July/August 1998
Scrap processors and railroads may have their gripes with each other, but they can build positive relationships by working together and understanding each other's needs and challenges.
By Lynn R. Novelli
Lynn R. Novelli is a writer based in Russell, Ohio.
Railroads and scrap processors together make one of the great success stories of this century. From the earliest days of scrap recycling, railroads provided the inexpensive overland transportation needed to move material from processors to consumers.
Likewise, the burgeoning steel industry at the beginning of the century depended on the development of rail service, not only main lines linking major cities but secondary lines to coal mines and scrap suppliers as well. The relationship among scrap processors, steel mills, and railroads helped transform the U.S. economy from an agricultural to an industrial base in the early 20th century.
Today, despite competition from long-distance trucking firms, steel rails still bind processors and railroads. But the tracks between them aren't always smooth. Disagreements develop, and complaints can fly. But over the years, processors and railroads have learned that it's not whether problems occur—they will—but how they're handled that determines the character and longevity of their relationship.
In short, despite their differences, recyclers and railroads can forge win-win relationships.
Gone Gons
The issue that most often strains relationships between scrap processors and railroads is the availability of equipment, particularly gondolas, or gons. Processors need and demand a consistent supply of clean, empty railcars, and railroads historically have had—and still have—difficulty meeting that demand.
Having to wait a week or longer for gondolas is frustrating and costly to scrap processors, says Jim Knight, president of Industrial Metal Processing Inc. (Spartanburg, S.C.). "To be profitable, we need to turn our inventory as many times as possible," he explains. "That means we need to ship when the market is right and when the mills need our product."
Industrial Metal Processing, which ships some 13,000 tons of scrap a month, had the luxury of selecting a site that was optimal for rail connections when it moved its operations in 1997. Even so, getting railcars is still a problem, says Knight. The alternative—shipping over the highways by long-distance truck—is cheaper, "but poses problems with the mills having to handle a large number of trucks," he notes.
Ted Lipman, president and chairman of Denbo Scrap Materials Inc. (Pulaski Tenn.), has always shipped via rail, first with the Louisville and Nashville line and now with CSXT (Jacksonville, Fla.). "CSXT has the largest fleet of gondolas available to the industry, and they're continually adding cars. They've been very helpful to the industry," says Lipman, former chair of ReMA's transportation committee. "Even so, the car shortage problem continues to plague us."
Several years ago, Lipman purchased the 130-mile Tennessee Southern shortline that serves his facility and other industries in the area when CSXT announced plans to abandon the line. Although Tennessee Southern owns its own engines, the car problem trickles down to affect its operations too, he says.
The chronic gondola shortage is a fact of life, regardless of which of the seven Class I railways a processor uses. It's a complex problem that touches many areas, says Wayne Efford, CSXT's director of marketing. "There isn't one easy answer as to the cause of the problem railroads continue to have in fulfilling weekly car orders."
Lipman and other scrap executives place at least part of the blame on scrap consumers that hold railcars to maintain inventory instead of promptly unloading them. In short, some find demurrage charges cheaper than material handling costs. "I visited a mill in April that had 150 loaded gondolas on the tracks because that was more cost-effective than unloading, storing, and reloading," Lipman says. In contrast, scrap processors "have no need to hang onto cars," he points out. "Car hire charges are a strong determinant of profit and loss in our business."
Market conditions can also have a strong impact on equipment availability, says Jim Titsworth, director of freight equipment, consumer business unit, for Burlington Northern Santa Fe Corp. (BNSF) (Fort Worth, Texas). "Surging freight volume is putting pressure on us," he states. "The business is growing so fast that it's outstripping our capabilities." Besides gondola shortages, he lists disruptions in local service, labor shortages, and a shortage of locomotives—despite BNSF's aggressive purchasing program that brings 400 new engines on line a year—as additional repercussions from the increase in shipping volume.
Cooperative Problem-Solving
Part of the solution to the chronic railcar shortage lies in expansion of the gondola fleet by the railroads, and—to their credit—they've made some commitments in this area.
CSXT, which annually moves 115,000 carloads of scrap metal—more than 8.8 million tons—decided in 1995 to invest $52 million over three years in its gondola fleet to grow its scrap/minimill business. Between October 1997 and July 1998, the company says it will have added 1,200 new, higher-capacity gondolas to serve its scrap customers.
Union Pacific Corp. (UP) (Omaha, Neb.) annually handles some 81,000 carloads of scrap in more than 7,000 dedicated gondolas, 1,500 of which have been added since 1994. UP recognizes the need to add additional cars to the fleet to meet demand, "but you don't build the church for Easter Sunday," says Randy Evans, UP's business director. "We see a sound wave of peaks and valleys in demand. This month we're completely out of gons, but last month we were able to satisfy all orders."
