Railcar Market UpdateTrinityRail
September 2016
2
Macroeconomic Indicators
Slow Economic Growth Has Become New Normal
• GDP Growth Up 1.1% in Q2 2016
• Consumption growth propping up economy while investment has struggled.
• Employment Still Short of Pre-Recession Standards
• The unemployment rate is 4.9%, almost at full employment. The U6 rate (unemployed,
marginally attached, or working part-time for economic reasons) has remained at 9.7%,
about 1.7% higher than the pre-recession lows.
• ISM Manufacturing Index Shows Small Contraction in August – Growth Likely to
Return in Fall
• Recent manufacturing trends have switched to consumer products rather than energy.
• Stability in Value of the U.S. Dollar Supporting Exports
• Indicators show renewed interest in U.S. goods (e.g., grains and chemicals) from
foreign buyers, but the value of the dollar remains elevated. Robust export growth
unlikely until the dollar falls back to normal levels.
• Housing Starts Reach Over 1.2 million in August to Continue Slow Improvement
• Still nearly 1 million builds below pre-recession highs, though multifamily builds are at
largest level since 1980s.
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U.S. Rail Traffic
350
400
450
500
550
600
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
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Weekly U.S. Total Rail Traffic (Carloads + Intermodal)
Source: AAR
2011-2015 Range 2016 5-Year Average
• Through 36 weeks, total traffic is down 7.1% in the United States compared to 2015
• When coal and petroleum & petroleum products carloads are removed, total traffic
is down 2% in the United States compared to 2015
• Agriculture & food products, chemicals, coke, and motor vehicles & parts have all
been positive y/y
Coal and Crude Oil Carloads Weigh Heavily on Overall Traffic
4
Train Speeds
• Train speeds have remained elevated in 2016 with the highest velocities across the
railroads since 2013
• Dwell times dropped through the first half of the year in conjunction with increased
train speeds, but have started to increase over the summer as rail traffic has
started to pick up
Train Speeds Accelerate Due to Low Traffic and Recent Railroad Investment
Source: railroadpm.org
5
Railcar Orders, Deliveries, and Backlog
Orders and Deliveries Slow After Record Totals During Shale Boom
0
20,000
40,000
60,000
80,000
100,000
0
10,000
20,000
30,000
40,000
Bac
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g
Ord
ers
/De
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Freight Car Orders, Deliveries, and Backlog
Freight Car Orders Freight Car Deliveries Freight Car Backlog
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
0
5,000
10,000
15,000
20,000
25,000
Q12010
Q22010
Q32010
Q42010
Q12011
Q22011
Q32011
Q42011
Q12012
Q22012
Q32012
Q42012
Q12013
Q22013
Q32013
Q42013
Q12014
Q22014
Q32014
Q42014
Q12015
Q22015
Q32015
Q42015
Q12016
Q22016
Bac
klo
g
Ord
ers
/De
live
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s
Tank Car Orders, Deliveries, and Backlog
Tank Car Orders Tank Car Deliveries Tank Car Backlog
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Railcar Delivery Forecast
Reduced Demand Expected to Lead to Fewer Deliveries
2016 2017 2018 2019 2020
Freight Car Deliveries 36,684 26,400 26,900 32,000 36,900
Tank Car Deliveries 19,985 18,800 15,100 15,800 17,700
Total Railcar Deliveries 56,669 45,200 42,000 47,800 54,600Source: FTR
• Railcar deliveries are expected to slow down through 2018 before returning to a
stronger production total in 2019
• Limited open hopper and gondola demand relating to coal movements will be a key
reason freight car deliveries are not expected to reach pre-recession totals
• Tank car delivery is expected to be strong by historical standards, but well off the
production pace during the shale boom
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Coal
• Total traffic is down as coal plant closures, low natural gas prices, and warm
winters have negatively weighed on coal movements
• 25% of open hoppers and gondolas are currently in storage
• The EIA is forecasting improved coal production in 2017 as a colder winter and
higher natural gas prices are expected to make coal more competitive
Coal Market Hit Bottom in Spring – Rebound to Stay Below Recent Norms
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
Class I Coal Carloads Terminating on Class I RRs
Source: STB*STCC Codes starting with 11
8
Biofuels
• Ethanol production and carloads are expected to continue to grow as the EIA
mandate continues to increase
• Low marine rates and smaller than expected differentials between corn and co-
product prices have led to a drop in DDG carloads since 2014
• The EIA forecasts a 3% increase in U.S. biodiesel production in 2017
• Ethanol’s share of finished gasoline consumption is forecasted to remain at 10% in
2017.
Steady Growth in Biofuels Unlikely to Significantly Dent Current Tank Car Oversupply
75,000
80,000
85,000
90,000
95,000
100,000
105,000
Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
Ethanol Carloads Terminating on US Class I RRs
*STCC Codes starting with 28184 Source: STB
9
Crude Oil, Petroleum Products, and NGLs
• U.S. crude by rail movements have dropped by over 50% from their peak
• Reduced crude oil prices, a narrowed WTI/Brent margin, and lower production out
of North Dakota’s Williston Basin have driven the downturn in crude by rail
• The Dakota Access Pipeline is likely to take away more share from crude by rail
when finally completed
• Natural gas liquids could see growth in the near-term with a colder winter expected
• Class I carloads of distillates are up 15% and heavy-end refined products are up
26% compared to last year
CBR Outlook Grim – Downstream Products and NGLs Have Upside
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
Crude Oil Originations on US Class I RRs
Source: AAR
10
Frac Sand
• Industrial sand deliveries hit the bottom in Q1 2016 and gained 2% in Q2 despite
lower rig count and crude oil production
• The spread of high intensity drilling is driving up frac sand demand and will allow
the market to rebound before the crude oil market
• A large frac sand shipper quoted an idle equipment rate at about 40% in March, but
have pulled cars out of service since
Frac Sand Market Carries Potential Strength with Drilling Trends
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
Industrial Sand Deliveries on Class I RRs
Source: STB*STCC Codes starting with 14413
11
Regulatory Review
• Transport Canada Protective Direction No. 38, 7/13/2016
• DOT/PHMSA HM-251C, 8/15/2016
• Open Topics• Modification Requirements for Existing CPC-1232 Jacketed
Tank Cars
• ECP Brake Requirements
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