Market indications suggest that major industry stakeholders may resume lobbying for a comprehensive bill that provides tax subsidies for scrappage of retired railcars that qualify for end-of-life services.
However, the results of this move remain unclear in the early stages, according to a Cowen report. However, victory is seemingly more achievable than it has been in the past as the effort would help railcar suppliers such as Greenbrier and Trinity along with metal recyclers that include Schnitzer Steel, Commercial Metals (CMC), Nucor, and Steel Dynamics (SDI).
Most railcars currently being scrapped have a gross weight capacity of about 260,000lbs according to industry professionals with expertise in rail car dismantling. Lighter steel railcars weigh between 60,000-90,000lbs depending on car type which includes tank cars, scrap gondolas, box cars, coal hoppers, etc.
A reasonable approximation provided to Davis Index by industry specialists indicates that about 31.5mt of scrap can generally be salvaged per railcar. With regards to scrap use, for every 1pc increase in steel mill capacity utilization rate, roughly 40,000gt of additional demand for ferrous scrap is noted, based on average domestic mill buying plans. Capacity utilization is currently around 58.9pc has been gradually rising since its low of 51pc in May.
The auto industry shutdown has led to 55pc of total vehicle railcar fleet being placed in storage, which spiked in May, according to the Association of American Railroads (AAR). There is an excess of close to 530,000 railcars which currently lay idle, representing about 32pc of the North American fleet compared to 15-25pc, more typical levels, based on data from the AAR.
At present, higher levels of inoperative cars are due to fewer rail movements, lowered by about 13pc so far in 2020 following about a 4pc drop in 2019. The COVID-19 pandemic has also had a negative impact adding to the overall industry decline this year.
The car allowance rebate system (CARS), also referred to as the cash-for-clunkers program, originally signed into law in 2009 led to the scrappage of more than 700,000 cars after the $3bn allocated for the program was depleted.
The possibilities and extent of such a new program are unclear. However, it may provide some help to the current state of the steel industry. If the program is meant to elevate railcar or auto scrappage, it may lead to some near-term assistance for domestic recycling. The economic strategy shows promise in 2020, and going into 2021, with infrastructure policies that could endorse a cash-for-clunkers bill.
Raised scrappage of railcars or autos would feasibly generate and make available more high-quality scrap, which would add to profits for scrap processors or auto recyclers. For example, Schnitzer Steel’s Auto and Metal Recycling (AMR) arm purchases railcars and autos for scrapping. The scrap is then used by the company or sold to steel mills. Metal recycling businesses for other steel companies such as CMC, Nucor, and SDI may also profit from the bill.
Meanwhile, encouraging new auto or railcar purchases to replace the scrapped cars would boost demand for sheet, plate, and special bar quality mill products, assisting steelmakers such as Nucor, US Steel, SDI, and Cleveland-Cliffs among others.