March/April 2010
Scrapyards and rail companies seem locked in an eternal battle, and the lack of communication between the two sides leaves some to wonder, can they make this relationship work?
By Theodore Fischer
The rocky relationship between scrap companies and the railroads is like a troubled marriage, complete with wounded feelings, communication breakdowns, incompatible priorities, and longings for a more appreciative partner. Unfortunately, in this relationship, divorce is not an option. "It's not practical to not use rail," says Colleen Kollmann, logistics manager with Sadoff Iron & Metal Co. (Fond du Lac, Wis.). "Steel mills, foundries, and scrapyards can't live without it." On the railroads' part, though waste and scrap combined are less than 3 percent of Class 1 railroads' volume and revenue, it's a "very high-profit freight," says Robert Szabo, an attorney with Van Ness Feldman (Washington, D.C.) and executive director of Consumers United for Rail Equity, a coalition of freight customers. Further, unlike coal or agricultural commodities, "we're not a seasonal business," points out Billy Johnson, ReMA's director of political and public affairs. "Twelve months of the year, we ship stuff."
Though scrap shippers theoretically can take their complaints to the Surface Transportation Board (Washington, D.C.), the federal agency that oversees the railroads, they are reluctant to do so because of the time, expense, and high burden of proof they must meet in formal rate cases. The result, Szabo says, is that they have no way out. They're "stuck dealing with railroads, paying whatever they say you're going to pay and getting the service they choose to give you." Or are they? Here's a look at the most common complaints, steps scrap companies can take to find relief, as well as pending legislation that could further improve scrap companies' relationship with rail.
Railcar Feast or Famine
The economic downturn seems to have quieted—for now—scrap companies' primary complaint about the railroads: the lack of railcar availability. From roughly 2004 to 2008, "as the scrap industry was expanding and people needed more and more cars, it was pretty bad," Johnson says. In a 2005 survey, 62 percent of ReMA members reported to the association that they had problems obtaining railcars the previous year.
The railroads don't deny this has been a problem. "The issue of car supply has come up many times on a historical basis," says Jim VanCleave, director of marketing for the CSX metals business unit (Jacksonville, Fla.), "but today we have the capacity to meet the demand that's in the marketplace, so we don't have any significant issues." Similarly, the Web site of Norfolk Southern Corp. (Roanoke, Va.) states that "with more than 20,000 cars in the Metals & Construction fleet, there is plenty of capacity available to meet our customers' needs."
As the economy starts to grow again, however, there's a good chance this problem will return. The railroads have not built any significant number of new cars in many years, Kollmann says, and they were "scrapping anything not roadworthy" at the peak of the ferrous market to get high prices for the scrap steel. Even if the railroads would begin to order new cars, it's likely the supply won't grow fast enough to meet a surge in demand.
Some scrap shippers have dealt with past shortages by buying their own railcars. Newell Recycling (East Point, Ga.) started buying cars in the mid-1990s, after the railroads serving them stopped investing in new gondolas. "We did it for two reasons," says Frank Goulding, Newell vice president of marketing and former chair of ReMA's ferrous division. "One was that the railroad offered to give us a discount on the freight if we were willing to invest in the railroad cars—which they did. And by buying cars that had a higher capacity, we could get better payloads."
Newell acquired used cars from all over the country—typically 4,000-cubic-foot, flat-bottom coal hoppers that they modified to hold scrap—and enjoyed a win-win relationship with the railroads until the market collapse in mid-2008. Since then, the company has not been processing sufficient volumes to keep its entire railcar fleet in service, leaving idle cars stored with short-line railroads. "Within a month of the economic collapse, the railroads experienced severe congestion caused by idled private cars and began imposing penalties of about $60 per car per day for leaving cars on their tracks, forcing Newell and others to find and pay for storage space," Goulding says. "We have about a third of our fleet in storage right now." Ironically, the railroads themselves are storing cars all over the rail system, Szabo says.
The scrap industry seems to have adjusted to another railcar issue that took it by surprise in 2008. That's when the Association of American Railroads (Washington, D.C.) suddenly implemented a rule for open-top railcars that banned mounding loose material above the top chord of the car. It conceived the rule as a safety measure, but the rule has economic consequences for shippers because it potentially reduces an open-top car's capacity. AAR estimated that shippers would need to add an extra car for every 10 to 12 railcar loads to compensate for the reduced volume. The association does allow certain other compliance measures—such as covering a loose load with tarp, netting, or baled scrap—that allow the cars to hold more.
