We hosted a call with industry executives on the rail equipment outlook, as a strong start to 2025 is overlooked due to pull-forward and causing shippers to delay large asset purchases. Coal volumes buck secular trends, used equipment pricing remains strong, and panelists remain skeptical of Class I service improvements.
Panelists are seeing demand for coal cars for the first time in years amid resurgent coal demand (QTD +22% Y/Y). A sharp recovery in natural gas prices combined with elevated energy demand (hot weather, data center demand) are supporting the near-term outlook for thermal coal volumes while export remains steady. Recent years have seen interruptions to coal’s declining secular trend but are likely to be viewed as temporary tailwinds embedded with political risk. Norfolk Southern and CSX will likely make coal car orders in the near future but mainly due to replacement needs as opposed to a reaction to demand.
Used equipment prices will remain elevated despite soft volume. Expectations of lower interest rates heading into 2025 led shippers to defer railcar orders as supply chain operators hoped for lower acquisition costs. However, despite sluggishness on the demand side, new-build prices remain elevated on input price inflation and higher steel prices, putting a floor on used prices. A muted new-build order book is also preventing an influx of capacity.
Tariff uncertainty is keeping shippers very cautious on rail equipment spend. The thin margin nature of rail equipment is causing shippers to take a wait-and-see approach to large asset purchases. Potential tariffs on these assets would significantly impact ROIC and is a concern for rail shippers. The North American fleet has been stable the past few years, though cars in storage numbers have been modestly trending down (on the lower end of the 18%-20% range). Panelists do not believe that CARB rules will trigger new loco purchases. “The cycle is broken for new locomotives.” Panelists believe that shippers will prioritize modifications to locos vs. new loco ordering.
Despite railroads posting improving service metrics, some panelists believe rail service has actually worsened over the past year. One panelist pointed to 50,000 merchandise shipments he tracked. Dwell time worsened at 75% of the terminals, and transit times worsened by 10% over the past 13 months. Acknowledging severe weather this winter, panelists were skeptical on the prioritization of rail service and volume growth at the Class I’s.
