Energy demands drive rail car industry backlog

At least 600 rail cars filled with sand arrive each month by train at Jim Lind's shipping terminal and warehouse in McKees Rocks.

They're destined for Marcellus shale wells.

Each hopper car carries 100 tons of the sand, said Lind, president and co-owner of McKees Rocks Industrial Enterprises, one of a dozen companies in the region that handle sand for shale-gas drillers, much of it delivered by railroads.

“Frack sand is white-hot right now,” Sterne Agee analyst Sal Vitale said. It has been one of the principal drivers of the all-time high rail car industry backlog of 124,000 rail cars.

That includes tank cars for oil, covered hoppers for sand, grain and other agricultural products, and multi-stack cars for vehicles.

Lind's company handles 3,500 to 4,000 rail cars of sand a year. The demand required him to more than triple employment from 20 to 70 since 2009, he said.

“We've added more sites in Youngwood, Sayre and two in Ohio, Niles and Hannibal,” he said.

Vitale said, “Demand strengthened from the second quarter to the third quarter, and we continue to see strong demand for car types apart from tank cars and frack sand, especially for automotive, plastic and grain cars. Coal cars are one of the only car types for which demand remains lukewarm.”

Manufacturers cannot keep up.

There are 124,000 rail cars on back order as of Sept. 30, according to the latest figures available from the Railway Supply Institute in Washington. That's up 25 percent from June 30, and an all-time high.

The larger manufacturers such as Trinity Industries Inc., FreightCar America Inc., and Greenbrier Co. Inc., have backlogs that represent as much as two years of deliveries at the current rate, Vitale said.

Major rail car manufacturing plants in Western Pennsylvania closed years ago, but dozens of component, system makers and steel suppliers stand to benefit from the boom.

“Our region is pretty rich in suppliers to the rail and transit markets, who supply products like we do, from components to signaling. When the market is strong like this, it's a benefit to the region,” said Wabtec Corp. CEO Ray Betler, who can watch trains run along busy CSX and Norfolk Southern rail lines from his office in Wilmerding. “We get the benefit of seeing our products on trains going by.”

Oil production, regulation

Oil drilling in North Dakota's Bakken and the Texas Permian shale oil regions propelled tank cars into such demand, experts said.

As many as 75 trains, carrying at least 1 million gallons of crude, pass through Allegheny and Westmoreland counties each week on their way to East Coast refineries, the Pennsylvania Emergency Management Agency said in a report released in October.

Carloads of crude surged to 415,000 last year from 9,500 in 2008, according to the Transportation Department.

The demand for rail cars “is largely driven by shifts in the energy industry,” said Henry Posner III, chairman of Railroad Development Corp. in Green Tree, which operates railroads in Iowa, Europe and elsewhere. “The shift away from coal to natural gas requires sand for fracking and covered hopper cars to move the sand. And oil is moving in increasing quantities.”

Tank cars represented 85 percent of manufacturers' backlog in early 2013, Vitale said. But orders started to slow in mid 2013 because of a slowdown in crude shipped by rail and apprehension about tank car safety standards. Because of the slowdown in tank car orders and increase in non-tank car orders, tank cars now represent just 41 percent of industry backlog, Vitale said.

The Obama administration in July proposed phasing out thousands of older cars under new rules meant to reduce risks of hauling oil by rail. Final rules are expected late this year or in early 2015.

About 1.6 million rail cars operate nationwide, including about 100,000 tank cars.

To encourage shippers to scrap older cars, BNSF Railway Co. said it plans to add $1,000 when an older car is used, starting Jan. 1. The surcharge would add about $1.50 a barrel.

Even so, “the whole longer-term dynamic of shipping crude by rail will not change. I think we will still see a significant increase in tank car orders when we have regulations in place,” Vitale said.

‘A wonderful situation'

At McKees Rocks Industrial Enterprises, meanwhile, sand deliveries come daily by Pittsburgh & Ohio Central Railroad, a 35-mile, short-line freight railroad that connects with Norfolk Southern. CSX delivers two or three times a week, depending on demand, Lind said.

“The oil service industry has allowed us to do a lot of improvements,” Lind said. The company added two warehouses for sand; a third is scheduled to open in January. It added a dock on the Ohio River to take deliveries by barge.

“For us, it's a wonderful situation — the market is really strong,” said Wabtec's Betler. Sales in its rail car component segment are on a pace to hit $1.3 billion this year, from $973 million in 2013, a nearly 30 percent jump, Betler said.

Jobs increased by 100 positions to 625 during the past five years at Wabtec's three plants in Western Pennsylvania. Its Wilmerding plant makes brake systems for freight cars and locomotives; Lawrenceville makes springs for the freight car undercarriage; and Greensburg makes rubber products used in freight car braking systems.

Railroads are investing heavily in freight cars, equipment and infrastructure, Betler said.

BNSF Railway, the former Burlington Northern Santa Fe, said it will spend $6 billion — half on rails, ties and ballast, and about $1.5 billion on expansion projects for locomotives and other rolling stock upgrades. Nearly $500 million will be spent in the Midwest, where BNSF handles agriculture, coal, crude oil and materials related to oil exploration and production.

“That's typical around the industry,” Betler said. “For the next two or three years, we're going to see increasing demand.”

Source: Tribune Live