"When that rule first came out, there were some instances of over-enforcement, but that has settled down and everybody has pretty much dealt with it," says Greg Dixon, general manager of Baker Iron & Metal Co. (Lexington, Ky.) and chair of ReMA's rail task force. "It's had a little bit of an effect on weight per shipment, but people have taken steps to get as much weight as they can." (For more information on the rule and compliance options, go to www.isrisafety.org/dave and click on the "Railcars" video.)
Slow Service, Steep Prices
Second only to complaints about railcar availability are scrap shippers' complaints about rail service and rail rates. Captive shippers—those served by only one rail line—seem to get the short end of the stick. "They may get service every other day—the worst I heard about was a place that got served once a week," Dixon says. "It just makes it difficult to plan." At the Sadoff yard in Fond du Lac, service "has really gone downhill" since extreme winter weather in early 2008, record flooding the following spring, and the economic downturn, Kollmann says. "We're down from seven-day-a-week service to three-day-a-week service, and we struggle to get that."
When shipping scrap, "time is money," Johnson says. The shippers have already purchased the scrap, but typically they don't get paid until the material reaches the consumer. Delays require a higher capital outlay and can result in a loss of value if the price of the scrap drops in the interim. Adding insult to injury, Johnson says, the shippers usually are paying rent on that railcar, even though they have no control over how long it takes to get to its destination.
Another service concern is rail line switching, which both delays delivery and increases expenses. Kollmann points out that in Canada, the government requires "mandatory mutual switching"—the railroads must build the cost of switching a railcar from one line to another into the rate. In the United States, rail companies are under no such obligation. Western railroads in particular add additional switching fees, she says.
Scrap shippers are unhappy with rail shipping rates in general. Rates for many Class 1 railroads have gone up 3 percent to 5 percent a year on average for the past five or six years, even though those companies have been "very healthy financially," Kollmann says. The rail carriers counter that they are the only mode of transportation that has to maintain its own infrastructure. They invested $440 billion—more than 40 percent of their revenue—in infrastructure between 1980 and 2008, they say, and researchers have determined they need another $135 billion by 2035 to meet demand forecasts. But the railroads don't seem to spread the cost burden equally across all customers. A May 2009 report by the Consumer Federation of America (Washington, D.C.) found that captive shippers pay 75 percent to 100 percent more compared with those in competitive markets, and the disparity has grown in the past five years. Captive shippers' rail traffic "represents less than one-fifth of total costs to railroads but provides two-thirds of their profits," the report states.
Szabo asked a railroad economist to look specifically at rates charged to scrap shippers in the past few years. "Most observers believe that the railroads cover all of their costs and make a reasonable profit when they average rates that are between 130 and 140 percent of their direct costs for moving freight," he says. In rail parlance, such rates have a ratio of revenue to variable cost (R/VC) of 130 to 140. A captive shipper who is charged rates that are at R/VC ratio of 180 or higher may challenge those rates at the STB. The economist discovered that in 2007, about 23 percent of scrap shipment rates had an R/VC ratio of 180 or more. If that proportion continued in 2008, the railroads generated $422 million in revenue from captive shippers of scrap.
Railroader Laments
Some conflicts between scrap and rail seem to be based in the fundamental incompatibility of their industrial biorhythms. Rail carriers prefer a steady, regular order for cars each week, but scrap companies don't have that consistency of supply and demand. Also, it's more efficient and profitable for railroads to run cars back and forth between point A and point B. Scrap companies might have some regular accounts that operate that way, but they also ship to many different customers in many different places.
And then there's the railcar cleanliness issue. "Something we've seen over a long, long time and [which we] still have not been able to find a reasonable solution to is keeping the [gondolas] clean—keeping dirt and debris out of cars," says CSX's VanCleave. Cars may contain anywhere from 2 to 5 tons of debris, which takes up space that could be better used for product, VanCleave points out.
Scrap company representatives say they're just as frustrated about debris in cars, but they adamantly deny they are entirely to blame. First, they say, the cars are not clean when they arrive. "Our members end up cleaning the cars themselves," Johnson says. "Sometimes they complain about it, sometimes they're just happy to have the cars."
The real offenders, scrapyards say, are the scrap consumers. Though some are conscientious about cleaning out cars the best they can, others either don't fully empty the cars or—worse—deliberately place unwanted materials in railcars and send them back to the scrapyard. Kollmann says she once got so frustrated about this problem that she carefully tracked the cars coming from certain scrap consumers, documenting their weights and contents. She both recovered the losses from the consumer and complained to the railroad. For the worst offenders, "we didn't want to sell to them anymore," she says. "We lost too much money" cleaning out the cars or sending them back.
