April 6, 2020

On Railcar Storage: PT.1 Industry Overview

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ON RAILCAR STORAGE is a five-part series written by Robert Skarzynski that explores the railcar storage industry in a concise and easy to understand manner. The insight found within was acquired by facilitating and structuring numerous Railcar Storage transactions with dozens of Railcar Users and Storage Facilities.

Chapters:

  1. Industry Overview

  2. Railcar Users: Selecting Storage Facilities (April 7)

  3. Railcar Users: Sending Cars to Storage (April 8)

  4. Storage Facilities: Questions to Ask Your Customers (April 9)

  5. Railcar Users/Storage Facilities: Should I Use a Broker? (April 10)

INDUSTRY BACKGROUND

Railcar users make money when their railcars are cycling from their loading site to their customers and back. In an ideal world, railcar users would have a constant demand for the commodity they ship and the railroad would run on time; they would utilize a perfect sized fleet of railcars and there would be no need for railcar storage. However, in the real world, those conditions are rare and railcar users need to store railcars from time to time.

Railcar Storage: Railcar users remove railcars from service and park them for a period of time.

Can you let your railcars 'idle' on the railroad? You might be able to; however, Class I railroads charge a fee for each day idle railcars are on their network. This fee can be a significant cost and add up very quickly. For this reason, railcar users move their cars into third-party storage facilities where the rate is much lower.

The railcar storage market is an active marketplace with railcars cycling in and out of storage on a regular basis. Railcars are stored for such reasons as:

  • Fluctuations in Commodity Markets (Oil, Fertilizer, Ag, Scrap, Etc.)
  • Having too many railcars on hand for current business volumes
  • Increased cycle time on railcars (faster cycle time means fewer cars are required to ship the same volume)
  • End of Lease, Return of Lease
  • Loaded Railcar Storage and Inventory Positioning

WHO IS INVOLVED?

Railcar Users

Railcar users fall into two categories; Railcar Owners and Railcar Shippers.

  • Railcar Owners: These owners are the big leasing companies, banks, and other entities that own, lease, or use railcars. Examples include Greenbrier, Wells Fargo, CIT, and Trinity Rail.
  • Railcar Shippers: The companies that lease or own railcars to move their product or commodity by rail. Examples include Cargill, Suncor, and Dow Chemical.

The most significant trend in the railcar market is the move from railroad-owned equipment to privately-owned equipment. As railroads focus on a "hook and haul" business strategy, the onus has fallen on the private car industry to meet the demands of railcar use, including storage. The percentage of privately owned railcars has been increasing for several decades as outlined in the below charge.

Storage Facilities

There are three different types of railcar storage facilities:

  1. Class II and Class III Railroads: Also known as Short Line Railroads. These are branch lines extending off Class 1 Railroads.

  2. Industrial Switching and Storage Yards: These are privately owned rail yards built to store railcars. These sites often have other services in addition to Railcar Storage.

  3. Private Sidings: Private sidings are rail tracks adjacent to Class I tracks that are owned by a private party. Private sidings normally do not have any way to move railcars.

Class 1 Railroad

For the most part, Railcar Users ship their products on one or more of the Class 1 Railroads; BNSF, Canadian Pacific, Canadian National, CSX, Kansas City Southern, Norfolk Southern, and Union Pacific.

Class 1 Railroad involvement in a storage transaction usually is restricted to moving the railcars to the storage facility; however, they initially must accept the routing or diversion of railcars into storage.

THE TRANSACTION

When a Railcar User requires storage at a Storage Facility, they will request rates for the storage transaction. Although there are many variations, the most common storage transaction will include:

  1. Switching Charge: The rate charged each time a car is brought to or from a Class I Interchange.

  2. Per Diem: Also known as the daily storage rate, the per diem is charged for each day that the railcar is physically in the storage facility.

  3. Selective Switching Charge: Commonly known as Cherry Picking, this is charged when a Railcar User requests specific car numbers when removing cars from storage.

Storage transactions can vary in structure, including "Take or Pay" agreements, reservation of spaces, and Storage Facilities can get very creative to earn the railcar storage business.

THE INTERCHANGE

Once terms are agreed upon between a Railcar User and a Storage Facility, its time for railcar users to route the cars into storage. This arrangement involves the railcar user and the servicing railroad.

Interchange: A track where railroads and storage facilities exchange railcars.

Once the cars are placed at the interchange, it's up to the Storage Facility to pick them up and place them into storage tracks.

SUMMARY

Now you know why Railcar Users store railcars and where. In PT.2 our discussion turns to the Railcar User: What to look for in a storage facility, what to ask, pitfalls to avoid, and more.

Thanks for reading, if you have any comments, questions, insights, please let me know either through a comment on this post or by email at [email protected]

Rob Skarzynski

 

 

MGH Railcar is your one-stop-shop for all your railcar storage needs in Canada. Working with Shortline and other private track owners, we provide a single point of contact for responsive and simplified rail car storage communications.

Short or Long Term Railcar Storage / Suitable for any Railcar Fleet Size / Non-Hazardous and Hazardous Railcar Storage / Loaded and Empty Railcar Storage