Posted by: beautifool May 22, 2013
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Last year, oil company BP launched its own unit tank train out North Dakota’s Bakken oil fields, and perhaps no one was more surprised by this development than Jeff Foshee, BP’s director of North America Rail Group. Foshee oversees the freight cars and lanes that carry BP’s oil, chemical, gas, asphalt, and other products by rail.
“I keep remembering the question about ethanol. That crude tank train — in the last 18 months, I’m not sure I’d be thinking of crude unit trains. And now we are at that point, and operating and growing,” Foshee told attendees at the January 2013 meeting of the Midwest Association of Rail Shippers.
The two-day meeting provided a chance for railroads and shippers to come together and discuss new developments, business challenges, and emerging trends facing the industry and its customers. Rail traffic has not yet rebounded to the peak year of 2006, but the volume is growing — although the mix of traffic has changed.
“I go back to 2000, and I think about where our economy was. Everybody thought that U.S. manufacturing would never, ever grow again. We were always going to be a consumer and services economy, which quite frankly didn’t have a great outlet for the U.S. railroad network,” Matt Rose, chairman and CEO of BNSF Railway, said. “But industrial products is now our growth engine.” Rose opened the event as its keynote speaker.
Industrial products grew from 16 percent of BNSF’s volume in 2006 to 18 percent in 2012, Rose said. Also up: petroleum (from 1 percent of volume in 2006 to 4 percent in 2012), and domestic intermodal (from 20 percent in 2006 to an impressive 24 percent of volume in 2012).
Commodities that have fallen on BNSF since 2006: international intermodal, coal, and forest products.
With traffic forecast to continue growing, BNSF will spend $4.1 billion this year on capital improvements, the highest amount the railroad has ever spent, Rose said. But he also called on the federal government to focus on improving infrastructure, develop a national freight strategy, streamline the permitting process for building new infrastructure, and refrain from introducing regulations that would hamper the industry’s ability to meet the demand for coal from other countries or curb domestic oil and gas production.
More track infrastructure, locomotives, and cars will help railroads become more flexible — a trait that is becoming more important to rail shippers, said Mark Davis, a senior analyst with Cleveland Research. Since the recession, shippers are keeping inventory levels at a minimum, and want to respond more quickly to changing market demands. The bottom line for transportation, Davis said, is that shipments are smaller, but more frequent.
Davis also said U.S. railroads will benefit in the next few years as more companies shift manufacturing from China, where wages are rising, to places like Mexico.
Flexibility will be the key to keeping crude oil shipments moving by rail, rather than pipelines, in the future, Davis said. The ability to divert trains to different destination points provides an advantage. Class I railroads have gone from originating 10,840 carloads of crude oil in 2009 to more than 203,000 carloads in the first 9 months of 2012 alone.
Drilling activity will continue, which will also benefit U.S. railroads. The depletion rates of wells in places like North Dakota are much quicker than established oil fields in locations like Saudi Arabia, Davis said, meaning producers will have to keep drilling more wells. And each drilling rig needs 40 freight cars of inbound material.
Meanwhile, high fuel costs and new regulations will continue shifting truck traffic onto rails. Whereas the focus for truckers at one time was on growing their franchise, now the focus is on profitability, Davis said. The result has been a shift away from national moves to shorter regional moves where backhaul opportunities will be more plentiful.
That trend has helped Florida East Coast increase its domestic intermodal business. The railroad gets about half its intermodal volume from CSX and Norfolk Southern at Jacksonville, but competes with truckers for the other half on a railroad that’s just 351 miles long, said Florida East Coast President James Hertwig.
Little backhaul potential exists in South Florida’s consumer market. Hertwig said for every four loaded containers going south, only one load moves north. Combine that imbalance with traffic congestion and driver shortages, and Hertwig says domestic truckers have become more inclined to give the railroad their Miami-bound loads at Jacksonville, rather than send their rigs and drivers further south. And with Florida East Coast’s multiple daily departures and terminals, containers don’t sit very long in Jacksonville waiting for the next train.
Railroad customers still say there are still challenges to shipping by rail, but the service is improving. “Our intermodal on-time service is 98.5 percent — that’s better than our over-the-road truck service,” said Shelli Austin, vice president of transportation at the shipping and warehousing firm of IDS Inc., where 75 percent of its traffic goes by rail. “I was a skeptic at first after seeing trucking. Now it’s the one thing I sell.”
“We’re finding people are accepting a longer transit time for the lower price,” adds Nancy Newbourne, director of logistics for Batory Foods, which uses intermodal to ship food ingredients from the Midwest to the West Coast.
Financial analyst Tony Hatch said railroads will not only see growth in shale oil-related moves (which is offsetting traffic declines in coal), but also a rebound in chemical shipments, which he considers “the most important” rebound. Hatch said the American Chemical Council estimates chemical companies are putting $30 billion of capital expansion in plants and terminals between New Orleans and Houston, which will provide huge opportunities for rail. “It’s basically already on the books, and we’re just waiting for railcars to roll on this.”
Not every emerging trend had a clear solution. Opinions differed as to which railroads or areas would see the most benefit from the Panama Canal’s widening in 2015. “Nobody knows where it’s going,” said Florida East Coast’s Hertwig, “but if you you’re not prepared for it, you’re not going to handle that business.”
Those words could have summarized the meeting in a nutshell. Opportunities for rail abound. But they’ll require flexible product offerings, reliable service, and better communication with customers to make sure their immediate needs and future demands are being met.
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