A typical 52 foot 6 inch gondola costs about $55,000, while a 65-foot gon costs $65,000. Even the largest railroad gives that kind of investment careful consideration. "The same capital budget dollars that are used to purchase gons must compete against projects for track upgrades, locomotives, boxcars, flatcars, automotive bi-levels, and so on," says Evans. "We've been fortunate to invest as much as we have in gondolas when we consider how few loads we get on that type of equipment compared with coal, auto, or intermodal equipment."
While scrap processors view the gondola shortage as a constant challenge to their timely shipments and profitability, railroads have a different perspective. "Profitability hinges on maximizing the number of turns per car," notes Evans, "so having a slight shortage all the time actually is a better situation than having enough gons or a surplus."
This basic difference in perspective has forced recyclers to take a more active approach to managing their car supply. New technologies such as electronic data interchange, or EDI, and CSXT's "dynamic car planner" system address problems of supply and demand. However, the inherent challenge, says Efford, "is that the peaks keep getting higher so that last year's peak is this year's base business level."
Cooperation between shippers and railroads can help manage equipment to the satisfaction of both sides, at least most of the time. It's not rocket science, says Jerry Simms of Atlas Metal & Iron Corp. (Denver). "When you order cars, be reasonable in your request and respect the fact that repositioning cars takes time," he says. Offering some advice, he recommends that processors "place a minimum standing order that you supplement as needed, while looking 10 to 14 days out."
Evans agrees that this approach will yield the most consistent service. "Shippers who place a standing order on a regular basis between specific points of origin and destinations generally are the easiest for a railroad to serve and satisfy with equipment," he says. "We can set up our transportation plan to cycle cars within the corridor, and it eliminates big spikes in the schedule."
Because of the time involved in repositioning cars between geographic regions, scrap operations that ship inconsistently are often the ones that experience greater delays in obtaining equipment during periods of heavy demand, he says.
The Catch-22 for processors is that scrap consumers often cause monthly variations by shifting their buying patterns and varying their inventory. Realistically, processors need a backup transportation plan, whether it's supplementing with trucks or ordering privately owned cars.
David J. Joseph Co. (Cincinnati) helps fill the void with its fleet of 3,000 railcars in the United States and 4,000 in Mexico. The firm has been leasing railcars to processors, other shippers, and railroads since 1986 and has operated a 2,500-car private line to serve its customers since 1990.
Ironically, Joseph Co. has the same problems with equipment availability as the railroads, and for the same reasons hasn't gone into a frenzy of gondola building. "There's market volatility," says Carl Adkins, Joseph Co.'s vice president of operations. "We need to take a long-term business perspective and be careful not to overbuild the size of our fleet."
Cleaning Conflicts
Scrap traditionally has been viewed by the railroads as a low-profit, high-maintenance business. That's changing to some degree, but equipment maintenance still causes a lot of discussion, with the burning question being: Whose responsibility is it to keep gondolas clean?
Cleaning bills for scrap gons can reportedly be as high as $1 million a year for the big railroads. In a way, it's a cost of doing business, but at least some of the expense could be avoided, says UP's Evans. "Most recyclers are careful in preparing their material and loading in a manner that minimizes dirt," he says. "But there are still a large number that load with front-end loaders and claws from unprepared areas, which results in large amounts of dirt being picked up and deposited in the cars."
The maintenance issue can even affect car availability and productivity, notes CSXT's Efford. "We view the plain gon as the lifeblood of the future of the steel industry, and this valuable car gets a lot of attention and action if we catch one sitting for more than a few days," he says. "CSXT, our shippers, and consumers realize that if a gon is sitting idle or has to be taken out of service to be cleaned or repaired, then it's disrupting the scrap pipeline. That means we have a joint responsibility to expedite the loading and unloading of gons, handle them carefully, and avoid placing dirt and debris in the car."
Other problems that periodically crop up include improper loading, damage to gons from magnets during loading, inconsistencies in scales that cause conflicts over tare weights, and debris on the track. The best way to handle these problems? "Talk them over with the railroad on a case-by-case basis," advises Simms.
Commitment Counts
If processors had a railroad wish list, near the top they'd ask for greater commitment to the scrap industry from railways, along with more responsive service.
"Scrap shippers don't make unreasonable demands," concedes Titsworth. "They want to see our locomotive in their yard when they want it. They want the cars they ordered, accurate invoicing, and someone to talk to."
