Steel Is Not a Steal

It looks like rail. If you hit it with a hammer, it would sound like rail. If it got up and walked, it would walk like rail. And, if it could speak, it would even talk like rail!
But today, what looks like rail is acting more like gold! Why? Steel is becoming much more expensive, and the increases are coming faster than a speeding TGV!

Doesn't take a railroad expert to know that steel is a HUGH component of the business. In spite of that, the paradigm is that steel, in all of its forms, is always there, and will be there at a reasonable price. That paradigm is gone, maybe for a good, long time. Recent steel price increases are significantly affecting the way things will be done.

Steel suppliers have raised prices twice in the past four weeks. They promise to raise prices again before another four weeks have past. Suppliers who provided material with a guaranteed price for three months are now guaranteeing a price for no more than fifteen days!

Steel components in trackwork, that area that interests Rip, are significant. Rails, spikes, bolts, tieplates, anchors, all have gone up in price as a result. No one is waiting for their old inventory to be depleted, either. It's like the price of gasoline going up when the price of crude goes up, even though the gas in the neighborhood station's tanks were there the day before. But something interesting is happening above and beyond all that we acknowledge to be true.

Certain end users, notably Agencies and Contractors, are now forced to accept prices much, much more quickly than the time frame that they have known in the past. No more playing the "your cost is too high, we are going to the competition" game. Suppliers are telling customers, "If you don't take this price within days, the next price will be much higher!" Suppliers know that their competitors are going to do the same thing. Pay me now, or pay me alot more later! Ah, there's a new paradigm! Let's see what changes occur over the next months and years.

Record Profits but Reduced Capital Budgets

It doesn't add up! Class Ones are pulling down big bucks. Trains are pounding heavily used tracks into the ground. Must be that the railroads are spending big bucks this year for maintenance, right? Wrong!

Last Autumn, the big Class Ones announced to their track material suppliers that orders would be way down for '08 in anticipation of much lower carloadings, hence much lower profits. So, are carloadings down? Not really. At least according to this and this from Railway Age.

But profits are up! At least judging by the initial 1st quarter report from CSX. No one disagrees that this is great news! Question is, are these same Class One Railroads so inflexible that they cannot revise their Capital Programs? They seem to be able to revise them downward quickly. The smarter of them will revise upward, too, and revise them now! Why?

-Track Material Suppliers are not that busy right now. Favorable pricing can happen. Not only that, but steel prices have gone significantly higher just in the past few weeks!And, higher petroleum prices will make an impact on pricing, too. '08 will be cheaper than '09. As the auto mechanic said, "You can pay me now, or pay me later!"

-Due to some accounting hocus-pocus, Capital Costs are suddenly cheaper!

-Many lines, such as the Wyoming Coal Lines, are busier than ever. Track is getting worn down, and strong track costs less and lasts longer than worn down track.

-Class Ones can become good neighbors by hiring and rehiring, and all of their suppliers will look good, too, as they do the same. This is a new paradigm for railroads, I know, but I hold out hope that somebody, somewhere, will take advantage.

So, why won't what is an obviously good idea happen? Why did these somewhat speculative decisions happen, too? I am guessing that hedge funds and other bankers are behind it somehow. During the past thirty to forty years, it was only the railroaders themselves who had to be educated every five years or so about how capital intensive the business is. Now, maybe, hedge fund managers and bankers outside the railroad's own headquarter buildings have to be told, too.

Whatever. It needs to be done. Now. Class Ones: Review the Capital Budget, and spend some of that money now, when it will buy so much more.