Addressing Railroad Problems

When shipping scrap by rail, recyclers face a gondola shortage and poor service. Can these problems be resolved or only managed?

By Lynn R. Novelli

Imagine this scenario: Scrap prices are strong, and you have orders to ship. So you call the railroad to request 10 gondolas for Friday, but you only get six and not until the following Wednesday. When the cars finally arrive, three of them are dirty. Meanwhile, your customers are waiting for their orders, scrap prices are possibly softening, and your production line is backing up.
   Sound familiar? Your frustrations over shipping scrap by rail are shared by many recyclers who use railroads. In a survey conducted by ReMA last July, 88 percent of the respondents rated rail transportation as “somewhat” to “very important” to their companies. Unfortunately, almost as many—82 percent—rated the railroads’ service 
as “fair” or “poor.”
   The current problems are merely the latest repeat of a familiar theme. Issues with rail transportation are as cyclical as the scrap market, says Steve Hirsch, ReMA associate counsel/director of state and local programs and staff liaison to ISRI’s rail transportation task force. As he explains, “rail issues are predictable and related to peaks in the price of scrap metal. When prices are high and then start to soften—as they are now—everyone is eager to fulfill orders and make shipments to lock in prices, and they want as many cars as possible, fast.”
   Railroads simply do not have enough gondolas to satisfy scrap shippers’ needs during periods of peak demand, says Dennis Wilmot, president of Wilmot Logistics, a logistics consulting and railcar supply and management company in Aurora, Ohio. But given the scrap market’s cyclical nature, railroads are hesitant to invest on the upside because they know the downside is coming, he adds. “Consequently, whenever scrap sees a spike in business, there’s a [railcar] shortage,” Wilmot notes.
   Compounding the problem, railroads have removed scores of old cars from their fleets without replacing them, depleting the overall supply.
   The current gondola shortage may be the most obvious scrap/railroad issue, but it’s only the tip of the iceberg. Service is the most important issue to scrap shippers, Hirsch reports. In the ReMA survey, 79 percent of respondents rated consistency and reliability as the most important elements of rail service, outweighing price more than six to one.
   Scrap recyclers all over the country note that they receive only partial gondola orders, with delivery often delayed by days. Declines in transport speed, extended dwell times and turnaround times, and lack of power on the rail lines contribute to a domino effect, says Doug Starosta, transportation manager for TXI Chaparral Steel (Midlothian, Texas) and a member of ISRI’s operations committee. “If the railroads were fluent, it would help the railcar situation tremendously,” he says. “That’s also why throwing more cars on the line will just bottleneck the system more and not solve the problem.”
   Declines in speed and increases in dwell time (the average time a car spends in the operating yard being processed) can be traced back more than 10 years. In 1993, the average train speed was 23 mph, but in 2002 it was less than 21 mph.
   While speeds are declining, dwell times are rising. For instance, in a report presented by Tom Pellington, senior director of transportation for The David J. Joseph Co. (Cincinnati), Union Pacific (UP) says it has experienced a 4-percent decline in train speed and a 6-percent increase in dwell time. CSX and Norfolk Southern (NS) have seen their speeds decline about 9 and 7 percent, respectively, while their dwell times have increased 13 and 2 percent. Of the major rail carriers, Burlington Northern and Santa Fe Railway Co. (BNSF) has come closest to holding speeds steady with only a 1-percent decline in mph and no change in dwell time.
   Also affecting service is the decline in railroad miles of track and number of employees. The consolidations that swept through the rail industry in recent decades have taken their toll on both. 
   According to the National Industrial Transportation League, Class I track mileage has declined by 100,000 miles in the last 20 years—from 270,000 in 1980 to 170,000 in 2002. In that same period, the number of railroad employees slid from 450,000 to 150,000. Meanwhile, the number of carloads originated has grown by six million.
   In all fairness, no one could have predicted the upturn in the scrap market that began in late 2003 and continued through 2004, says Starosta. That market boom left the railroads scrambling for crews and power to cope with the increased demand. “Hiring and training new crews and ordering and receiving new equipment are both long processes,” he says. “Meanwhile, business has continued to grow.”
   Also, the railroads are still trying to sort out the problems stemming from their various mergers, says Greg Dixon, general manager of Baker Iron & Metal Co. (Lexington, Ky.) and chair of ISRI’s rail transportation task force. “We as individual recyclers or together as ReMA have no control over their internal issues.”
   For example, mergers have made it necessary for railroads to integrate lines, and service has suffered as a result. This can spell disaster for scrap shippers, says Dixon, who has little confidence in computerized planning systems for car delivery. He speaks from personal experience: He recently ordered four gondolas that ended up in Atlanta. It took three weeks for the cars to be rerouted to their correct destination in Lexington.
   On top of their internal challenges, railroads must cope with the same pressures facing all businesses today—rising fuel costs, high labor costs, and extra security costs. Recent bad weather nationwide hasn’t helped the situation, Starosta adds. UP, for example, had two complete lines washed out by floods, forcing a two-week shutdown of those runs while they were rebuilt.
   In addition to the above challenges, railroads face shareholder pressure to perform well financially—not an easy task in the capital-intensive rail business. “Unlike highways that are supported by public monies,” Wilmot says, “the rails belong to the railroads, which have to answer to shareholders who want a decent return on investment.”
   To add to the pressure, the federal Surface Transportation Board requires railroads to show a 20-percent return on investment to be deemed profitable. Most are unable to meet that high standard. Instead, they are scrambling to meet the cost of capital, protect the value of their franchises, and maintain operational density.
   Unfortunately for shippers, the railroads’ focus on cost reduction to satisfy shareholders has coincided with an upswing in the global economy. At the time when shippers need service the most, railroads have cut their personnel and aren’t investing in infrastructure and equipment. “The railroads will continue to cut capacity, putting more pressure on the rails that remain,” predicts Chuck Hunter, director of transportation for PSC Metals Inc. (Cleveland). “They’re already at or near physical capacity, operating at slower speeds so it takes longer to get where they’re going and back again.”
   Most capital investments by railroads are going into intermodal transport, which they view as a steady, long-term profit center compared with the bulk shipment of commodities like scrap. “They feel that intermodal transport is the future, and that’s where they’d rather allocate their limited resources,” Dixon says.
   According to many recyclers, railroads don’t view scrap transport as a major contributor to their revenue and are, therefore, less interested in spending money to resolve scrap-shipping problems. The fact is that agriculture, coal, and other commodities give the railroads more consistent, higher-volume business than scrap. “Scrap is definitely not the dominant player in the railroads’ business plan, so you have to wonder how much they listen to us,” says one scrap shipper.
   That said, Starosta asserts that railroads do value scrap shippers and want to improve service. As he states, “I believe they have added cars to handle steel and scrap—and now they want to keep them loaded.” 
   At the same time, ISRI’s Hirsch notes, “the railroads have publicly stated that they prefer to do business with shippers who can guarantee a specific number of cars moving from destination A to destination B and back, several times a week on a regular schedule. That business model does not fit the scrap industry. Our members are more likely to need five cars going to three different destinations in a single week.”

