No Retrofit Bonanza for Tank Car Makers

When U.S. regulators adopted new rules last May to make hauling crude by rail safer, shippers anticipated relatively moderate costs and adjustments while rail tank car makers geared up for a retrofitting bonanza. It has not worked out that way.

Months later, oil companies are learning that meeting the new standards is more expensive and complicated than they thought while tank car producers have yet to see the windfall from the fleet's overhaul.

Blame the reality of dealing with railway operators' own technical requirements and an oil price rout that has radically changed the economics of the once-booming business.

In the U.S. Northeast, which accounts for half of the nation's crude rail shipments, Amtrak is warning that some of the cars modified or built to new specifications will be too wide for the busy corridor. Rail operators are also signaling they may impose new surcharges for certain older cars.

Industry officials also say that the new safety features, such as thicker walls, thermal protection and front and rear shields, go further than many had expected.

"No one anticipated the new rules would require all these bells and whistles," Robert Pickel Jr., a senior vice president at Canadian rail car builder National Steel Car, said. "Some of the retrofits cost more than the actual car."

The U.S. Department of Transportation's has initially estimated it would cost around $30,000 to adapt older DOT-111 cars that have featured in some recent derailments. Manufacturers and leasing companies estimate that cost at up to $80,000.

Squeezed by a plunge in the price of crude, now trading at less than half of mid-2014 levels, shippers are struggling to figure out what is the smart play: Refit old cars? Sell them for scrap? Shift them to carry other liquids and use idle new cars instead?

As a result, rail car makers such as National Steel Car, Union Tank Car or Greenbrier Companies have to contend with just a trickle of retrofitting work and a looming decline in orders for new cars caused by the oil slump.

"If you would have asked me eight to nine months ago, how many retrofits would we doing in the third or fourth quarter, we would have guessed a lot more," says Michael Obertop, a senior vice president at GBW Railcar Services, a joint-venture formed in June of 2014 by Greenbrier and Watco Companies to handle retrofit work.

At stake are some 30,000 older DOT-111 cars which, unless modified, must leave oil service by Jan 1, 2018 and 55,000 CPC 1232s built after 2011 that will require $15,000-30,000 worth of adjustments apiece by 2020.


Shifting Numbers
The U.S. shale revolution unlocked millions of barrels of oil in North Dakota and rail transport soared because pipelines were unable to carry the dramatically increased loads. As a result, tank car production more than doubled and is expected to reach about 35,000 this year.

But that boom may be coming to an end.

"If oil didn't drop to $40 a barrel, we would be making 35,000 tank cars this year and next," Pickel said. "Most people expected that number to continue for another five years, but, right now, I am not sure that it holds up."

Ultimately demand for upgrades and new cars will depend on shippers' response to new rules and a weak market.

Most experts say they will probably not bother to upgrade the older DOT-111s, but it is less clear what will happen to newer CPC 1232s that still have decades of service ahead.

Obertop said some shippers are deciding to modify them now to beat a potential rush closer to the 2020 deadline. Many also want to bring forward the upgrades because of safety concerns after a series of high-profile derailments, several officials from tank manufacturing companies said.

But complying with both the new rules and railways' specifications means new technical challenges and costs.

Shippers say they may need, for example, to move a ladder from the side of the modified cars to the front or the rear at an additional cost of thousands of dollars to be able to travel along Amtrak's Northeast corridor.

The national rail operator would not discuss the specifics of its requirements.

"Any rail car that operates on the Northeast Corridor - one of the most heavily used and complex railroads in the world - must meet our rigorous safety standards, including appropriate clearances," an Amtrak spokesman said without elaborating.

Rail companies, such as BNSF, Union Pacific and Canadian National are charging more for the use of the older cars, and fees may rise for all except the newest cars, called DOT 117s.

"You can expect the safest cars will have the best economics for shippers," BNSF spokesman Mike Trevino said.


(Reporting By Jarrett Renshaw)