AAR Notes Expenditure Increase, What Could It Mean?

Check out this article from the AAR Website. Capital Expenditures for Railroads are going up at the incredible rate of 21% in '06! I wish my IRA had that kind of growth.

What will it mean? I have already heard some suppliers comment that, if you can't make money in this market, you need to do something else. Now, we will be looking at even more pricing pressure.

Most track material manufacturers and suppliers I know of are looking at any new work wondering how it will fit into current production schedules, rather than considering whatever pricing will get the job. If it doesn't fit the schedule, the price goes up. Even if it does fit, the capacity of the competition is considered, and the price still goes up. Now, the industry will be asked to produce 21% more, just for the Class One Railroads.

At least two things will probably happen, besides price increases.

First, Public Agencies will be amazed at the amount of that price increase, if and when Request for Proposals are issued for a particular project. Some people say that public money is getting tighter all the time, with dollars once intended for transportation being diverted to Katrina Repair Efforts, as well as the War in Iraq. Higher track material prices are going to squeeze Light Rail and Commuter Rail projects even more.

Second, more foreign suppliers will be looking at the US Market with an eye to capture part of it. We have already seen rail from Japan used in US Railroad Projects. Now, other manufacturers and suppliers will follow. Being a believer in the Free Market System, I think the ultimate outcome here will be positive. Over the long term, competition will increase, product selection should increase, and prices should drop as well.

It should be noted that if such a scenario of international involvement happens, material prices will drop for the Class One Railroads, but not necessarily for Public Agencies. That is due to the famous "Buy America" clause that is part of all Federally Funded projects. Unless these foreign suppliers actually build their manufacturing facilities on US soil, their products will not qualify under "Buy America". So, Agencies will be stuck with dealing with homegrown manufacturing facilities, and the aforementioned capacity and pricing issues, at least in the short term.

Not only that, but I haven't even mentioned the potential for supplier mergers and buyouts, something that has been rumored for some time, at least as a way to counter the humongous size of the Class One Railroad customers. That could happen, too.

$8 Billion is a big number. A 21% increase also gets some attention. Interesting things are sure to happen in the next year or two with the Railroad Supply Industry. And, if you believe what I wrote some time ago, it is an indication of continuing strength in the US Economy. Hang on!