Scrap Transport Experience Flux

Due in part to the strength of the commodity markets, transporting scrap metal remains a challenge, with more changes imminent.

Given the current market strength for most scrap materials, trading activity should be healthy and consistent. But transportation -- from rail to truck to barge -- remains extremely tight, with little relief in sight.

In addition, several factors could alter the playing field, including the recent awarding of control over gondola cars to the railroads and the proposed sunsetting of the Interstate Commerce Commission.

"Right now, it’s amazing -- the economy is tremendous, and yet we’re still suffering because you can’t move the scrap to the marketplace," says Ron Havrilla, vice president of corporate transportation for Columbia Iron & Metal Co., Cleveland, and chair of the Institute of Scrap Recycling Industries’ transportation committee.

The entire scrap transportation industry is undergoing numerous changes on all fronts, according to Mike Edwards, director of transportation for the David J. Joseph Company, Cincinnati.

"The domestic inland river fleet is still extremely tight because of domestic coal and grain imports and exports," he explains. "The truck market is tight. The rail situation is obviously tighter than it was a year ago. The demand is definitely there, and it’s really just razing the playing field."

With the ongoing shortage of gondola cars, more shippers are turning to trucks for transporting materials, says Carmen Mormeno, vice president of Jack Gray Transport, Gary, Ind.

"Business is good in the recycling area. In fact, it’s getting to the point now where there are almost not enough trucks," says Mormeno.

"They’re all having problems with the gondola cars, so now they’re coming back to the trucks. And there are only so many trucks. We have to take care of those that took care of us, so that’s created a little bit of a shortage."

In addition, there is a widespread shortage of truck drivers. This particularly affects scrap recyclers who own their own trucking fleets.

"When the people who have their own trucks can’t find drivers, they just leave them parked," says Mormeno. "I think the trend is going to go back to where there’s people in the scrap business and people in the trucking business."

But one large scrap processor, Cozzi Iron & Metal Inc., Chicago, is not having too much trouble keeping its trucks on the road, according to Al Cozzi, president of Cozzi.

"All of our trucks are running, but we are having trouble getting enough guys to run as many of the two shifts as we would like," says Cozzi. "Drivers are very tough to get. They are a very precious commodity these days."

Despite this, the company plans to hang on to its fleet of trucks, he says, in order to maintain its desired levels of service.

"Whether we use our trucks or somebody else’s is purely economical," says Cozzi. "If it’s cheaper, we’ll use someone else’s."

Scrap processors have considered buying their own railcars, but because it is difficult to assure their return, most have decided against it, says Mormeno.

"The people at Sam Allen were considering buying gondolas, but decided to buy double trailers. Now they have to find drivers."

The market is "a little bit crazy," says Mormeno. Because the markets are up, with high demand for equipment and a shortage of availability, the transportation industry is able to play hardball and charge high rates.

There has been some movement to try and force consumers to arrange transport, says Mormeno, but this has not always been successful. "The consumers are saying, ‘if you want to sell to me, you sell it delivered.’"

There is no end in sight, as long as the markets stay up, because "the material has to move," says Mormeno. But once the markets start to go down, the transportation equipment situation will start to ease, he says.

Intra-state deregulation of trucking, implemented January 1, is another factor affecting trucking, says Mormeno. One immediate effect of that has been the springing up of small, independent truckers, increasing the competition in the trucking arena.

"It’s a whole new ballgame now," he says. "States may toughen up on safety, but you won’t see many new regulations. We’re just kind of laying back and watching. This is only the third month, and we haven’t really seen a big change. But we hear reports of new trucking companies emerging."

"These fellows are able to negotiate now on a much broader range of business than they were ever able to before," adds Edwards.

"Also, the railroads have more or less given up some short haul business to the truckers because they don’t make money on it. All of this adds up to a trucking shortage."

Although safety regulations are theoretically not going to be lessened as a result of the trucking deregulation, safety is a concern of some in the industry.

"With Washington cutting back and reducing the size of government, are you going to have the infrastructure to enforce safety?" asks Edwards. "I’m worried about it in the future though it’s not happening right now."