Improving Communications
Any good counselor would point out that one key to a healthy marriage is frequent, clear communication. The same holds true for a scrap shipper's relationship with its rail carrier. "As hard and as painful as this sounds, I'm still a firm believer in communication with the railroads," Dixon says. "You sit down with your local people, and you try to figure out what are the problems and if there's anything you can do to fix them. If you can't do it with your local people, then you have to go to corporate people."
Get to know your rail service people—and their supervisors—by name, Johnson suggests. "Explain to them how your business works, and bring them to the yard" to show them how volumes can fluctuate. "They want to be responsive, they just don't necessarily know your business. The more they know about you, the better you'll get helped." Kollmann says she has a "very good working relationship" with CN, the primary railroad serving the Sadoff yards, due to constant communication with her rail rep. "Even in the car-shortage days, I still did fairly well [compared with] my competitors on car availability," she says. "I'm very active, always calling them." When she hears other scrap shippers complain about poor service, she says, "I'm not sure they're making an effort to fix the problems on their end." Complaining can get results, she asserts. One particularly angry e-mail made its way up the chain of command to the railroad's CEO, who called back to personally resolve the problem.
Kollmann also makes a point of attending shippers' meetings, either with individual rail carriers or larger groups like the Midwest Association of Rail Shippers (Wayne, Ill.) or Wisconsin's Badger-CURE. Such events allow her to interact with various rail representatives so she's not only speaking to them when she has a complaint, she says. In spring 2008, in fact, a Badger-CURE meeting brought the STB chair to her yard on a day CN had failed to deliver an order of railcars from a switching point, perfectly illustrating one of the problems the yard faces.
For their part, many railroads say they're working on better communication as well. "When there are changes in service to our scrap customers, I'm notified and contact the customers directly to advise them on what those changes are," says Rob Finch, CSX business manager for ferrous scrap. "All the conversations we've had with customers about changes in service have been successful. There has not been much pushback from the shipping community because they understand that there has been a significant change in volumes and that we need to adjust our service accordingly."
Resolving Disputes
If direct communication doesn't resolve a problem, the next step is to approach the STB. Many scrapyards don't realize the STB can do more than just hear formal rate and service cases, Johnson points out. The agency offers several stages of involvement in a rail dispute.
The first stage is just registering a complaint—even anonymously—with the STB. Why bother? Because the STB tracks such complaints, Kollmann points out, and when Congress has a question about how well the freight rail system is working, that complaint is one of many it can use to report back on rail performance. The second stage is identifying your company to the STB and asking it to notify the railroad of your complaint. In the third stage, you ask the STB to investigate the complaint, which puts some pressure on the railroad to resolve it. The fourth stage is mediation—both parties agree to have the STB investigate the dispute and find a solution. Johnson adds one more option: Have your U.S. representative or senator call the STB on your behalf.
All told, when trying to resolve a dispute, "try to do it the nice way first," Johnson says, by working directly with the railroad. If the carrot doesn't work, "then you always have the stick—the STB and Congress." Results are not guaranteed: Informal mediation is voluntary and nonbinding, thus the railroad can choose not to participate or to ignore the STB's decision. But the STB's intervention is an annoyance, and the railroad might do whatever it can to make the problem go away or not seem obstinate to the agency that regulates it.
The Formal Complaint Process
The last resort for resolving a dispute is the STB's formal rate and service appeal process, though it sounds much like the court in Charles Dickens' Bleak House, where petitioners were advised to "suffer any wrong that can be done you rather than come here!"
"The STB is a pretty expensive place to do business [or] to get a case resolved," Johnson says. "It can take years and hundreds of thousands of dollars in legal fees, and who knows whether you'll win or lose?" Part of the problem is the level of proof the STB demands for rate relief cases. Not only must the shipper prove that its rates' R/VC is 180 or greater, it also must prove there are no effective alternatives to shipping via that rail carrier for that route. "That means that a truck can't be an effective alternative, there can't be another railroad alternative, a barge can't be an alternative," says Jeffrey Moreno, an attorney at Thompson Hine (Washington, D.C.) who specializes in transportation regulatory issues.
The scrap industry faces an additional burden, Moreno points out. The STB can exempt railroads from regulation of its business with certain shippers if it deems that regulation isn't necessary to protect them from competitive abuses or to advance rail transportation policy. In the early 1990s, the scrap industry and the railroads asked the STB to grant them that exemption. At the time, Moreno explains, "railroads had excess capacity, and they were offering highly competitive rates to capture volume." The process of changing rates was cumbersome, however—they had to file them in advance with the Interstate Commerce Commission (the predecessor to the STB), thus they could not adjust them quickly in response to competitive pressures. "It was to the scrap industry's benefit to become exempt because rates were falling," he says.
