Castings conundrum - Cover Story - freight car truck casting companies - Industry Overview

Railway Age, June, 2003 by Christopher Ytuarte

A case study in tricide-down economics, freight car truck casting companies are feeling the bite of a slow economy and reduced car orders. What happened, and what does the future hold?

Christopher Ytuarte, Associate Editor

Back in early February, the former Buckeye Steel foundry was re-opened under a new name and after more than five months of inactivity during which the cold Ohio winter wreaked havoc on its interior structures. Sand, water lines, and hydraulic pumps were frozen solid. Unfinished castings and other parts sat eerily still, unmoved since the day the plant was shut down in September, 2002.

Today, Buckeye is known as Columbus Steel Castings, and after getting the plant back into working condition, the new kid on the less-than-crowded castings block had its first heating March 13. The sight of dust-covered bolsters with nowhere to go is, officials hope, a thing of the past.

"It's a hell of a thing to say, but Buckeye probably had a bigger effect on the market when we closed than we did any of the 30 years I was there," says Columbus Steel Castings Vice President-Sales and Marketing Jeffrey Laird. He formerly held the same position at Buckeye.

It is that "big effect," and its causes, that has sent a ripple through the railroad industry the past few months. It has forced both suppliers and those on the buyside to take a long look at a business model that can, and has, caused a shortage of vital components in the supply chain.

From the top of the railway food chain, the tight economy and its reduced spending patterns have trickled down from railroads and freight car lessors to carbuilders and to suppliers of freight car parts. With new car orders hitting a 15-year low in 2002, it is the lowest man on the totem pole that ultimately feels the sting, as Buckeye did declaring bankruptcy and shutting its doors. Most industry insiders agree that no one industry entity is to blame for the current conundrum, and that it is the business method in general that needs to be addressed.

"I think we have a very unhealthy situation that has developed in the supply business where the current competitive model is creating some very serious and potentially long-term problems for the railroads themselves, and higher prices in the long run," says Greenbrier President Bill Furman. "In the last decade, as the railroads consolidated, they've become more focused on their own internal issues. Many of their decisions having to do with the supply chain have had short and shorter time horizons in which they run an optimization model or they look at how the supply community delivers value to them. It's the old cliche about looking at quarter-to-quarter earnings as opposed to the longer term."

Many industry observers feel that the buyers need to identify the situation and work to defuse it.

"It's not a market-shrinking, it is the capability of the suppliers," says one insider. "The market will create suppliers, and what has happened is that the freight car business dropped for four straight years and the conditions in the market forced them into bankruptcy. The buyers of freight cars don't have the planning to be able to smooth out demand so we don't have these horrible cycles. That's what forces people into bankruptcy."

"Buyers can not be oblivious to the condition of important sectors like castings, especially when off-shore sources are not fully developed yet," says Furman. "We cannot rely on foreign castings in the current state of things. They may be a long-term potential source of strategic supply, but today we need a domestic footprint in North America for the technology and the production of these castings. If our model produces this type of irrational and destructive behavior, it's incumbent on all of us in the buying chain to be more aware of it."

ASF-Keystone, a member of the Amsted Rail Group, is currently handling the lion's, share of castings orders until Columbus Steel can ramp up to full production capacity.

"The truck castings market obviously is very volatile due to the cyclical nature of the new car market," says ASF-Keystone Director-Marketing Brian Lynch. "The culmination of such dramatic swings in the market, combined with depressed truck casting pricing over the last few years and ever increasing operating costs, has forced several casting manufacturers to either scale their operations back or exit the business altogether."

A predicted upswing in car orders for 2003 (nearly double that of 2002; see p. 1) has carbuilders and suppliers concerned with capacity to produce. "A temporary capacity issue in the supply of new truck castings currently exists due to the untimely exit of at least two suppliers," says Lynch. "Also, the backlog of new cars has increased by over 6,000 units in the first quarter and an unforeseen demand in bolster replacements has risen as a result of an AAR mandate to change out one supplier's bolster design on certain car types."

According to the AAR's Pat Ameen, foreign casting companies may become a factor if domestic capacity is not improved. And with that comes concerns about quality. A recently released AAR early warning alert disclosed the presence of some 30,000 sub-standard bolsters--manufactured in Mexico--on the market today.