Some tank cars face store-or-scrap choice

OREANDA-NEWS. June 30, 2016. The hottest economic debates in the flammable rail transport business these days might have more to do with the steel that comprises tank cars rather than the fuel that fills them.

With most spot crude-by-rail economics underwater amid tight onshore-to-international crude spreads and the ethanol industry well-supplied, owners of tank cars out of service are faced with the choice of storing or scrapping their units.

At the Argus Crude Transportation Summit this week, National Steel Car senior vice-president of marketing and sales Bob Pickel told the Houston audience that 36,000-38,000 tank cars of all varieties are estimated in storage, or nearly 10pc of the North American fleet.

And storage space is filling up. Pickel said lower-rate storage is likely to be in remote areas. Costs can vary from \\$3-\\$10/d plus switching costs and has led to announcements of storage-oriented businesses.

One alternative is to scrap, especially as the 2018 deadline looms to remove pre-October 2011 DOT-111 tank cars out of crude service in the US. But like crude, scrap prices were gravity-bound in 2015.

After spending the second half of last year at multi-year price lows, ferrous scrap prices began a recovery this February that delivered gains for three successive months. Despite a drop this month, average ferrous scrap prices in June are up by 38pc from January.

Veteran AllTranstek rail consultant Dick Kloster and others at the conference said it is unlikely the approximately 75,000 older DOT-111 tank cars would be retrofitted to meet new US and Canadian standards, or roughly half of the general-purpose fleet. But about 27,000 of those are in ethanol service and legally can remain there until 2023.

There are potential angels for older cars. If gasoline with 15pc ethanol unexpectedly gains traction — something US government statisticians do not expect this year — that could increase demand for DOT-111s. Likewise, burgeoning products-by-rail exports to Mexico can use the older cars until 2029.

Until then, owners of unemployed older cars will keep one eye on their storage costs and another on metals markets.