New railcar orders rose 80% to 6,227 in the first quarter of 2021 from the fourth quarter of 2020 as rail freight volumes improved. Lease rates are showing improvement (but remain “soft”1). Greenbrier: “We’re seeing a broad-based need across all sectors and all businesses. Shippers are pursuing larger, higher-capacity railcars as a means to optimize rail shipments while reducing their carbon footprint by using rail.” Canadian National earlier had placed an order for 1,000 new-generation, high-capacity grain hopper cars (Trinity built) as their grain shipments have achieved 14 straight months of record growth amid record high grain prices. Trinity: “We see positive carload trends for railcar types representing over 50% of the North American fleet.” Railcars are continuing to come out of storage as average scrap pricing has increased: forty-seven thousand railcars are expected to be scrapped in 2021 with the age of scrapped cars declining to 36 years from 43 years in 20162.  

Class Ones are reporting record operating ratios3. “We are even more confident about growth for the balance of this year,” Norfolk Sothern’s CEO Jim Squires told investors and analysts on the railroad’s earnings call on July 28th. For the second quarter, Union Pacific set records for operating income, net income, and earnings per share, and an all-time record operating ratio.   

The pandemic revealed the geopolitical risk of over-dependence on foreign production. China’s reluctance to approve the return of Boeing’s 737 Max to service reveals their focus on local certification of the C919 (by this year-end) and demonstrates their ambition to become a global power (Boeing has not placed any new aircraft orders there since 2017). China’s coerced joint ventures and industrial technology theft is moving it toward a new kind of predominance among Asian low labor cost countries, growing in sectors that are far less exposed to labor cost competition – particularly high-tech production that demands sophistication and reliability as well as cost efficiency. As China absorbs U.S. technology it plans to replace foreign corporations with domestic ones. 

A more belligerent China now boasts an increasingly skilled labor force, growing middle class, strategic raw materials, highly developed manufacturing capabilities, and plans to further invest $1.4 trillion in advanced manufacturing and automation by 2025. With its high labor costs, US manufacturing will be forced to improve productivity and increase the efficiency of its workforce to effectively compete (of particular concern is 25 percent of the US manufacturing labor force is now age 55 or older). National security concerns and ongoing tensions have created this need to reduce dependence on manufactured imports. Smart strategies include building strong transportation links with Mexico and Canada that will develop competitive advantages. 

Rail and air transport investment requires the ability to anticipate major changes, understand served markets, shipper logistics patterns, modal alternatives, and consumer behaviors. The U.S. economy grew at an annual rate of 6.5% in the second quarter and economists expect the third quarter to be better.  For investment policy, portfolio composition, and asset management, look beyond the pandemic to position your rail and aero investments. Call RESIDCO.

1 GATX, CFO Tom Ellman, first-quarter 2021 earnings call, April 20th: “non-energy tank car lease rates remain down 15 to 25%, with freight car lease rates down more”.

2 CIT internal estimates as of June 1, 2021, MARS July Lake Geneva Summer Presentation.

3 NS 58.3%, CSX 43.4% (excluding one-time expense credits adjusted to 55.1%), Union Pacific 55.1%. 

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