North American rail squeeze tightens

Trouble down the line

30 July 2007 00:00  [Source: ICB]

The blossoming US biofuel industry is putting pressure on an already creaking chemical rail network

STEFAN BAUMGARTEN/TORONTO

The blossoming US Biofuel industry is putting pressure on an already creaking chemical network. There is little hope for near-term relief. With an upsurge in ammonia, urea and bioethanol production, rail capacity is tight and it's getting tighter. Add to that a year-on-year decline in service levels, delays, and a quasimonopolistic market, where most facilities are served by only one carrier, and it's not a pretty picture in the US.

The latest half-year data confirm a rise in rail demand. For the six months ended June 30, US chemical railcar traffic increased by 2.2%, to 788,285 carloads. This compares with 771,081 carloads in the same period last year, according to the Association of American Railroads.

The rise reflects steady growth in year-on-year weekly chemical rail traffic in the first half of 2007. For the week ended June 30, railcar traffic recorded 32,341 loadings, a 5.1% increase over the same week the year before. This followed a 4.1% increase, to 29,841, for the week ended June 30.

Deutsche Bank, which analyzes chemical railcar data, says the four-week moving average as at June 30 was up by 3.6% from the same period last year. The bank believes this year's chemical loadings are being boosted by increased shipments of agricultural chemicals and ethanol, both related to higher US corn plantings.

Agricultural chemicals - primarily ammonia and urea - account for about 17% of overall chemical loadings, while ethanol accounts for about 7%. But ethanol carloads could grow by over 30% this year on the back of the US biofuels boom, Deutsche Bank says.

Railroads play a key role in chemical logistics. About 21% of chemical production is shipped by railcar, and the percentage is much higher for major producers of basic chemicals and fertilizers. Unfortunately, the relationship is often monopolistic. According to the American Chemistry Council (ACC), about 63% of the rail-served production facilities operated by its members are "captive shippers." That is, served by only one rail carrier.

Capacity Crisis

Dow Chemical would like to see more competition on North America's railroads, says Henry Ward, the company's director of transportation and security. "We prefer having multiple sources of supply for all modes of transportation to increase reliability and security of supply as well as competitive costs."

North America's largest chemical company, Dow moves about 40% of its North America product volumes by rail. About half of its shipments are captive. Dow operates a 26,000-strong private fleet of railcars. Some of the cars are leased, and others owned by the company, which ships to all parts of North America, using every US Class I railroad.

Rail transport remains the safest, most efficient and most economical mode for long-distance overland transportation of chemicals and plastics in North America, Ward observes. "Rail safety performance is 10-15 times better than highways, with 99.997% of rail hazardous material shipments reaching their destination without incident."

But critical issues, such as security and global competition, are causing "congestion at all points of entry and increase the cost of doing business," he adds.

The booming market for ethanol, which is taking up an increasing amount of railroad capacity, has aggravated the crunch.

Ethanol shipments have caused considerable congestion at certain nodes within the infrastructure, as well as causing major backlogs in car manufacturing.

"Some would estimate that up to half of the entire backlog for new car builds are for ethanol-related cars," Ward says.

Dow is calling for collaborative solutions between government and the private sector to provide a way out of the capacity crisis. "There is no overall integrated holistic freight transportation plan for the US," says Ward.

Dow is studying the impact of rail capacity, through its trade association, with the newly formed RAND Supply ChainPolicy Center, which studies key supply chain issues in North America to understand the critical issues in freight transportation.

The Center is part of RAND Corp., the nonprofit research organization headquartered in Santa Monica, California.

Dow is also a participating member of the Chamber of Commerce Transportation Logistics Committee, which is working on the infrastructure capacity issue through an initiative called Rebuilding America.

Canada's Agrium, the Calgary, Alberta-based North American fertilizer major, relies on rail for about half of its shipments, says investor relations manager Richard Downey. Railcar capacity was "definitely in issue," for Agrium, and even more so after the strikes on Canadian railroads this year, he says.

Interestingly, as far as rail traffic is concerned, Agrium has noted some upside from the US ethanol boom, says Downey. While the ethanol boom has put pressure on truck transport, it has, at the same time, freed up some railcar capacity for Agrium, as less grain is being transported to the ports for export, he explains.

The American Chemistry Council is urging lawmakers to ensure more competition. It is seeking comprehensive measures to improve US rail services for chemical manufacturers, particularly for captive chemical shippers.

The biggest problem is the quasimonopolistic nature of the railroad market, says ACC spokesman Scott Jensen.

The railroads are not subject to US antitrust laws, but are regulated by the Surface Transportation Board (STB), a government agency. The ACC wants Congress to repeal the railroads' antitrust exemption. The organization also wants to reform the STB, which is the sole mediator of disputes between shippers and railroads.

According to the ACC, the STB is skewed in favor of railroads. Registering disputes costs shippers, at a minimum, $175,000 (€127,000), and resolving a dispute costs on average $3m and takes three years.

The situation in Canada is similar, in that two rail carriers - Canadian National (CN) and Canadian Pacific (CP), the largest and second-largest rail carrier, respectively - dominate the market.

Strikes Hit Hard

The fragility of Canada's railroad system was brought home when a 15-day rail strike in February by 2,800 conductors badly dented the country's export-oriented chemical industry as well as its entire manufacturing economy.

The impact on chemicals and fertilizers was immediate. The strike threatened to paralyze operations at the Port of Vancouver, Canada's export hub to Asia.

Transport by truck offered no viable alternative to petrochemical and fertilizer production sites. Particularly hard-hit were the many captive production sites that relied on Canadian National alone for their supplies of raw materials and deliveries to markets.

Canada's NOVA Chemicals cut operating rates at all its Canadian sites by 15%. Dow Chemical declared forces majeures on caustic soda in Canada. Fertilizer major Potash Corporation issued layoff notices at a potash mine in Saskatchewan. When the CN strike flared up again in April, Canada's federal government used back-to-work legislation to force an end to the action. A separate strike by CP maintenance workers had a less devastating impact and was resolved quickly.

The chemical and fertilizer industry struggled with the fallout for months. Canada's federal government has, partly in reaction to the strike, pledged to undertake a review of the country's rail services. It has also introduced comprehensive legislative amendments to protect rail shippers from the potential abuse of market power by railways, Among other measures, the proposed legislation would broaden the scope of regulatory probes of disputes over tariffs and services, extend notification periods for tariff hikes, and improve arbitration procedures for shippers in disputes with rail firms.

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By: Stefan Baumgarten
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