Even though directives have been in place since January requiring that gondola cars be returned to their owning railroads after each trip, the system is not yet running smoothly, according to Havrilla.

"The control issue is still a factor," he explains. "Even though the railroads are supposed to give the cars back to their owners, many of them are still not doing it. And a lot of the shippers don’t know what’s happening."

Many railroads appear not to be clear on which car service directives they are a party to and which they are not, says Havrilla. Also, some railroads are not following the directives.

"They’re getting fined, but they’re so short and they have to supply their customers with the cars, so they figure the fine is worth the aggravation, especially the Western roads," he explains. "I see cars going everywhere. So it still isn’t working the way it’s supposed to be, but it just started in January, so it will take a while."

Others say the confusion caused by the new control rule is not as bad as expected.

"I’m surprised there haven’t been more problems associated with the new car service directive," says Edwards. "Some railroads are obviously worse off than others, but overall it is nowhere near as bad a situation as I had initially envisioned, especially from the carriers that were on the short end of the fleet situation to begin with."

The slight downturn in the ferrous market in the first quarter may have helped alleviate any pressure that could have been caused by the new directive, says Edwards. "The mills are not buying as much recently, so there is less demand."

But the rule giving railroads control over gondola cars has only been in effect since the beginning of the year, he adds, so it may be too early to tell what the long-term results will be.

"I’ve been pleasantly surprised," says Edwards. "But with the next uptick in the market, as the rules get a little more cast in stone and the grace period goes away, that comment may not be valid anymore."

Even shipping by water is difficult in the current climate, says Havrilla, leading processors to discuss the possibility of working to repeal the Jones Act.

"That’s the regulation that says foreign vessels cannot haul domestically, only U.S. vessels can haul in the U.S., so that keeps the rates high," he explains. "We’re seeing if it’s time to let the foreign vessels compete domestically, which would bring the price down.

"So everything’s brewing, it’s just a matter of taking time to get all this done," says Havrilla.

Causing some concern in the scrap recycling industry is the imminent sunsetting of the long-lived Interstate Commerce Commission (see related story).

The primary regulatory agency for both the railroad and trucking industries, ICC is widely expected not to survive until 1996.

"They are the governing factor of transportation, so it’s going to be interesting," says Havrilla. "That will be the next big issue we get involved in."

The sunsetting of ICC could have a positive impact on the scrap industry, according to Edwards.

"The ICC is very slow, very bureaucratic," he says. "This sunsetting has got the potential to be a very good thing. It could speed things along. But then again, depending on the bureaucracy of the Department of Justice and the Department of Transportation and all those other regulatory agencies that are likely to end up with bits and pieces of the ICC’s current responsibilities, it’s hard to say for sure."

The jury is still out, he concludes.

If all the remaining issues in truck regulation get thrown out as a result of the sunsetting, that would also have a positive effect on the scrap industry, according to Mike Mattia, director of risk management for ISRI.

"Then we won’t have to worry about somebody producing another undercharge bill, which would be nice for everybody," says Mattia.

"The question is, what will happen to railroads?" he continues. "Because you could probably throw out the lion’s share of regulations for trucking and not have a problem, but you can’t throw it all out for railroads because of the way they are structured. They are still quasi-monopolistic."

A big concern of scrap shippers is the ability to have access to some form of redress if they feel they are being treated unfairly by the railroads, he explains.

"Right now, it takes a room full of attorneys and a half dozen years to prove that you’re a captive shipper, and no one in the scrap recycling industry has ever tried that," says Mattia. "We are working and hoping for better redress."

ISRI has also been working for some time to deregulate scrap that moves by rail, he adds.

"Part of this, for the nonferrous, has been to allow the cap on nonferrous rates to be in place but to modify the regulations so that the average shipper can say ‘hey, my shipments went above the cap, therefore I need redress,’" says Mattia.

So far, the DOT and the ICC have expressed the opinion that the rate cap is unnecessary and can be eliminated. Another possible option might be to simplify the existing cap regulation, and then see, over time, if it is more effective than it has been in the past, suggests Mattia.

"The regulations have been so cumbersome, requiring that room full of attorneys again, that only one scrap recycler has ever challenged the cap concept -- and they were successful," he says.

