Auto Production Could Boost Rail

“The latest Wards North American auto production forecast calls for a large increase in North American auto production in 3Q09,” observes Morgan Stanley Research. The analysts note that using this forecast, autos could add 2% to that category of rail volumes.

“It's also worth noting that if the Big 3 complete a restructuring prior to year-end, investor concerns that rails could face some political opposition to price increases on legacy auto contracts when they expire in late 2009 should abate,” added the analysts.

The benefit to rail volumes doesn't end with the automotive sector. A number of commodities, namely steel and chemicals, have a large automotive component, observe the Morgan Stanley analysts. “Steel inventories are already low and our steel analyst expects US production to increase in the second half of 2009 on greater demand, particularly in the automotive sector,” say William Greene and Adam Longson. “Any indirect increase in metal or chemical volumes as a result of increased auto production may be more meaningful for railroads as both commodities tend to have higher margins than autos (particularly chemicals).”