Russell Sage — “Buy your straw hats in winter.”
I'm sure you've read the dismal near-term forecasts.
"New freight car outlook: 16,000 in ’10, 21,000 in ’11"
New railcar orders received during 2009 failed to top 10,000 units. Things certainly look bleak for the railcar industry right?
Not necessarily. For the following reasons.
The US Transportation Energy book stated the following figures for Freight transportation in 2004:
Class 1 Railroads - 341 BTU consumed per short ton mile
Heavy Trucks - 3,357 BTU consumed per short ton mile
That makes rail 10 times more fuel efficient and I don't anticipate fuel costs going down significantly anytime soon (or ever).
With that in mind, and given that 39% of the 1,965,830 railcars comprising the North American fleet are more than 25 years old, I believe scrap rates, driven by the pursuit of higher fuel efficiencies, will generate a significant need for new, lighter weight railcars. I also think Ethanol (which isn't going away anytime soon), and the record corn crops produced to meet Ethanol demand, both drive demand favorable to ARII.
FTR Associates, a consultant to the freight supply industry, said approximately 60,000 units were scrapped in 2009, and likely another 57,000 units this year and 56,000 units in 2011 will be retired.
Scrap metal prices will likely influence the scrap rate as well.
Having said all that, ARII may very well go much lower before it goes higher. I've sat in stocks for years waiting for the worm to turn.