Meeting those needs requires that a railroad actively manage its scrap business, says Lipman. "Iron and steel scrap is a niche business for the railroad," he says. "To manage it appropriately requires knowledge about all aspects of the transportation business."
In recent years, processors say they've sensed more of a commitment from the railroads in that respect. "Scrap isn't a big source of revenue for the railroads, and historically there hasn't been a lot of emphasis on trying to satisfy scrap processors," says Knight. "But they've realized in recent years that they'll lose the business if they don't, and they've been trying harder."
Joseph Co. touts its responsiveness and personal touch to shippers, two areas where the company feels it excels. "We can offer the right size car for the product and the shipper, work through changes in delivery schedules, and adjust the number of cars we're sending if a mill gets backed up," says Adkins. Joseph Co. also hates to bill demurrage, he adds, because "that means an asset isn't being used efficiently for either party. We want improved utilization, not demurrage."
The seven Class I railroads try to be responsive and give personal service too, but it's admittedly more difficult for a major railway than for the more intimate Joseph Co. Assigning responsibility for managing scrap to a specific individual or team is one approach that works by improving communication, which has trickle-down effects on service and efficiencies.
CSXT's Scrap Team is probably one of the best known in the business. Its five members are dedicated to satisfying the needs of scrap customers for equipment scheduling, allocation, and delivery, says Efford.
Processors who ship via CSXT say the team comes through on its promises. "The message is that they appreciate the business generated by this industry," says Lipman. "We have very favorable relations with them."
Other strategies for fostering good communication can be as simple as having a railroad representative visit the scrap operation and vice versa to get a perspective on each other's needs and constraints. CSXT annually holds a "scrap linkage" meeting that includes scrap processors, consumers, and brokers. UP and other railways regularly attend ReMA events to meet and talk with shippers.
Recyclers can do their part to establish a good rapport, says Simms, noting that one of the easiest ways is to "follow the rules," which means "comply with proper loading practices, proper heights, nothing over the side, and watch your weights."
The scrap business's transformation into an industry of large corporations has added an element of professionalism and sophistication that improves business relationships between railroads and processors, says Titsworth. "For large railways like BNSF, we find it easier and more profitable to work with other large corporations," he says. "We're seeing better management of quality and environmental issues, all the way down to better treatment of our equipment. Scrap now poses real business opportunities for the railroads."
By the same token, the railroads' evolution into modern, technologically up-to-date operations has made them easier for processors to work with. BNSF, for example, is enhancing its electronic capabilities for billing, equipment scheduling, and other functions.
Merger Pros and Cons
Just as recyclers and railroads seem to have entered a new, friendlier era, is it all about to be shaken as Norfolk Southern Corp. and CSXT divvy up Conrail? When the acquisitions are completed, the two railroads will account for nearly 80 percent of the line mileage and revenue ton-mileage in the nation.
This massive merger will offer scrap shippers two key benefits, says Efford. "The creation of a lower cost, single-line pricing structure—compared with previous Conrail-CSXT joint-line moves—will open up new opportunities for shippers in the form of previously untapped scrap consumption markets," he explains.
Second, he continues, "single-line service will reduce the amount of time gondolas are tied up in interchange. This will improve car utilization, which will mean more capacity for shippers, and will reduce inventory in-transit costs."
Still, despite the promises, the service disruptions following the BNSF and UP-Southern Pacific Rail Corp. mergers cause shippers some trepidation as they await the Conrail split. "Shippers face the uncertainty that the resulting system will be so huge that service will slide," says Knight. "We need quality service, or we'll look for another carrier to move our scrap."
Merging two multibillion-dollar concerns with diverse hard assets, personnel, and vision into one smoothly running operation doesn't happen overnight, but the ultimate benefits to recyclers and other shippers will be worth it, says Titsworth. At BNSF, three years after its merger, "all new systems are in place, and the merger-related changes are done," he says. "Service inconsistencies and problems that occurred during and immediately after the merger have been ironed out, and BNSF has retained most of its customers, including many processors who have shipped with us for 70 or 80 years."
CSXT, perhaps learning from the BNSF and UP-Southern Pacific mergers, hopes to make its transition a seamless one. According to Efford, the company has deliberately over-committed resources in the form of people, power, and infrastructure to support that objective. Plans for the division of Conrail by CSXT and Norfolk Southern are expected to be finalized this summer, with the reorganized lines operational by fall.
To be sure, all of the consolidation occurring in both the rail and scrap industries is ushering in a new era in those businesses—and perhaps a new, improved era in their relations. •
Scrap processors and railroads may have their gripes with each other, but they can build positive relationships by working together and understanding each other's needs and challenges.