Rail Loading Volatility Provides Investment Opportunity Insight
What does rail traffic tell us about the U.S. economy? Weak loadings, a large overhang of idle equipment, and excess railcar manufacturing capacity all continue to negatively impact equipment values and pressure lease rates. But year over year losses have disguised a recovery that started mid-2016. Traffic demand is no longer falling, but stabilizing at current levels. As surplus railcars are absorbed, the storage of idle equipment in the North American Rail fleet is a leading indicator of an improvement in the fundamentals of traffic demand.
Is now the time to invest in a market with too many railcars, and too little freight? Remember, as prices rise investment becomes riskier, but, as prices fall, investment becomes less risky. The best approach to navigate this market is to understand what drives traffic, and anticipate the difference between current market pricing and future equipment values. While we invest in the present, we invest for the future
For example, after months of talks, OPEC secured a global agreement to cut oil output. Cheap energy has made U.S. manufacturing more competitive without tariffs or trade disruptions. Between 2000 and 2008 coal was significantly less expensive than natural gas. Coal then supplied 50% of U.S. generation. However, beginning in 2009 the gap between coal and natural gas narrowed as large amounts of natural gas produced from shale formations changed the balance between supply and demand in our natural gas markets. Today’s hydraulic fracturing shale gas (and crude oil) has made the U.S. one of the most cost effective energy producers. The connection? Resin producers in the Gulf Coast ship to international packagers for West coast export in Long Beach, California. Product shipped in plastic pellet railcars reaches Asia one week faster than product shipped via ocean vessels from Houston.
The new Administration has pledged to reinvigorate the U.S. economy with infrastructure spending. Roads, bridges, airports, and other construction projects require construction aggregates (open top hoppers and gondolas). Think of this Fall’s grain market strength and continuing light vehicle demand. With corporate tax reform, a special rate on repatriated funds, government regulatory decisions based on economic realities and free market solutions, we feel more optimistic about traffic volumes in 2017.
Sound investment strategies produce sound results, and Capital that invests in Rail can expect safety of principal and continuing cash flow. Short-term yields on leased cars are attractive, a deep secondary market allows the portfolio trading which provides both liquidity and the opportunity to manage exposure. With our growing portfolio of rail equipment, and rail specialists on staff, we manage asset concentrations, credit exposures, and counterparty risks. Our playbook includes long-term strategies, an understanding of the characteristics of this market, and the ability to select and manage railcar and locomotive investment for better than average returns. With practical investment experience, we identify those market opportunities that ensure you have an ample margin of present value above current market pricing.
RESIDCO, rail equipment specialists. We call the signals for prudent rail investment. Contact us now!
 On November 30, OPEC announced a ‘deal’ to cut production. Oil prices have surges in response. The consensus is that Crude will be around US$55 to US$60 in 2017.
 U.S. Energy Information Administration.
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