Chemical shippers: Restless captives - chemical industry's worries about railroads

Railway Age, Oct, 1999 by Lawrence H Kaufman

Two-thirds must rely on a single rail carrier. Without competition, they say, their service providers have no incentive to improve.

Chemical and plastics manufacturers can be excused if they feel they are seeing deja vu all over again. They also can't be blamed for concluding that rail mergers are not good for anyone, much less rail customers.

Many are still recovering from the western rail service crisis of 1997-1998. Now they are experiencing service failures in the East as Norfolk Southern and CSX Transportation struggle to overcome the early service failures that stemmed from their June 1 breakup of Conrail.

Chemical shippers won't soon forget the rail service fiasco that began in the summer of 1997, when Union Pacific's difficulties absorbing Southern Pacific led to a service meltdown that began along the Chemical Coast of Texas and soon spread throughout the West and to other carriers outside the region.

Chemical companies saw their cost structures blown away as must-complete shipments were shifted from rail to more expensive trucks. Utilization rates dropped precipitously as privately-owned fleets of tank and covered hopper cars, which account for virtually all rail movements of chemicals, sat idle in rail yards or--worse--moved aimlessly through the rail system like the mythical Flying Dutchman sailing ship, never reaching their destination.

Logistics executives at chemical companies are happy to relate their individual horror stories, but few will talk on the record because of real or imagined fears of retaliation if their comments offend rail carriers. They are quite willing, however, to let their industry association speak for them.

Dealing with poor rail service for the second time in three years, plastic and chemical producers have instructed the Society of the Plastics Industry and the Chemical Manufacturers Association to take an increasingly active role in pressing for legislation that would force more competition on their railroad suppliers.

As a practical matter, though, railroad executives are not too concerned about the threat because major legislation is unlikely to be cleared by Congress this late in the year. Next year is a presidential election and all 435 seats in the House of Representatives and one-third of the Senate will be up for reelection, so it is a less-than-even bet that anything will happen then, either.

Despite screams of rage from designated chemical and plastic industry spokespersons, the picture isn't all grim. "Service has come back, but it's not great," says Maureen Healy, director-transportation issues for the Society of the Plastics Industry. "It's back to premerger levels, but shaky." She credits UP with having learned from its humbling experience.

In the first eight months of 1999, railroads handled 1,106,445 carloads of chemicals--a 1.8% gain from the same period of 1998. Significantly, rail carload traffic for all commodities slumped 1.1% over the same period, as chemicals increased their share of rail carload traffic to 9.2%.

The chemical industry, like many grain and coal customers, is among the few truly captive railroad customers. Chemical shipments consist of bulk commodities that can be handled far more safely and efficiently by rail than by other modes. Inland and coastal barges offer less expensive transportation for large quantities of chemicals, but the navigable waterway network serves only limited geographic areas. Motor carriers, on the other hand, are far more expensive and require two to three truckloads to carry the volume of products that can be handled by one railcar.

This leaves rail as the mode of choice. It is best at handling large volumes in repetitive shipments moving long distances.

According to Randy Speight, director-distribution programs at the Chemical Manufacturers Association, CMA members account for 90% of chemical industry productive capacity, and two-thirds are captive to a single rail carrier. Captive plants pay 25% higher rates than those with two or more carrier options, according to CMA surveys, Speight says. "While we don't get the service that is promised [in merger applications], at the same time the majority of our members are paying more for substandard service," he says. "Where there is no competition, there is no incentive to improve."

While admitting that service isn't where it wants it to be, UP says its service crisis is in its past. Customers agree. "UP says it is back to premerger service levels on some corridors. Some of our members have eased pain, but I'm not heating a whole lot of people saying they are at the level they expected based on the promises made," Speight says.

Railroads invariably promise significant improvements in service quality when seeking Surface Transportation Board approval of mergers. This was especially true in the Union Pacific/Southern Pacific case. The applicants were burdened from the start by the fact that they were the principal competitors in the chemical producing region stretching from New Orleans west through Houston to Corpus Christi, Tex., along the Gulf of Mexico.