Weekly Hardwood Review Indicates That Cooling Market for Railties Expected To Rebound in the Spring of 2007
Railtie Market: Prices for railties are expected to decline moderately, according to the Weekly Hardwood Review (WHR), but if sawmills exercise discipline, tie purchases and prices should rebound in the spring.
Date Posted: 11/1/2006
(Editor’s Note: The following article was derived from a report in the Aug. 4 edition of the Weekly Hardwood Review, which granted permission to re-write its original article. The Weekly Hardwood Review provides accurate, timely information on North American hardwood lumber markets.)
Prices for railties are expected to decline moderately, according to the Weekly Hardwood Review (WHR), but if sawmills exercise discipline, tie purchases and prices should rebound in the spring.
Railroads are expected to continue buying record numbers of ties in the coming year, according to the WHR.
Trends indicate that as long as business is good, railroads will spend freely on track maintenance. Freight traffic has increased by 1.6% so far over 2005, and quarterly financial reports by railroads show the increased traffic translates to increased profits.
“So there is every reason to believe that tie demand will continue to be strong for some time,” the WHR reported.
The most recent data by the Railway Tie Association shows tie production and inventories still rising while tie prices have been leveling off.
Tie prices may decline until spring, however. While railroads are on pace to buy a record volume of ties this year, production also will reach record levels.
Class 1 railroads have put quotas in place, which reflects the current oversupply of ties. A slowdown in demand will pave the way for moderately falling prices as the market makes a correction.
Tie demand will remain solid in 2007, however. Sawmills exhibited unprecedented restraint earlier this year to prevent over-production of red oak. If they show the same discipline with ties, production levels quickly will fall back to match demand. Barring any problems with creosote supplies, the newsletter expects tie purchasing and prices to rebound in the spring.
Creosote supplies and prices are a factor in the tie market. Creosote supplies dipped in the summer to the extent they threatened operations at some tie treating plants, at least for the short term. In fact, several treating plants ran out of creosote.
Creosote prices increased the cost of treating a tie by 10%-15%, according to one tie treating plant.
Some treating plants have built the largest inventories of green ties that they can recall, and the prospect of running out of creosote could motivate plants to reduce inventories, which means either lowering prices offered for incoming ties or establishing quotas.
More troubling is that the creosote shortage potentially could depress railtie markets longer term.
Creosote is derived from coal tar, a by-product of cooking coal in order to produce coke for the steel industry. Based on industry ratios for creosote use and projections by the Railway Tie Association, tie production will require about 66.6 million gallons of creosote in 2006.
The volume of coke produced annually in the U.S. has been slowly declining, according to the Energy Information Administration.
Based on known ratios, Weekly Hardwood Review predicts that the decline in coke production has reduced maximum creosote production from 113.5 million gallons in 2000 to 91.1 million gallons in 2005. Creosote production was expected to decline another 1% to 90.2 million gallons in 2006.
In fact, competing markets for coal tar have reduced creosote production below the figures above to a level that is below the needs of the wood treating industry. In order to supplement creosote supplies, about 15 million gallons of creosote oil will be imported. Imports normally would be sufficient to bridge the gap, but a few new wrinkles are causing difficulty in creosote markets.
The most significant issue impacting creosote supplies has been the high cost of fuel oil. Crude oil prices skyrocketed last year, and the higher cost of crude is passed down in products that are refined from it, including fuel oil.
Large manufacturers look for cheaper alternatives instead of burning high-priced fuel oil in boilers. One of the alternatives is coal tar. According to some estimates, increased use of coal tar for boiler fuel could reduce overall availability of creosote by as much as 40%.
Fortunately, crude oil prices have moderated since the record of $78.50 per barrel reached in early July. By early October, crude oil for November delivery was about $58.52 per barrel. The moderating prices for crude reduce the incentive to burn coal tar, which would make more available for refining into creosote.
However, the Energy Information Administration predicted earlier that oil prices may average around $70 a barrel through 2007. At that price, burning coal tar would remain an attractive alternative to fuel oil.
Overseas producers of coal tar also turned to burning it in boilers. In addition, new coke plants being built around the world are cleaner, so they no longer even produce coal tar as a by-product.
Creosote oil imports were down compared to 2005 but still remained ahead of 2004, according to the International Trade Commission. Some tie treaters turned to Mexico this year for help with creosote supplies, and data from the commission confirmed that imports of creosote oil from Mexico have been up slightly this year.
Still another factor in the creosote market is carbon black, a product derived from creosote. It is used mainly by tire manufacturers. The number of motor vehicles – and the tires they use – continues to grow world-wide. In fact, the global market for tire black is growing at an annual rate of about 4%, according to the Freedonia Group Inc., although U.S. demand for tire black is expected to grow somewhat slower as tire manufacturers increasingly move production to Mexico and overseas. Nevertheless, increased global demand for tire black has pushed prices higher, making it an attractive alternative to creosote. As demand for carbon black continues to grow, coal tar could be processed into more carbon black and less creosote.
Creosote prices have increased. Tie treaters have to make up the additional cost either by raising prices for treated ties or buying green ties at lower prices. Railroads have been looking to pay less for treated ties, forcing treating plants to make up the additional costs by lowering their buying prices.
Yet, there also are reasons to believe that creosote supplies will improve. U.S. steel production has been at its highest level in five years, according to the International Iron and Steel Institute. Increased steel production likely will increase coke production, which in turn will increase the amount of coal tar available for use. In fact, coke production was up earlier this year. Coal tar also produces another chemical needed in manufacturing aluminum, and aluminum demand is strong and growing, which should further stimulate interest in refining more coal tar. So increases in coke and aluminum production should help increase the amount of creosote being produced world-wide.
In addition, markets for other wood products treated with creosote have been shrinking. And creosote is just one of several chemicals that are used for treating utility poles and some other products. As the cost of creosote increases and supplies become less stable, other chemicals become more attractive. A shift to alternative chemicals to treat other wood products would free up additional supplies of creosote for treating railties.
Overall capacity to treat ties should decline in the short term if a creosote shortage persists, but it is not likely to fall below 85%-90% of current capacity. An extended shortage of creosote would also spur some tie treating plants to turn to alternative chemicals.
During the past two years, strong railtie demand has provided many sawmills with an alternative outlet for oak logs. When No. 2 Common red oak hit a five year low in the summer of 2005, an increasing number of mills turned to cutting ties.
After a year of better economic returns, however, the tie industry has been unable to sustain the pace. The increased production caught up with the market, softening the market for ties in many areas. There are still some regions where ties are in short supply, but overall production has outpaced demand for a while now.
Class 1 railroads, the largest buyers of ties, have put quotas on supplies for the first time in three years, and several railroads planned to reduce the prices they pay for treated ties in the fourth quarter. These factors all underscore a cooling in demand for green ties.
Tie demand also has seasonality. Just over 22% of railtie purchases are made in the fourth quarter, and only 20.9% are made in the first quarter, according to the Railway Tie Association. Production numbers decline less in the same quarters. Assuming production levels decline at the same rate as they have historically, the oversupply could worsen in the fourth and first quarters.
(For more information about the Weekly Hardwood Review, call (800) 638-7206 or visit www.hardwoodreview.com.)
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