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Published June 24, 2015, 02:49 PM

Once shunned for oil, ethanol makes a return to U.S. rails

Sinking lease rates, weak crude prices and tough new safety measures for transporting oil by rail have spurred a resurgence in hauling ethanol on the U.S. rail network, as some train companies convert tank cars to carry more corn-based biofuels.

By: Jarrett Renshaw, Reuters

NEW YORK -- Sinking lease rates, weak crude prices and tough new safety measures for transporting oil by rail have spurred a resurgence in hauling ethanol on the U.S. rail network, as some train companies convert tank cars to carry more corn-based biofuels.

The trend emerged in the past six months and marks a shift in a years-long boom in transporting crude-by-rail after rail companies, such as Greenbrier and GATX, rushed to increase tank car capacity as the U.S. shale revolution took off five years ago.

Now, some rail car owners are cleaning out oil-carrying tank cars to carry corn-based ethanol which is blended into U.S. motor fuel.

It is not clear if this is the start of a long-term trend or how widespread the shift has been.

But experts and traders say several factors are behind their renewed appetite for ethanol: Crude rail volumes have plunged this year as it has become more economic to import crude by sea; lease rates are down over 70 percent in the past 18 months due to a surplus of car capacity and the crude rout has fueled a recovery in demand for ethanol as more Americans take to the road.

New tank car safety standards announced in May after a series of fiery rail disasters in recent years may also be behind the trend.

"Two years ago, the ethanol guys were mad that all their cars were being taken away, and five years ago, it was only ethanol," Jeff Kerr, a senior editor at energy industry intelligence service Genscape, said.

"Now, ethanol guys are saying welcome home."

Tom Williamson, owner of Transportation Consultants, said he has helped broker several deals that included roughly 700 oil cars being pulled from oil and put into ethanol service in recent months.

The process includes an extensive cleaning of the cars and a full inspection, he said.

A U.S. ethanol trader said he has seen more cars become available since the crude price rout started nine months ago and lease rates have fallen.

More lenient, lower lease rates

The U.S. rail network has also improved performance, allowing shippers to do more hauling without adding more cars.

New federal safety regulations for tank cars carrying fuel may also be behind the push. Rules on ethanol, which supporters say is less volatile than crude and is biodegradable, are more lenient than oil.

"It's certainly a factor in the switch, as leasing companies may be taking advantage of the longer lead time," Williamson said.

The ethanol industry has eight years to replace or modify the 28,000-tank-car fleet, three years longer than oil cars.

But another big driver has been the sharp drop in monthly lease rates for tank cars.

Long-term lease rates for the most common tank cars have plunged to as low as $700 a month, down from abut $2,500 about 18 months ago. One physical trader who focuses on crude rail said he saw a 18-month lease for $850 a car.

The cost of taking cars off the rails - as much as $100 a month per car - also makes it more appealing to make the switch, industry sources said.

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