Back in November, we provided information regarding industry sources that are predicting a very material increase in new railcar orders in 2021, following last year’s declines. We noted at the time a forecast of 90% increase in orders this year.
Predicting the future is always risky, particularly since factors no one anticipates often come into play to change the dynamics of the marketplace. And, we now have an unforeseen market condition that has the potential to change either the number of new railcar orders or how those cars are deployed: a very meaningful increase in steel pricing. According to Matt Elkott, Railway Age May 7, 2021, there are estimates that the price of steel may place a “15%-25% premium on newly built equipment.” As Mr. Elkott notes, this factor may spur a change in what may normally be a “buy-vs-lease” ratio, steering price-conscious industries to minimize the impact of higher pricing upon near-term costs through more leasing. Here are a few other potential impacts of this dynamic:
– The secondary market for railcars will see higher pricing as the cost of scrap increases and also new railcar pricing escalates;
– A potentially tighter secondary market as industries delay upgrading their fleet in the hope that future prices fall.
Often, these pricing cycles last longer than we would like to see and the valley-to-peak swings are surprisingly large. Our advice: If you see a railcar that meets your needs, hesitating to get a better deal later may turn out to be a regretful decision.
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