"The idea of the cap was to protect and foster the movement of scrap, particularly by rail, but since it’s been so complicated that the majority of scrap recyclers have not been able to use it for a defense, why not simplify it and then give it a test run? If nobody cares about it still, then throw it out. One of our concerns is that legislators may be throwing out the baby with the bathwater."

A third concern of scrap recyclers regarding the commission's expected sunsetting has to do with markets, says Mattia.

"Gonds are in a shortage; they’re poorly utilized by all industries, and we’ve been working on concepts to better utilize our gonds in hopes the railroads will invest in more."

But without regulatory oversight such as that provided by the ICC, the widesoread concern is that railroads will be able to control which areas of the country a given processor can ship scrap based on the railroad’s convenience -- not the scrap processor's convenience, he explains.

"This puts the scrap recycler in the position of, ‘well, since I’m shipping with ABC carrier on the West Coast and he says he’ll only ship my scrap to certain areas because it’s economical for him, if receivers in these markets find that out, then I’m losing a lot of bargaining power because I can’t take my scrap elsewhere.’"

But on the positive side, the sunsetting of the bureaucratic commission could be a good time for processors to address these concerns, many of which have been longstanding, says Mattia.

"Now is the time to re-write the rules, given the current environment," he says. "But we want to be sure that shippers, recyclers, and others will be able to re-write the rules that allow them some redress."

At some point in the relatively near future, Congress will write a bill containing proposals about where certain functions of the ICC will now be handled, says Mattia.

"Some may go to the Department of Transportation, some to the Department of Justice, some to the Railroad Administration -- it depends on what functions they keep," he saays. "Hopefully by the time Congress sits down to write a bill, industry will have had time to comment on what stays and what goes."

When the ICC has been dismantled and its various and sundry functions parceled out, the market has settled down and all the new rates and effects of deregulation worked out, the transportation industry will lose its current uncertainty and reach a new point of stasis, says Edwards.

"Ultimately, when all the old pricing from the old contracts and tariffs that the old pricing mentality is phased out and the new higher freight rates and so on are phased in, everything is going to fall back into its relative competitive situation between the trucks, rails and barge -- it’s just going to be at higher levels," he says.

"So really I think the great fear right now is the unknown until everything shakes out," Edwards continues.

"Once we reach the new equilibrium, people will yawn and go on about their business, and it will be another catastrophe that’s now gone away."

As soon as the major economic indicators -- along with operating rates in the steel industry -- begin to slow down, says Edwards, there will be some easing in the transportation equipment situation.

"Then you’ll see carriers move from their current return on equity or return on asset mode of pricing back to market share pricing," he says. "It happens every cycle."

RETIRING AN OLD PLAYER

Although many regulatory bodies face the threat of extinction at the hands of the new Congress, the Interstate Commerce Commission is a favorite target of some, according to Mike Mattia, director of risk management for the Institute of Scrap Recycling Industries, Washington.

"ICC is the oldest regulatory body we have left," says Mattia. "The ICC was formed about a dozen years after the Civil War, back in 1880-something, when the railroads started to grow and became a monopoly. So the ICC’s first job was to get in and control the railroads."

For a number of years, this was a satisfactory arrangement. Railroads experienced a boom period when there were a number of different companies in the industry. But now, says Mattia, there are only about a dozen large railroads remaining.

"In the next five years, that dozen will probably be six," he explains. "We’re starting to look at an even more powerful monopoly. So there’s got to be someone looking over the railroads."

But it probably won’t be the ICC. The commission grew significantly over the years, regulating trucking as well as railroads, and becoming cumbersome and bureaucratic. Many complained that the ICC didn’t solve the problems it was created to address.

"It became very difficult to correct redresses," says Mattia. "It was just a massive playground for attorneys and litigation, and the average shipper couldn’t say ‘hey, I have a beef, this railroad is putting the screws to me.’"

Abolishing the agency became a personal mission for several Republicans in Congress who objected to the amount of pomp and circumstance the ICC affected. "So when the Republicans took control they said ‘let’s get rid of it. It’s an old-order thing we don’t need anymore,’" says Mattia.