Railroads Continue Merger Mania

The cost of transporting scrap metal is a significant portion of overall business expenses, so it is essential for scrap processors to have reliable transportation methods. Truck movement of ferrous scrap is generally best for short haul movement of the material – that which occurs within 150 miles. Rail movement is most cost-effective for longer hauls. Barge shipments are possible for scrap processors who have direct access to inland waterways.

All three of these modes of transportation are currently running into logistical problems. The most heavily publicized have been the problems with rail movement of scrap, especially in the Southwest where Union Pacific has been struggling with a number of merger issues since it acquired Southern Pacific last November in a $5.4 billion deal.

That railroad, the largest in the country, has been hit with a flurry of bad news as it has attempted to absorb the SP into its system. The effect on scrap processors has been increased difficulty obtaining gondola cars for shipping scrap to consuming mills. Union Pacific has seen the biggest problems with shipments into the heavily traversed Southwest.

A litany of reasons are cited for the problems: a sharp reduction in the workforce, a lack of locomotives, logistical problems which have caused some cars to be lost in the system for an extended period of time, and the difficulties in integrating two different rail cultures under one company.

While the UP is at the center of the problem, difficulties are not limited to the Southwest, or even the one rail system. One large Midwestern broker says that the UP did insufficient planning for the merger, and eliminated too many people too quickly. "In the meantime, [the problems are] like a pebble in a pond, with ripples spreading out," he says.

Ron Bird, transportation manager for Commercial Metals Co. (CMC), Dallas, says that some shipments that previously took 14 days are now taking 45 days. "The situation is the worst I have ever seen," says Bird. He points out that many of the problems the UP is now going through are similar to what it experienced when it acquired the Chicago & Northwestern railroad several years ago, but are perhaps worse, since the SP is a larger railroad with many more employees.

Other scrap processors have similar stories to tell. One broker notes that a recent shipment from Texas to Nevada, which typically takes six days, finally reached its destination in 33 days.

The problem, according to Bird, could end up being much worse than the United Parcel Service strike earlier this year, and numerous industries – not just recycling – are affected. For example, industries that rely on rail to move material, including power companies, are seeing shortages in their feedstock, which could result in higher prices to consumers.

Bob Melendi, CMC’s marketing manager for ferrous scrap, adds that, although there aren’t fewer gondola cars, the UP problem is slowing down the time it takes to get railcars from the shipping company to the receiving company and then back to the original source.

"There is gridlock on the railroads," says one transportation broker. "The merger between the UP and the SP happened too fast. It is getting worse and worse."

Some companies, which have seen these sorts of problems before, are avoiding these difficulties through ownership of their own cars. The David J. Joseph Co., Cincinnati, for example, owns a fleet of gondola cars, which helps keep their material flowing. And CMC, which presently owns 70 converted gondola cars, is in the process of leasing 300 gondola cars to help in the movement of material.

However, the cost of either buying or leasing a gondola car is high enough to make it unaffordable for many processors, points out Dennis Wilmot, transportation director for Luria Bros., Shaker Heights, Ohio. Further, even if a given processor owned a gondola car, the car would still be under the control of the railroad – including the repairs. "You hope the railroad will cut you a break on the fare," says Wilmot.

The UP/SP problem is also spreading to other railroads – both short lines and other Class I railroads. With more cars tied up in the UP system, traffic is slowing down on other rail lines. To make matters worse, several rail users are seeking financial compensation from the UP for lost cargo. Although the UP has vowed to correct these problems, many analysts predict that they will likely continue until the first quarter of 1998 at the earliest.

Adding to the nation’s rail challenges is the plan by CSX and Norfolk Southern to split up Conrail in a deal for around $10.2 billion. This move, however, is different from the UP/SP acquisition, according to advocates of the deal. For one, there are two companies rather than one absorbing another rail line.

The proposal, which is expected to be heard by the Surface Transportation Board by the middle of next year (see sidebar), would parcel out Conrail lines throughout the Northeast and Midwest between CSX and Norfolk Southern.

Although it is far from a done deal, scrap processors are watching this proposed merger closely. According to initial plans set up by the railroads, the two rail lines will be taking different sections of Conrail track. Advocates of the Conrail division feel that it will improve competition, since Conrail previously had a fairly exclusive hold on rail lines in the Northeastern U.S. Also, competition between a stronger CSX and Norfolk Southern could have the potential to drive down freight rates.

Jeffrey Cole, chief executive officer of Ferrous Processing & Trading Co., Detroit, feels the breakup of Conrail will have a positive effect on the scrap industry. "The deal could bring about more efficient and cost effective rail shipments," says Cole. "It will maximize efficiencies of both railroads."

Although he acknowledges that his company is seeing a shortage of gondola cars, he says the company has to be more aggressive in searching them out. "People skeptical of this transaction are afraid of change," he says.

Some in the industry have expressed concerns that the reduction in the number of railroads servicing the scrap industry will actually lead to monopoly-like conditions. Measures should be taken to ensure that rail rates remain competitive, says Cole. But he feels that competition will probably not diminish, given the competitive pressure of trucks as an alternative for scrap processors. "The competitive zeal should not be underestimated," he says.