Resolving—or Managing—the Situation
   So what’s the answer? What measures can scrap recyclers take to cope with the gondola shortage and avoid service problems? The best approach, say transportation experts, is to manage the situation rather than try to solve it.
   Large corporations with sufficient capital have established their own private fleets of gondolas. Some smaller scrap and steel companies also own some railcars, but they typically use them to supplement what they get from the railroads. 
   Chaparral, for example, invested in a small fleet after being told that CSX could not meet its needs in full. Still, “if the railroads didn’t supply us with cars, we couldn’t do business,” says Starosta.
   PSC Metals has chosen to “aggressively invest” in private gondolas through leasing and purchase, Hunter says. The railroads, particularly the eastern lines, have encouraged this practice, motivating scrap companies to invest in their own equipment by offering a rate differential for private cars. So far, the western rail lines have not followed suit.
   In the past, smaller scrap dealers were able to sell scrap to large companies that had their own railcars, with the larger firms providing gondolas at no charge to the shipper. That has changed, Dixon notes. Now the shippers can be charged as much as $350 per car. “The bottom line is that the small operators are the ones at a disadvantage,” he says. “Large processors and conglomerates can afford to buy their own fleets, but the smaller dealers are the ones who will be most affected.”
   Another option is contracting with a railcar broker. Under this approach, shippers have the option of leasing the desired number of cars each month, then doing their own rate negotiations with the railroads and tracking the cars themselves. Or, shippers can contract to have the broker provide the cars, negotiate rates, track the cars,
and more.
   Some scrap recyclers have made their own internal adjustments to make their business more attractive to the railroads, Hirsch says. “We’ve seen recyclers shift their shipping patterns, for example, so that more product goes to the same destination,” he observes. “We’ve also seen scrap processors adjust their shipping schedules and even adjust their production schedules to find a way that works for all parties.”
   Still another option is paying a premium for gondolas to ensure their availability and delivery. BNSF is a leader in this area. That railroad developed an innovative program that requires shippers to pay a premium price for cars but also guarantees their availability. Under its Load Origination Guarantee Service (LOGS) program, shippers bid on available gondolas, and the cars go to the highest bidder. What makes the program a winner, says Starosta, is that the shipper with the winning bid is guaranteed to receive the number of cars ordered on time or BNSF pays the shipper a $200-per-car penalty.
   The LOGS program not only gives the shipper peace of mind, it also helps the railroad plan for car allotments, Starosta explains. “Knowing that a specific number of cars are online and how many are committed through the LOGS program at a premium price, BNSF can put more cars on line to fill the rest of its orders,” he says.

