ASSESSMENT of the RAILWAY MARKET
Portrait of a Changing Landscape
David Briginshaw, Editor-in-Chief,
The Rail Journal (no longer valid - use main page)
June 19, 2006
THIS MONTH we report exclusively on SCI Verkehr's latest survey of the world market for railway equipment and services. The good news is that the market is continuing to show steady growth of between 2 and 3%. This confirms our own view that rail is continuing to enjoy a period of unprecedented growth and that the outlook for rail has never been better than during the period when most of the world's railways were first constructed. SCI Verkehr says its latest survey is a far more accurate assessment of the railway market than its first survey, published three years ago, as a result of considerable feedback from the industry. The new survey also includes after-sales maintenance contracts for the first time. These account for half of the Euros 59 billion vehicles sector, 52% of systems technology, and a massive 72% of the Euros 31 billion infrastructure market. The latter is hardly surprising considering the large amount of money required to maintain tracks and signalling. These two developments mean that it is not possible to make comparisons between the two studies. It is very clear that the railway landscape is changing quite considerably. Our articles on Russian Railways (RZD) in this issue reveal an increasingly profitable railway that is steadily ramping up investment. RZD's president, Mr Vladimir Yakunin, said at a recent UBS conference on Russia that RZD intends to attract major investment to the rail sector, in particular by creating subsidiaries and affiliated companies in competitive sectors and then selling stakes to investors. RZD needs to replace a high proportion of existing equipment and cope with steadily-increasing traffic. Orders placed so far have already led to a revival of Russian railway equipment manufacturing. Western companies are also starting to benefit as RZD seeks to inject new technology. When RZD, the world's biggest railway in terms of network size, really starts to flex its muscles, the effects on the world market will be quite significant. Kazakhstan is another country to watch as it is keen to become a key part of a new railway landbridge between the Far East and Europe to rival Russia's highly-successful Trans-Siberian Railway. Saudi Arabia is also pushing ahead with ambitious plans to create a railway landbridge, and build high-speed passenger lines in the west and heavy-haul mineral railways in the north. Many South American railways have now moved firmly into growth mode following widespread privatisation. Argentina wants to be the first country in the entire American continent to build high-speed railways. If successful, this could spur other countries to do the same. The development of strong home markets for rail equipment in countries such as China, Korea, Russia, and India, could lead to a major shake-up in the railway equipment supply industry. The first signs are already there. Hitachi, Japan, has won its first train order in Britain and will undoubtedly use this as a springboard to enter other European countries. Rotem in Korea is making its presence felt with aggressive bids for new trains. Chinese manufacturers are starting to look outside their traditional markets. CSR Ziyang has opened an office in Britain with a view to selling diesel trains in Britain and locomotives in Scandinavia. Very low production costs coupled with the injection of western technology will prove a potent mix that will be irresistible for many railways seeking to keep costs down. The world's looming energy crisis is set to have a profound effect on rail transport. While the world's energy experts argue over whether oil production has peaked or will peak in the foreseeable future, it is clear that oil production will start to decline. Yet the demand for energy is soaring as western countries show no sign of cutting demand and developing countries strive to catch up. Rail transport is in a strong position both to benefit from and help countries to deal with the energy crisis. Rail is the only mode of transport that can operate with any source of fuel, provided, of course, the railway is electrified. Countries that take railway electrification seriously, such as Japan, China, Russia, India, and most of Europe, will be a in a much stronger position to weather the forthcoming energy crisis than those that don't. Railway managers and politicians need to start talking now about how to electrify their networks. There is not a moment to lose. UPDATE:
