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U.S. railcar makers continue to backtrack

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U.S. railcar makers continue to backtrack

The recent U.S. shale-oil boom was a boon for U.S. railcar manufacturers. But their fortunes have gone into reverse, due to a drop in oil prices, cuts to shale-oil production, and an ever-greater percentage of oil now travelling by pipeline.

The dramatic increase in oil volumes pumped from shale-oil regions, coupled with nascent oil pipeline infrastructure, led to an explosive increase in U.S. crude-by-rail volumes. This is shown in the chart below.

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Source: U.S. Department of Energy

Between 2012 and mid-2015, the demand for tank cars to transport oil, as well covered hopper railcars that transport dry bulk loads such as frac sand, experienced abnormally strong demand. However, the previously rosy conditions for railcar manufacturers have taken a swift turn after oil prices collapsed in 2015.2Source: Railway Supply Institute

The drop in oil prices has led to lower levels of U.S. shale-oil production, and a reduced demand for railcars to transport the oil. This is combined with a shift in oil volumes from rail transport to pipelines. For example, the North Dakota Pipeline Authority estimated that 75% of crude produced in North Dakota was travelling by rail and 17% by pipeline in April 2013. In August 2015, 47% of North Dakota crude moved by rail, and 45% by pipelines. It now appears that the previously robust demand for railcars, particularly tank railcars to transport oil, has caused a severe railcar glut in the U.S.

It is estimated that a fifth of North America’s 1.6m-strong railcar fleet is idled. With such a steep oversupply of railcars, new railcar orders have fallen off a cliff. U.S. railcar orders for the September 2016 quarter declined by 25% year-over-year, despite having already fallen by 83% year-over-year in the September 2015 quarter. These are enormous declines, and there are simply too many railcars chasing after too little freight. So far we are yet to see any green shoots of a turnaround.

George joined Montgomery Global Investment Management in September 2015 as a Research Analyst. Prior to joining Montgomery, George was an investment analyst at Private Portfolio Managers where he covered global equities across various industries, using a value investing framework. George’s prior experiences include equities research and investment banking roles at both Citi and Greenhill & Co.

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This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564) and may contain general financial advice that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking advice from a financial advisor if necessary.

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