There’s an interesting phenomenon going on right now in the transportation world. All the parts, of which most are normally stable at any given time, are not stable. Turmoil may be too strong of a word to use but its darn close to being so. Let’s take a look at what’s going on around us.
Rail Transportation Merger. The big news in this arena is the proposed Canadian National (CN) or Canadian Pacific (CP) merger with Kansas City Southern (KCS). As of this writing, the winner hasn’t been determined but it’s leaning towards the CN. The merger process in and of itself creates a buzz of activity at the regulators level in many states with very intense focus at the District of Columbia level being led by the Surface Transportation Board (STB). The CN claims it to be more of an end-to-end merger. If that’s the case this does simplify many of the rate and regulatory issues that arise. However, from a shipper’s perspective it deserves a deeper look. CN already has a presence that gets them from Canada to the Gulf of Mexico. Now they are working on locking up the KCS to interior Mexico destinations and originations. That certainly gives the combination market dominance over that corridor (Chicago, Jackson, New Orleans). This is something to keep in mind if your rail traffic runs in those corridors. Express your interest in preserving service and competitive rail rates. Contrary to that the CP lines look to be more of a bolt together operation at Kansas City providing little overlap in territory. Regardless of the outcome, it’s imperative that shippers, shortlines and trade groups participate in the process through the STB. Keep your eye on www.stb.gov for the latest updates.
Precision Scheduled Railroading (PSR). First introduced by the late Hunter Harrison (CEO of many railroads), PSR has worked itself through most of the Class I railroads with exception of BNSF. It’s been somewhat difficult for customer relationships. While manifest railcar and train scheduling has needed an overhaul for some time, it’s a hard-core change from a somewhat erratic, but more customer sensitive (or maybe schizophrenic) schedule, to PSR where scheduling is much more precise and runs on railroad time and not customer time. To accommodate such a change in rail operating scheduling, many customers have added shifts and increased capacity that may not be fully utilized to simply comply. This puts the onus of building a bit of slack in the rail transportation system on the Shipper or Receiver. As a shipper or receiver, it’s up to you to provide the flexibility required to make the PSR model work. That comes in the form of increased track capacity, additional loading or unloading capabilities or additional rail or capital equipment. These improvements do affect rail transportation scheduling and there are a host of accessorial charges that come with non-compliance. PSR drew the attention of Wall Street early on as a great way to wring cost out of a somewhat stodgy transportation system. There’s nothing wrong with managing expenditures to create an opportunity to obtain better margins. We all work at that diligently in each of our own industries. Admittedly it made a lot of shippers better at shipping when they’d just as soon be better at creating whatever it is they ship. There is no good measure of how much and what exactly the shipping and receiving community has invested in PSR but it’s substantial. With the pandemic the PSR pain points are flying under the radar. Just another unstable moment in rail transportation today.
Rail rates. Rates have continued to edge up despite the lackluster economy. As in any business, only growth and return margins are celebrated. I get it. As a corporation owned by serious investors you grow or die at the Wall Street level. This makes it more challenging for new potential shippers to join the fray. A good example of this is the comparison of two aggregate (rock, sand, gravel) regions in the U.S. I’ll compare the southern Texas and northern California regions. The rail centric region of Texas has unit trains of rock moving between central Texas limestone mines near Austin and San Antonio and the major metropolitan areas of Houston to Dallas/Fort Worth and many points in between. Rock by rail is so integrated into this area that rail rate increases are sometimes difficult to absorb but a change in transport modes while moving so much tonnage makes no sense. The rail side of this market was developed decades ago and is firmly rooted in the culture of those shippers. The markets are resolved to rail freight increases so passing along freight increases to construction companies is part of the process of doing business. Contrast that to northern California for hard rock aggregates and you will get a different picture. There is rock-by-rail business within the northern California market but it doesn’t hold a candle to the volumes in Texas. The companies mining and shipping the rock are deeply rooted but still can’t meet supply requirements for the region. Congestion, growing housing requirements, land development moving into the foothills of the Sierra mountains and environmental causes are begging to price rock-by-rail into these high growth areas. The later introduction of railed rock in this region (when compared to TX) may be part of the reason for this hesitancy. Or it could be too many NIMBY’s? Or not enough interest or too big of a challenge to take on? In an interesting move, several years ago Polaris Materials out of Vancouver, BC began shipping material from British Columbia to Richmond and Long Beach, California. How can it be less expensive to barge rock from BC to CA? Rail rates due to higher costs or not meeting railroads internal return numbers are simply too high to move the traffic. Regionally you’ll see rail rate increases simply due to more captive situations. We’re just edging out of a pandemic. Look for all those healthy marketers to continue rail rate adjustments into the near future. Planning for that is just another unstable moment in rail transportation today.
Railcars. What’s up with all the stored railcars and the conversation around there still not being railcars available for service? As of May 1, 2021 there were 365,379 railcars in storage. That’s a lot of supply to pick from and there should be just about any railcar available that a person could want. Not the case. There’s about 119,000 that are tank cars withering the downturn of the crude oil business and DOT mandates that are due over the next few years. There are around 128,000 covered hoppers for grain, sand, etc. Note that grain is starting to swing back into the black, but sand cars have been overbuilt and have a long road to some type of rationalization. The last two largest groups are 34,000 open top hopper and 40,000 coal gondola railcars gradually working out of the system by being repurposed through refurbishment programs, scrapping or cascading into other services. The latest surge over the past few months in scrap prices has caused a significant demand increase for high cube gondolas (4000 cubic foot +) and 2700+ cubic foot, 286k GWR gondolas. Many companies are considering building new railcars at prices that are 20% to 30% higher than Fall of 2020/Spring 2021. The quelling of the pandemic, opening up of international trade markets and lowering value of the US dollar has created a perfect storm of opportunity. This trade surge has increased the finished price of steel putting a premium price increase of 15% to 25% on the finished cost of a newly built railcar. Premiums that in turn drive up the cost of a good used railcar hence eventually driving up the cost of a leased railcar. Turmoil! Just another unstable moment in rail transportation today.
Accessorial charges. These changes are making rail transportation choices more ala carte. While it’s nice to have choices, the choices you need to make aren’t easy ones. Some of your choices: put in more rail than you need to accommodate service interruptions and risk storage and demurrage charges; short yourself on private equipment so you can ensure your railcars are always in service to avoid demurrage or storage charges; get the exact number of railcars you think you’ll need or a few extra if you have the space to better insure you have railcar supply sufficient to meet your shipping requirements, while intensely managing storage, demurrage, ordering, and other potential costly pitfalls; get an internal expert or outsource the work to an external expert to get ahead of the requirements. It’s a different arena we’re working in than a few years back. Just another unstable moment in rail transportation today.
Moving large quantities of bulk and containerized freight over land long distances is a perfect fit for rail. It does come with its challenges though. While the current environment continues to show instability and challenges, remember that this too is just a moment in time in the rail transportation arena. The way you deal with, prepare for, plan and manage with determine the level of success and cost savings you realize. The Tealinc team is here to support your needs during this unstable moment in rail transportation. Control what you can control and manage the rest!