Projections and Communications
Given the dynamics of the scrap industry and the pressures on the railroads, there may not be a long-term, permanent fix to the problems both sides are facing, Starosta says. By keeping the lines of communication open with the railroads, however, scrap recyclers can improve the situation. “We have to work together and build a relationship with the railroads so we are in partnership,” he states. “When scrap prices are the highest, steel prices are the highest, but record prices don’t help if we can’t move the product.”
   Starosta meets at least annually with Chaparral’s railroad vendors to discuss his firm’s projected needs for the coming year and its expectations for improvements in equipment and service. The railroads, in turn, tell Chaparral how many cars they’ll be able to deliver consistently and reliably. “It’s much better for our planning if we know what the rails can do for us,” he says. “If we know in advance that they can’t fully meet our needs, we can plan to supplement as needed with our own cars or [other] private cars.”
   According to Starosta and Wilmot, the single most important element in improving rail service is for scrap shippers to accurately forecast their needs for their railroad vendors. “When the railroads know in advance what to plan for in cars, power, and crews, they can stay fluent,” says Starosta.
   As an example of what poor forecasting can do, he points to the steel industry’s unpredicted 30-percent upswing in business earlier this year, which caused problems throughout the rail system. “Everyone’s business was up, but our customers’ forecasts were thin and our forecasts were thin,” he explains. “There are some improvements the railroads need to make, but it’s difficult for them if we aren’t giving them good forecasts.”
   What he does not recommend is over-ordering the number of railcars you need to compensate for anticipated problems in delivery. For example, a shipper who needs six cars may order 10, expecting to get 60 percent of the order. Though this practice can benefit the shipper, it leads to over-forecasting by the railroads, which can result in excess capacity and other problems.
   The railroads appreciate at least a general forecast for six to 12 months ahead, says Wilmot. For the short term, scrap shippers should be able to provide their forecasts three weeks in advance and place their car orders a week in advance, he asserts. Shippers who place their orders through the Internet can even track their cars in real time.
   So, is there a long-term solution to the scrap/railroad dilemma? ISRI’s rail transportation task force is at least giving it a try, attempting to meet with the railroads to lay the problems on the table in a nonadversarial way.
   “I’m hopeful that opening up a dialog and addressing the issues will at least start improving the situation,” Dixon says.
   The good news is that anecdotal reports suggest modest improvements in car availability and reliability in recent months, Hirsch reports. The improvements may be due to changes in market dynamics, but he also gives credit to ReMA and individual members. “They’ve been persistent and have worked their way up the chain of command at the railroads to make their voices heard,” he says. “And we’re feeling that the railroads have been trying to figure out strategies that work for both sides.”
   Wilmot believes ISRI’s role should be to address the big, long-term issues with the railroads such as service and equipment. On the day-to-day, week-to-week business of transporting scrap, it’s up to the individual scrap shipper to manage his own situation. “If you don’t manage it, the situation will get worse,” he says. “But if you do, you will be more competitive.” 

Lynn R. Novelli is a writer based in Russell, Ohio.