A combination of rationalizing supply, new market opportunities and government mandates is rekindling interest in building, leasing or retrofitting tank cars, bringing a thaw to a frosty market.
"We are seeing a pickup in inquiries for orders or modifications of tank cars in flammable service," Trinity's newly promoted rail division head Eric Marchetto said on an earnings call yesterday, echoing other voices recently who have indicated that tank cars may be coming in from the cold.
Resuming retrofits
Trinity is looking at retrofitting some of the tank cars in its own lease fleet to meet the 2015 DOT-117 standard, although it did not say which cars or how many. The legacy DOT-111 tank cars already have come out of crude service but can remain in the ethanol fleet until 2023, giving owners and renters some time if they choose.
Some owners who bought from Trinity the DOT-111s or the CPC-1232 models that manufacturers made from 2011-2015 — coinciding with the crude-by-rail tank car construction boom that immediately led to a glut — are starting to return them for retrofits themselves, chief financial officer James Perry said.
And Trinity may be looking to bolt more tank cars onto its lease fleet. Marchetto said some secondary market owners, namely banks, are "looking to unload" cars now that a modicum of value has returned.
"I think it will present some buying opportunities for some people," he said.
Major railcar lessor GATX reaffirmed this week that it will not retrofit any of its nonjacketed tank cars and, in fact, believes others will join it in scrapping them, decreasing supply and shoring up a market that has been depressed since 2015. Recently rising scrap prices should only encourage it more, GATX chief commercial officer Paul Titterton said at the Southwest Association of Rail Shippers (SWARS) conference in San Antonio this week.
"It is more economically advantaged to scrap older cars," Titterton said, adding that he expects only about one-third of the approximately 60,000 general-service tank cars in flammable service that are not DOT-117 compliant to be retrofitted with thicker steel and other safety improvements.
GATX's remaining legacy cars will move "lower-hazard material permitted by rule".
Greenbrier, which established the GBW joint venture with Watco partially in anticipation of a wave of tank car retrofits that so far has not materialized, is hopeful that business will begin to trickle in. Greenbrier chief executive Bill Furman last month said owners of legacy tank cars that are due for required requalification service every 10 years have expressed interest in using that pit stop for a DOT-117 retrofit.
"We actually have received some momentum in that business, which could positively affect GBW, but we are also doing some of that ourselves," he said, adding that Greenbrier's manufacturing side — which was building essentially a DOT-117 type of car before the 2015 mandate — also is seeing "more activity" in the new car market.
As tank cars overdue for requalification come out of storage in a thawing market, American Railcar Industries (ARI) also sees an opportunity to double-dip with retrofit work.
"Hopefully we will see a steady improvement in repair services as the year goes on," ARI chief executive John O'Bryan, who took over for Jeff Hollister in January, said today on a conference call.
Oh, Canada
One demand driver could be Canadian crude by rail, which is poised to grow over the next two years or more as increasing production is now bumping against static — and insufficient — takeaway pipeline capacity. But just as railroads Canadian National and Canadian Pacific have been loath to commit resources, remembering the rise and quick fall of such movements earlier this decade, equipment providers have long memories, too.
"This is not going to be a long-lived phenomenon," GATX's Titterton said. "Production has no place to go by pipeline, so there clearly is a need to move barrels out of Canada by rail. But the question really is how long will that demand last, how long until those pipelines get built."
Enbridge hopes to have a replacement for its Line 3 pipeline into the US midcontinent, and the 370,000 b/d of restored capacity that comes with it, in service by mid- to late-2019 if they can get through Minnesota regulators in a timely manner. But crude still might be constrained by then, and the timetables for Kinder Morgan's 590,000 b/d Trans Mountain expansion to the British Columbian coast and TransCanada's 830,000 b/d Keystone XL pipeline to Nebraska are much fuzzier.
Looking south
There seems to be more long-term optimism among petroleum rail shippers about Mexico's staying power, considering its massive fuel appetite, relative closeness to the US Gulf coast refining and fractionation centers, large inland population centers and insufficient and tap-prone pipeline system.
On top of that, the 2015 tank car rules that focused on crude and ethanol movements allow refined products — which historically have had little presence on US rails — to run in legacy tank cars until 2029.
"We are really just seeing the beginning of [independent] refined products imports into Mexico," Kansas City Southern chief executive Pat Ottensmeyer told SWARS this week, noting that only a fraction of fuel movements from the US to Mexico take place on rails as infrastructure on both sides of the border continues to ramp up.
Titterton agreed that more US tank cars might find themselves in Mexico soon.
"Mexico could be a different story," he said. "If various market participants play their cards right, we are seeing on the tank car side significant and probably sustainable demand to move refined products into Mexico."
If rail's share of refined products movements from the US to Mexico ramped up to 20-25pc, compared with less than 5pc now, "you would see those refined products shipments rival propane and LPG in terms of total carloads" in the US, PLG Consulting chief executive Graham Brisben said. Since 2012, monthly LPG carloads have consistently hovered around 40,000, while refined products have been at trace levels.
