May 11, 2007 / 2:01 AM / 12 years ago

Demand for ethanol railcars rising after slump

CHICAGO, May 10 (Reuters) - Demand for new railcars to move ethanol is starting to increase after a pause for the first three months of the year due to a lack of new plants and production delays, said an executive at GATX Corp. GMT.N on Thursday.

“For the first quarter we were focusing on growth in other areas and ethanol is just starting to come back,” said Robert Zmudka, vice president and general manager of sales at GATX, a leading provider of railcars. He will speak at an ethanol financing conference in Chicago on Friday.

“We’re starting to talk about new plants and new production again, which is a great sign that the financings are starting to get completed again. It’s more from our existing clients expanding versus seeing new participants enter the market.”

GATX does not make its clients public but Zmudka said they include most of the large producers of ethanol.

Ethanol plant construction boomed in 2006 due to high profit margins. The industry has cooled off in the last year as corn prices hit 10-year highs and oil prices retreated. In addition, the cost to construct a new plant has skyrocketed, mostly due to strong global demand for steel and equipment.

However, there is still a backlog of orders for new ethanol railcars, Zmudka said.

A small number will be available in 2008 but the majority of customers will have to wait until 2009 for new railcars.

“I’ve been doing this for almost 19 years and I’ve never seen such a steep incline of one product moved by rail,” he said.

While the growth in alternative fuels has been explosive, ethanol railcars remain a small portion of GATX’s total fleet of 161,000 owned and managed rail cars in North America and Europe.

GREATER EFFICIENCY NEEDED

About 75 percent of U.S. ethanol moves on railroads, Zmudka said. Trucks and barges transport the rest.

The most efficient way to move ethanol is using unit trains, which can move between 65 and 90 railcars. Each railcar holds 30,000 gallons (114,000 liters).

However, equipment is needed at the destination to quickly unload the cars and return them to service.

“The key for this marketplace will be for the industry to continue to invest in unit-train infrastructure at origination and destination locations so that the railroad continues to be the most efficient mode of transportation for moving large volumes of ethanol.”

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