; and empty return time to make a complete cycle) are improved, the result will be extra railcar capacity. It’s simply a matter of doing the math. A change from a 20-day cycle time to a 24-day cycle decreases the effective capacity of your railcar fleet by around 20%. If you have a 100 railcar fleet and it takes a utilization hit of 20%, you need 20 more railcars to fill in for your normal shipment patterns. This would only be a change of four days in a cycle time to make a 20% impact, e.g. from 20 to 24 days per railcar trip. ,i>Need help evaluating or improving your cycle time? Let us help you!
Here’s a real-life example. The decrease in railcar demand followed the track of as COVID-19 spread throughout the world. While COVID-19 was initially discovered in December 2019, the United States didn’t begin to feel the effects until March 2020. This initial timeframe from March 2020 was rout with a lot of confusion. Service industries began to shut down in droves due to mass layoffs. Manufacturing industries followed suit and imports and exports were reduced. This drove a noteworthy decrease in demand across all sectors; requiring less railcars, trucks, barges or ships to be available. Reacting to this demand shift, manufacturers, shippers, receivers and the railroads reduced their trained staff to protect their profitability as much as possible. Railcar utilization follows this trend with a little timing delay.
The jerky nature of getting the country back in business and the demand for skilled employees is posing a real challenge to smoothing out the supply chain. The utilization rate for railcars follows that same jerky motion. To band-aid the holes this leaves in having enough transportation capacity available, many private railcar owners, railcar lessors and railcar lessees are adding to their rail fleet inventories to smooth out the bumps.
The number and type of railcars available as supply is imperative in understanding pricing. Currently, there aren’t a lot of idle railcars available. Statistics still show that from a number’s perspective, there are still a lot of railcars in storage. Unfortunately most of those railcars are tank railcars that don’t meet Association of American Railroads (AAR) or Federal Railway Administration (FRA) guidelines and either need to be updated with a costly retrofit or scrapped or other equipment that is in gross excess of shipper demand. When it comes to railcar supply, there is no help here for available additional capacity.
New Railcar Builds
Railcar builders are inundated with new railcar builds. Coinciding with this demand is the reduction in the capacity of delivering new railcars because the entire supply chain that was used to support the new railcar building process is tied up in this dynamic cycle time dilemma. Railcar builders were caught behind the demand curve just like the rest of the manufacturing industries (think microchips, refrigerators, sofas and automobiles) in the fray. Prices for inputs and assembly increased dramatically and the price of new railcars followed suit. Many railcar builder lines (the ones they can staff and have parts for) are at or exceeding capacity through fourth quarter 2022 and first quarter 2023.
Coming back from a low that has lasted since 2016 due to an oversupply of railcars the turn-about is dramatic. In less than six to twelve months we’ve gone from an oversupply and under-demand of most all railcar types to a complete lack of supply for most every railcar type. The pandemic suppressed consumer demand as well as impeded the fluid operations of the ship-rail-truck; ship-truck; barge-rail; rail-barge, rail supply chain. These disruptions caused a significant amount of employers, including the railroad and manufacturing facilities, to pull back on manufacturing. This is a world-wide phenomenon that reminds us that we’re certainly working in an international economy and a changed work force. This resulted in an entire work class with a very specific set of skills and knowledge to be sidelined.
Railcar Lease Rates
So what does all of this mean for railcar lease prices? Railcar lease rates and prices for used and new railcars have risen dramatically in the last half of 2021. Prior to that time, we were beginning to see railcar supply constricting and demand increasing ever so slightly. We’re seeing lease rates for used railcars increasing and we’re seeing that railcar lease prices for newly built railcars (2022-2023) are in some cases double the price of those railcars leased in 2020 and 2021. New railcar building prices that railcar manufacturers must charge to stay in business have already skyrocketed based on increased steel prices. Steel still a major component of any railcar is mostly comprised of repurposed steel from the original form to a scrap metal. Scrap metal is a primary feed stock for steel mills. This new demand for scrap metal causes an influx of demand pulling a much higher level of scrap metal supply to those scrap metal accumulator and processing companies.
Predictions for 2022 and Beyond?
The integrated rail network (railroads) on which scrap metal and steel is transported seeks rail rate increases to capitalize on the trend. The steel mills feed automobile manufacturers, appliance makers, steel building materials and railroad track along with a host of other products. The price for these items has also risen in the quest for manufacturers and distributors to protect or increase their margins. Bought a new washer or drier lately or how about a new automobile?
Unless something unforeseen occurs, it appears railcar lease rates have begun gaining strength and will continue to do so for the next twelve to twenty-four months. Souring railcars to buy in this “Lessors Market” has become exceptionally challenging. Our advice is to plan accordingly and plan early!
Let’s Create Value Together.
Tealinc is a railcar lessor, railcar management and consulting firm. Contact us for an evaluation of your rail transportation situation. We’re always engaged and care about generating positive results be it a railcar lease, management of your rail assets or providing exemplary consulting results. We’re looking forward to creating true value with you.