Then two things happened. First, the 1995 ICC Termination Act ended the rate filing process altogether, leveling the playing field for all rail customers. Second, the rail industry consolidated and "became capacity constrained, which meant [railroads] were no longer offering great deals to attract traffic," Moreno says. Previously the railroads had charged scrap companies rates only slightly above their variable costs to attract volume. In the early 2000s, however, "the railroads were saying, ‘We don't need your traffic anymore, so if you want us to continue hauling scrap, you'll have to pay us higher rates.'" Rates started going up for all shippers, Moreno says, but scrap rates went up higher than others because they were starting from a lower baseline. Even worse, the industries that gained rate flexibility under the ICCTA can file rate appeals with the STB, but scrap and the other industries that received exemptions still cannot.
Moreno says the scrap industry or a single company theoretically could seek to revoke the exemption, but it might not be worth the cost and effort. "It would require economic studies, a full-blown STB proceeding, and the railroads would fight it pretty hard," he says.
Legislative Relief
Scrap companies could find hope for improved railroad relations from recent action on Capitol Hill. In December, five member of the U.S. Senate Committee on Commerce, Science, and Transportation introduced the STB Reauthorization Act of 2009. According to the committee, the act "would comprehensively update and improve the economic oversight of the railroad industry and address longstanding imbalances for shippers by increasing rail competition, strengthening federal oversight, and improving shippers' access to regulatory relief."
Three of the bill's many provisions should be of particular interest to scrap shippers, Moreno says: exemption, arbitration, and bottlenecks. Job one is to dump that exemption from regulation that scrap shippers welcomed in more prosperous and competitive times. "Unless the exemption is revoked, scrap companies can't take advantage of any other elements of the bill," Moreno says. Though the bill does not automatically revoke exemptions, it does order the STB to perform a study within two years of the bill's passage to determine if they should be lifted to protect the exempt commodities, like scrap, from competitive abuse by the railroads. The bill also would upgrade the standards for granting and revoking exemptions. Though the industry might have preferred the bill to lift all exemptions outright, it does "lower the hurdle for revoking the exemptions," Moreno says.
Once the exemption is revoked, shippers could ask the STB to arbitrate rail rates, railroad practices, and common carrier service disputes worth up to $250,000 a year for up to two years ($500,000 total). Unlike the existing mediation process, this arbitration would be binding, Moreno says. Once a shipper brings a complaint to the STB, the group would determine whether to permit arbitration even if one party objects. No longer would scrap shippers have to choose between spending more money on legal fees than their case is worth or simply submitting to the railroads' will.
The "bottleneck provision" would benefit captive shippers who are served by more than one rail carrier at either the point of origin or the destination of a shipment but have no alternative rail line at the other end of the route. Under current law, the railroad that controls the captive segment can force the shipper to use it for the entire trip. "What this [proposal] does is to require that railroad to quote a separate rate for that [captive] segment—what we call a bottleneck rate for the bottleneck segment," Moreno says. Shippers would then be able to separately negotiate rates with the railroads competing for business on other segments of the route.
In January, the ReMA board agreed to support the STB Reauthorization Act, though the odds of this particular bill's passage through the House and Senate are unknown. "It's hard to say right now," Moreno says, "but my take is that it's got to happen no later than June, because this year's an election year, and Congress doesn't have a long attention span after June."
The Right Track
Looking ahead, the railroads say they intend to work more closely with scrap companies in many areas of mutual interest, including the design of the next generation of freight cars. "It may not occur this year, but we're looking to scrap shippers to help us do that," says CSX's VanCleave, "whether they're bigger cars or higher-cube cars" or cars that can hold 286,000 pounds versus 263,000 pounds.
Nonetheless, many scrap companies doubt that they and the railroads will ever enjoy a marriage made in heaven. "When I was asked to chair ReMA's rail task force, I realized how ignorant I was to accept a role in something I have no control over and can't change," Dixon says. "The way railroads are currently set up, there are always going to be issues. Somebody's going to want 50 cars and there are only 30 in their area, so the railroad can't deliver them. As the old saying goes, ‘You can't win 'em all.' But through improved communication—along with a little help on the legislative side—I think we can win more." •
Theodore Fischer is a writer based in Silver Spring, Md.
Scrapyards and rail companies seem locked in an eternal battle, and the lack of communication between the two sides leaves some to wonder, can they make this relationship work?