2009 Outlook:As the worst recession since the Great Depression of the 1930s continues to tighten its grip on the nation and spread across the globe, many aspects of American life - "dependable" things we've taken for granted for a very long time, like real estate values appreciating and the stock market staying on a steady upward climb, with the occasional hiccup - have vanished, along with retirement savings. Americans aren't buying new cars. They're scaling back on discretionary spending. They aren't building new houses or upgrading to a larger home. They're forgoing pleasure travel. Many are losing their jobs as some of the world's largest, longest-established companies teeter on the brink of bankruptcy. And yes, railroad traffic is slipping, badly. But Americans still have to eat, and heat and power their homes. They still need clean drinking water. The raw materials needed - coal, agricultural products, chlorine, for example - are most efficiently, cost effectively, and safely transported by rail. These are essential tasks that only railroads can perform. Railroads handle more than 40% of the nation's freight ton-miles while using just 8% of the nation's energy required for transportation. That's why America's railroads, though certainly not recession-proof, are certainly recession-resistant. Compared to many industries in these worsening economic times, the railroads won't fall as far, and they'll come back sooner. Though some cuts in spending are inevitable, the railroads continue to push forward with capacity improvement projects and basic, state-of-good-repair maintenance. Even with cuts of 20%, they will still need to spend well in excess of $10 billion in 2009 on capital expenses, maintenance, and supplies. That's still a substantial market. These are among the reasons railroads remain fundamentally strong. General Motors or Ford could vanish overnight. Union Pacific and Norfolk Southern and CSX and BNSF won't. In the midst of economic turmoil, Wall Street and investors have exhibited a good degree of confidence in railroads. "Despite a much softer freight environment, shippers expect rate hikes to continue," says Morgan Stanley transportation analyst William Greene. "Shippers expect volume to slow, but not collapse. They see more value from rail, which is supportive of long-term pricing. All railroads are showing improvement in service and value. Intermodal will continue to take market share, and this is not purely a fuel decision. A modal shift to rail from trucks appears to be an ongoing theme as shippers look to cut costs. Even in a deep recession, we see 12% to 45% upside by year-end 2009 for U.S. railroads." "Investors see railroads as the best investment in the transportation industry," says Kansas City Southern chief executive Mike Haverty. "In addition, railroads have high barriers to entry, which provide a greater degree of security to the investment. Plus, during a difficult economic period, investors like to be invested in companies with hard assets, which again favors railroads. And, while re-regulation is always a threat, the fact that railroads are self-funded suggests that politicians would be reluctant to do anything to hurt the financial viability of the industry." How the Obama Administration will treat transportation is the industry's biggest source of concern. Initially, the positive signs seem stronger than the negative ones, even as some disaffected shipper groups flock to Capitol Hill, waving their "railroads are thieves in cahoots with one another" banner. (One clear and present danger is a class-action lawsuit brought by a group of shippers that have accused the railroads of colluding on fuel surcharges. If they prevail in court, it could cost the railroads heavily.) While politicians who have listened to cries for re-regulation will most certainly try to push their agendas, indications are that President-elect Obama and those he has chosen to lead the Department of Transportation will practice restraint, with a more even-handed approach. Chances are good that when funds become available, the railroads (both freight and passenger) will be getting a bigger slice of the federal pie, especially if infrastructure dollars are part of an economic stimulus package that includes large public works projects. While this is encouraging, large sectors of the industry are beginning to feel significant pain. For example, freight car deliveries should total just under 58,000 units this year, but an economy in recession will dampen future demand for capital equipment, including freight cars. In 2009, economic conditions will not support much demand for cars other than coal, grain, DDG, and tank cars, according to Economic Planning Associates: "Based on beginning-year backlogs and moderate demand for these cars, we look for deliveries of 41,000 cars in 2009, followed by a further easing to 39,000 in 2010. We expect minimal, if any, interest in boxcars, centerbeams, bulkhead flats, autoracks, and intermodal equipment." After 2010, the freight car market is expected to recover. "Assuming that the measures undertaken by the Treasury Department, the Federal Reserve, and the central banks of a number of major foreign economies will eventually correct current liquidity dislocations and the high costs of capital, we expect a cyclical revival in railcar demand beginning in 2011," EPA said. Deliveries are expected to increase to 45,000 units in 2011, followed by 52,800 in 2012 and 57,500 in 2013. At this point, it remains to be seen exactly how the industry will ultimately be impacted by a worsening economy. These aren't the best of times by any stretch of the imagination, but the railroads have many things in their favor. President-elect Obama wants to make what he is calling the "New Energy Economy" the centerpiece of his administration. He is referring to new or more-efficient energy sources, to wean the nation off foreign petroleum. The railroads can and should have a large part in carrying out the new President's vision. For the full story, subscribe to Railway Age.
Railroads remain fundamentally strong International Railway Journal
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