Regulatory boost for rail tank car makers could be short lived

Oil railcar makers hoping for a

lasting boost in demand from tougher North American safety

standards may be in for a disappointment.

Factors including volatile oil prices and a loophole

allowing shippers to keep running older cars could leave rail

car makers like Trinity Industries Inc and Greenbrier Co

with a capacity glut, once initial orders for cars that

comply with tougher safety rules are filled, analysts and

industry officials said.

Investors cheered safety standards issued in early May after

a string of deadly accidents involving trains hauling crude oil.

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The U.S. rules call for retiring by 2025 older tank cars

that lack safety features such as thicker hulls, shields to

protect the ends of each car, and pressure-relief

valves. Canadian rules are similar, but not harmonized with the

U.S. ones.

The order backlog for tank cars hit record levels of over

52,000 in the first quarter. At current production levels, it

would take five quarters to fill that demand. KeyBanc Capital

Markets analyst Steve Barger estimates the rules could push the

price tag for a tank car to $160,000, up from $130,000.

The top tank car manufacturers are a mixture of

publicly-traded and private companies. Trinity is the market

leader, followed by Greenbrier and American Railcar Industries

Inc, then privately-held National Steel Car, Union Tank

Car and a number of smaller operators.

Robert Pickel, senior vice president for marketing and sales

at National Steel Car, said about 140,000 tank cars could be

affected by the new rules. But he described the industry’s

outlook as “very fluid and changing” thanks to low energy

prices.

‘UNPROVEN AND UNRELIABLE’

“They all have to be modified to one degree or another,” he

said. “The question is how many will be replaced or

retrofitted.”

Leasing companies will have to decide whether to buy new

cars or spend up to $60,000 refurbishing 20-year-old tank cars

or $10,000 on year-old models, Pickel said.

Resistance from railroads to new technology is one risk to

future demand for the tank car makers.

The U.S. regulations mandate electronically controlled

pneumatic brakes, which trigger all axles simultaneously rather

than one at a time as in the current design. The requirement

should bolster brake makers Westinghouse Air Brake Technologies

Corp and Knorr Brake Company, but the prospects for a

jump in orders are cloudy given major railroads’ firm

opposition.

The electronically controlled brakes “remain unproven and

unreliable,” No. 2 U.S. railroad BNSF’s Chief Executive Carl Ice

said in a speech Wednesday at the annual meeting of the National

American Rail Shippers Association.

Another potential problem for rail car makers is a loophole

in the new U.S. regulations that could allow many older cars to

stay in service.

The Transportation department rules apply only to trains

with “a continuous block of 20 or more tank cars loaded with a

flammable liquid or 35 or more tank cars loaded with a flammable

liquid dispersed through a train.”

‘TOO MUCH CAPACITY’

A DOT spokesman said the rules are aimed at long trains

hauling crude out of the Bakken shale formation in North Dakota.

But shippers could keep older cars in service to haul other

flammable liquids such as ethanol, and configure shorter trains

to stay below the limits in the rule.

“In my opinion, you ought to be matching the regulation with

what’s inside the car” rather than to train length, said Ed

Hamberger, who heads industry lobby group the Association of

American Railroads.

Tank car makers have ramped up production in anticipation

that all tank cars would need to be replaced, but the way the

rules are written could mean up to a third of tank cars or more

remain in service, said Art Hatfield, an analyst at Raymond

James.

“The industry has hurt itself by building too much

capacity,” he said.

After the new tank car regulations were released, railcar

lessor GATX Corp said 13,700 of its tank cars could be

affected, but added that number “could be substantially less”

depending on how many travel in larger trains.

A plant being built by equipment maker Vertex Rail will lift

the U.S. industry’s already swollen annual production capacity

by 5,000 to 45,000, said Andreas Aeppli, a principal at

consulting firm Cambridge Systematics. The industry normally

replaces 10,000 tank cars a year.

“With this massive capacity overhang, we could see a pricing

war,” Aeppli said.

(Editing by Joseph White and Christian Plumb)

Regulatory boost for rail tank car makers could be short lived