Biden administration executive order to target consolidation, anticompetitive pricing in rail, shipping

Adam Yanelli

09-Jul-2021

HOUSTON (ICIS)–US President Joe Biden is expected to sign an executive order on Friday that encourages regulators to increase their focus on consolidation and alleged anticompetitive pricing in the railroad and ocean shipping industries.

A fact sheet explaining the order was posted to the White House website Friday morning.

In it the president encourages the Surface Transportation Board (STB) and the Federal Maritime Commission to focus on enforcement and to coordinate with other agencies and their ongoing responses to corporate consolidation.

Chemical manufacturers are some of the largest shippers by volume across all modes of transportation, and the American Chemistry Council (ACC) said it supports the action.

“We commend President Biden for directing the Federal Maritime Commission and the STB to resolve persistent transportation problems and adopt much needed reforms, which will help provide a boost to American manufacturing, consumers and US competitiveness,” the ACC said.

The trade group said the urgency to address the problem is mounting as the industry’s transportation needs increase.

“New investments in US chemical production will drive greater demand and result in more than 1m additional shipments per year by 2030,” the ACC said.

CONSOLIDATION
In 1980, there were 33 “Class I” freight railroads, compared to just seven today, and four major rail companies now dominate their respective geographic regions.

Freight railroads that own the tracks can privilege their own freight traffic – making it harder for passenger trains to have on-time service – and can overcharge other companies’ freight cars.

The executive order calls on the STB to require railroad track owners to strengthen their obligations to treat other freight companies fairly.

This is likely referring to an STB proposal from 2016 for reciprocal switching, which would allow a shipper to gain access to another railroad under certain circumstances.

Reciprocal switching refers to the situation in which a railroad that has physical access to a specific shipper facility switches rail traffic to the facility for another railroad that does not have physical access.

The second railroad pays compensation to the railroad that has physical access, typically in the form of a per car switching charge.

As a result of the arrangement, the shipper facility gains access to an additional railroad.

“ACC applauds the executive order’s call for long overdue solutions to promote competition within the US freight rail system,” The ACC said, adding that reciprocal switching provides market choices to manufacturers and other rail customers that currently have no competitive transportation options.

“Where competition is not possible, we support the Administration’s call for more fair and workable procedures for shippers to challenge unreasonable rail rates,” the ACC said.

The Association of American Railroads (AAR) has previously said it opposes reciprocal switching and issued a statement maintaining its position.

“Any STB action mandating forced switching would put railroads at a severe disadvantage to freight transportation providers that depend upon taxpayer funded infrastructure,” AAR president and CEO Ian Jefferies said.

“Such a rule would degrade rail’s significant benefits to both customers and the public by throttling network fluidity, disincentivizing investment, increasing costs to shippers and consumers, and ultimately diverting traffic onto trucks and the nation’s already troubled highways,” Jefferies said.

In the US, chemical railcar loadings represent about 20% of chemical transportation by tonnage, with trucks, barges and pipelines carrying the rest.

SHIPPING
The order urges vigorous enforcement by the maritime commission against shippers charging American exporters exorbitant charges.

It cites consolidation in the industry that has seen more than 80% of the global market controlled by the 10 largest shipping companies, compared with controlling only 12% in 2000.

This leaves domestic manufacturers who need to export goods at the mercy of these companies, the text of the order said, often in the form of increased detention and demurrage charges.

Most chemicals are liquids and are shipped in tankers, and freight rates have been steady.

Polymers, such as polyethylene (PE) and polypropylene (PP), which is shipped in pellets, are moved by container ships.

Container ships also carry a wider scope of cargoes, including consumer products like electrical appliances and automobiles, so demand for that space has risen as economies reopened after lockdown measures because of the pandemic, leading to a spike in rates.

The National Association of Chemical Distributors (NACD) said the results of a recent survey show the severity of the shipping crisis as “delays and costs associated with shipping have continued to rise dramatically over the last three months”.

The survey showed 82% of respondents are seeing an average delay of more than 11 days, with half of companies reporting delays greater than two months.

“Previously, 55% of respondents reported being charged additional premiums by carriers beyond tariffs and contract rates,” The NACD said. “Now a whopping 61 of the 84 respondents, or 72.6%, report paying these premiums.”

Focus story by Adam Yanelli

Thumbnail image shows a train track. Image by Shutterstock

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