MANAGING RAILCAR FLEET SIZE COSTS IN AN EVER-CHANGING ENVIRONMENT
1. M A N A G I N G R A I L C A R C O S T S I N A N
E V E R - C H A N G I N G E N V I R O N M E N T
NORTH AMERICAN FRAC SAND
EXHIBITION & CONFERENCE
February 22, 2023
2. T O P I C S T O B E C O V E R E D
1. About Railroad Financial Corporation
2. Current State of the Railcar Market
3. Small Cube Covered Hopper Railcar Fleet
4. Drivers for Railcar Lease Rates
a) Commodity Prices
b) Interest Rates
c) Loadings
d) Storage
e) Service
f) Velocity
3. Founded in 1989
• RFC is the only financial advisory firm with a practice
devoted solely to the rail equipment industry
$25 Billion
• RFC has represented clients in transactions on rail
equipment value in excess of US $25 billion
Customer Base
• Primarily industrial commodity shippers
$500 MM – $750 MM
• Average annual rail-related transaction volume
Diverse Team
• Former: Shipper, Lessor, Bank Investor
Annual Rail Equipment Finance Conference
• 2023 will be the 37th year (375+ attendees)
A B O U T R A I L R O A D F I N A N C I A L C O R P O R A T I O N
The team applies its deep
knowledge of leasing, finance,
and rail equipment coupled
with its broad relationships
with investors to deliver the
lowest cost financing solution
and best T’s and C’s
RFC Saves Clients
Money
4. C U R R E N T S T A T E O F T H E R A I L C A R M A R K E T
The market for most railcar types
have moved to being “scarce”
• Lease rates have been on the rise
• Demand for cars is highest in the
past decade
• Most railcars (except for crude
and sand/cement) are out of
storage and on lease
• 2023 deliveries estimated to be
~42,000
• 2022 through 2026 do not include
small cube conversions ~6,000
per year
16,523
82,296
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
F
2024
F
2025
F
2026
F
North American Railcar Deliveries
Source: ARCI Committee of RSI
5. C U R R E N T S T A T E O F T H E R A I L C A R M A R K E T
Source: ARCI Committee of RSI
6. C U R R E N T S T A T E O F T H E R A I L C A R M A R K E T
Source: ARCI Committee of RSI
• Net effect for shippers (across almost all
segments)
• Lease rates across almost all market segments
are on fire!
• 9 sequential quarters of increased rates
• Coal cars, small cube covered hoppers for sand
(cement), grain hoppers are all seeing increases
in lease rates for the first time in a while
• The war in Ukraine has caused multiple
commodity constraints
• Grain, steel prices, natural gas, oil
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
1
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4
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7
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2
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3
Railcar Backlog
7. S M A L L C U B E C O V E R E D H O P P E R F L E E T
Source: Railinc
8. D R I V E R S F O R R A I L C A R L E A S E R A T E S
• Commodity prices have gone through extreme changes relative to the past
• Investors across the board have benefited from lower interest rates in the pandemic economy.
For the first time in four years interest rates are rising and expected to increase
• Lower interest rates support “bottom feeding” purchases of cars by opportunistic investors hoping to capitalize on the
volatility of the lease market during service disruptions and demand spikes
• Low interest rates are also fueling large scale asset purchases as new entrants (Wafra with Trinity, JP Morgan Infrastructure
with Instar) enter the market while historically long-term investors (Andersons sells to AITX / ITE) exit the market
• How much will rising interest rates impact lease rates?
• Bonus Depreciation era begins tapering
• Storage
• Railcar loadings down
• Railroad service levels down
9. S T E E L P R I C E S
Sources:
*Investing.com
** https://www.cmegroup.com/trading/metals/ferrous/hrc-steel_quotes_globex.html
***SteelBenchmarker.com/history.pdf
0
500
1,000
1,500
2,000
2,500
1/1/14
5/1/14
9/1/14
1/1/15
5/1/15
9/1/15
1/1/16
5/1/16
9/1/16
1/1/17
5/1/17
9/1/17
1/1/18
5/1/18
9/1/18
1/1/19
5/1/19
9/1/19
1/1/20
5/1/20
9/1/20
1/1/21
5/1/21
9/1/21
1/1/22
5/1/22
9/1/22
1/1/23
5/1/23
Hot Rolled Coil Steel Historical & Futures Price
10. 1 A N D 1 0 Y R H I S T O R I C A L T R E A S U R Y R A T E S
Source: Federal Reserve
11. P P I : R A I L R O A D R O L L I N G S T O C K
Source: Federal Reserve
13. • Crushed stone, sand and gravel had
biggest year over year gains – 22.6%
• Weekly carloads averaged 19,919 – the
most for January ever recorded dating
back to 1988
• Infrastructure Investment & Jobs Act
• Typical calendar year, US Class I railroads
carry 1.2 – 1.3 million carloads of
crushed stone, industrial sand and gravel
R A I L C A R L O A D I N G S Y E A R O V E R Y E A R ( J A N . )
Source: AAR
14. A N N U A L R A I L C A R L O A D S O F S A N D
Source: AAR
15. R A I L R O A D S E R V I C E
• Pandemic exacerbated pressure from Class I railroads to do more with less as all Class I’s
pursue Precision Scheduled Railroading (PSR) and reductions in operating ratio
• Let’s face it – it is neither precise nor scheduled
• Drop off in traffic as a result of the pandemic led to large scale layoffs
• As it has been nationwide, rehiring and restaffing has been a challenge
• Employment benefits marginalize work
• Salary increases coming from other industries (Loco engineer earns $80K – Walmart driver earns $130K and
goes home at night)
• Recent resolution on some paid leave after strike averted
• Railroads struggle to deliver quality service and expand their franchise (increase loadings)
• Congestion feels otherworldly
• Impact being felt across all commodity groups and service levels
• UP announced publicly the need to reduce cars on line to try to address service problems
18. 18
Will Geiger
Senior Vice President
wgeiger@railfin.com
Railroad Financial Corporation
676 N. Michigan Ave, Ste 2800
Chicago, IL 60622
www.railroadfinancial.com
Thank You Thank You / Q&A