An added benefit for Ferrous Processing, Cole points out, is that the company’s facilities will now be serviced by both railroads.

Luria’s Wilmot is more skeptical. "Every rail merger has brought with it some problems. Every time railroads make a change there are problems. It’s not like a light bulb that you can just turn on and off."

Other processors express concern that the merger will leave some rail-dependent processors at a major disadvantage. And many scrap processors have voiced concern about perceived slow response and difficulties in getting plain gondola cars to move material.

On the other side, railroads point to what they say are the advantages of the upcoming merger. Wayne Efford, director of the Metal Sales and Marketing Team for CSX, says it may be possible for scrap processors to reach new consumers as a result of NS and CSX splitting up Conrail. "You will be able to reach, on a single line, the customer," he says. This would eliminate additional charges previously incurred when switching from one rail line to another.

Additionally, to address concerns about gondola shortages, CSX is adding 1,200 gondola cars to its fleet by the end of the first quarter of next year. The addition will add to the 7,000 gondola cars the railroad presently owns.

To ensure shippers are aware of the steps that are taking place, CSX recently held a meeting with shippers to hear their concerns and field questions about the rail shipment of material.

Robert Bergia, senior traffic manager for Tube City, Glassport, Pa., feels that splitting up Conrail will have a tremendous impact on scrap shippers in the Northeast. "Hopefully, it will create better competition," he says, adding that a key will be if CSX and NS are able to integrate the new system smoothly.

The Institute of Scrap Recycling Industries, Washington, cognizant of the need to improve the dialogue between the two parties, recently implemented a work group with the Association of American Railroads, Washington, that would look at ways to ease many of the timing problems. Although it is still early in the process, Mike Mattia, director of risk management for ISRI, feels there have been some positive discussions between the two parties.

With the economy rolling along at a healthy pace and the end of the year approaching, space aboard trucks, rail, and even barges would be tight even without the problems caused by the rail mergers.

"It couldn’t happen at a worse time," says a Midwest scrap broker. "I’m sure the consumers have to be frantic."

"There are gondola shortages everywhere," says Ron Havrilla of Pro-Trade, Hudson, Ohio. "With the price of scrap up, everyone wants to ship." He adds that with many companies searching out alternatives to rail transport, trucking availability is becoming tighter. At the same time, trucks are usually not competitive for long-haul shipments.

In addition, trucks are generally busy with shipping other, more valuable commodities, according to Tim Lake, Jr., of Fibre Freight, a transportation provider, headquartered in Deland, Fla. Even as a backhaul, recyclables often take a back seat to other, more valuable commodities. "We are working very hard to find any type of transportation," says Lake. "It is becoming increasingly difficult."

Overall, those in the industry agree, all sides need to work together in order to make transportation – especially by rail – work more smoothly.

"Railroads are like any other business," says Cole. "On balance, if you make a commitment to railroads, the railroads will meet you halfway. They aren’t like a taxi. You can’t just stick out your hand and get a car."

The author is senior editor of Recycling Today.

Sidebar

Anatomy of a Merger

In order for the proposed acquisition of Conrail by CSX and Norfolk Southern to be complete, it will have to go through a complicated regulatory approval process under the jurisdiction of the U.S. Department of Transportation’s Surface Transportation Board.

The procedural calendar schedule for the CSX-Norfolk Southern-Conrail deal is the following:

May 16, 1997 – Preliminary Environmental Report filed.

June 23, 1997 – Primary application and related filings filed. Environmental Report filed.

July 23, 1997 – Publication in the Federal Register of: notice of acceptance of primary application and related filings; and notice of the five related abandonment filings.

August 6, 1997 – Comments on the draft scope of the Environmental Impact Statement due.

August 7, 1997 – Notice of intent to participate in proceeding due.

August 22, 1997 – Description of anticipated responsive applications due; petitions for waiver or clarification due with respect to such applications.

September 5, 1997 – Preliminary Draft Environmental Assessments for the construction projects referenced in Decision No. 9 due.

October 1, 1997 – Responsive Environmental Report and Environmental Verified Statements of responsive (including inconsistent) applicants due.

October 21, 1997 – Responsive (including inconsistent) applications due. All comments, protests, and requests for conditions, and any other opposition evidence and argument, due. Comments of the U.S. Secretary of Transportation and the U.S. Attorney General due. With respect to all related abandonments: opposition submissions, requests for public use conditions, and Trails Act requests due.

November 20, 1997 – Notice of acceptance (if required) of responsive (including inconsistent) applications published in the Federal Register.

December 15, 1997 – Response to responsive (including inconsistent) applications due. Response to comments, protests, requested conditions, and other opposition evidence and argument due. Rebuttal in support of primary application and related filings due. With respect to all related abandonments: rebuttal due; and responses to requests for public use and Trials Act conditions due.

January 14, 1998 – Rebuttal in support of responsive (including inconsistent) applications due.

February 23, 1998 – Briefs due, all parties (not to exceed 50 pages).

April 9, 1998 – Oral argument (close of record).

April 14, 1998 – Voting conference (at board’s discretion).

June 8, 1998 – Date of service of final decision. With respect to any exempted abandonments: offers of financial assistance may be filed no later than 10 days after the date of service of the final decision.