The Case of the Gondola Shortage

Here’s a look at why railroad car supplies don’t seem sufficient for scrap hauling demand and what might change the situation in months to come.

By Marc Krug

Marc Krug is an Annandale, VA.-based writer.

The shortage of railroad gondola cars that has plagued North American steel recyclers through the past 18-plus months has all the character of a well-written mystery: an infinitely complicated plot, a diverse group of characters, and a never-ending wealth of explanations as to how it all came about.

The most popular and simplest of these explanations cudgels from memory that painfully obvious truism drilled into us in Economics 101--namely, that shortages result when demand exceeds supply. And in the case of the gondola shortage, this adage does, indeed, apply.

On the demand side are steel scrap shippers and consumers, who have enjoyed robust business through the last year and a half, thereby increasing their need for gondolas--the standard type of car used for moving their sought-after scrap by rail.

The supply of gondola cars, meanwhile, has been on a steady slide for some time, with the fleet today standing 26-percent slimmer than it did in the mid-1970s. To best understand the reasons for this decline, a short history lesson is in order. In the early 1970s, there was also a shortage of gondolas, although not as severe as the present one. At that time, the railroads responded by making major investments in new gons, only to face declining demand in the late 1970s and most of the 1980s. The result was a surplus of cars, and railroads that wanted to survive had to lower their rates. "Everyone wanted to keep their cars busy," explains Jim Kearney, equipment manager for Norfolk Southern Railroad (Roanoke, Va.). "To do that you had to be cheaper than the next guy."

Since then, while older cars have been put out to pasture, few new cars have been purchased for fear that what happened then will happen now. As Dennis Wilmot, traffic manager for Luria Brothers (Cleveland), puts it, "Fearful and gun-shy, railroads now are reluctant to make the necessary investment in new equipment." This reticence comes through clearly in these remarks from John J. Carroll, assistant vice president of the Association of American Railroads (AAR) (Washington, D.C.): "Demand is high now, with scrap prices approaching $140 a ton. But a drop in price could change a shortage into a surplus overnight." Clearly the spectre of the lean 1980s endures, and the net consequence has been a two-decade diminution of the available gondola fleet. (See table on page 132 for a statistical look at the situation.)

Of course, as in most complex situations like that of the gondola shortage, total unanimity does not reign; there are conflicting viewpoints. David Bertram, managing director, metals service and equipment, for CSX Transportation (Jacksonville, Fla.), for instance, says, "I would not say that there is a gondola shortage--at least not one that is generalized or nationwide. Shortages do exist on certain railroads and in certain regions, particularly the West." While some may not agree with his opinion of a nationwide shortage, many do concede that some aspects of it are region-and railroad-specific.

The Profit Issue

Wherever and whatever the shortage, there are factors beyond those potent memories of a previous gondola surplus that seem to have contributed to the current shortfall in cars and the rail companies' reluctance to invest in new ones.

Perhaps chief among them is the fact that whether we are speaking of the surplus 1980s or the shortage 1990s, hauling scrap has never been an overly profitable enterprise for the railroads. One reason, according to Kearney , is that gondolas don't bring in the rates that other kinds of railcars do. And, notes Michael Mattia, director of risk management for the Institute of Scrap Recycling Industries (ISRI) (Washington, D.C.), gondolas hauling scrap are not as profitable as gondolas carrying finished or semi-finished goods. Put another way, adds Scott Witt, traffic manager for Oregon Steel Mills Inc. (Portland, Ore.), “Rates are basically a function of the price of the material hauled. Traditionally, scrap has not commanded high process; therefore, transporting it does not command high rates.”

One industry transportation manager explains this further: "We, as an industry, have done a very good job of selling the idea that scrap, as a lower value commodity, should be shipped at lower rates. So scrap tends to be looked at as a backhaul, with the profit coming from the front haul shipment of steel, lumber, and any other higher-value commodity that moves in the same cars as scrap."

Ronald R. Havrilla, vice president of corporate transportation for Columbia Iron & Metal Co. (Cleveland) and chairman of ReMA's transportation committee, believes there's more to why scrap brings meager profits--namely that those who haul it average only one turn per month, whereas those who haul other commodities average between 1 1/2 and 2 turns per month. He also cites the profit-leveling potential of competition from the trucking industry, particularly in light of new federal rules that have further deregulated intrastate trucking, leaving more room for rate negotiation, which can make trucking a more attractive option for shipping scrap.

On top of these factors, gondolas are made even less profitable by a commonfate: They tend to be damaged more frequently and more extensively than most other cars, especially when put to work hauling scrap, some maintain. "Once scrap is loaded," claims a steel mill representative, "shippers may use a magnet to pound the scrap into the cars, so that none appears above the walls." Kearney backs up this assertion, stating, "You only have to be there-to hear and see what goes on when scrap is dropped in these cars--to know why they don't last long."

The result is a double-edged sword in the side of gondola availability. Not only does damage to the cars hasten their demise, thus reducing the size of the fleet unless replacements are added, but it also necessitates more frequent repairs, which translates, again, to reduced profitability and reduced incentive to invest in new gons.

Similarly, the sometimes grim nature of hauling scrap can be seen a part of the reason behind the current gondola shortage. “When front end loaders scrap off the ground, the generally bring dirt with it,” notes Witt. Cars carrying dirt obviously weigh more and carry less scrap, plus they need to be cleaned more frequently, consuming both time and money and making them less profitable.

Put these issues together and it's as if low profitability, or more precisely, low return on investment and abbreviated life spans have formed a conspiratorial partnership to make gondolas a scarce commodity. In fact, even without the recent rise in demand, these forces alone might have created a shortage.

Insufficient Numbers, Inefficient Use

There’s one more chapter to the shortage story, and that’s efficiency, or lack thereof, in gondola use. As Mattia puts it, “gondolas aren’t just insufficient in number, they are also inefficient in use." Mike Edwards, manager of transportation for David J. Joseph Co. (Cincinnati), adds, "We've not come close to making the maximum use of the existing fleet. What we have here is an inefficient use of an expensive asset around $50,000 per car." And supporting these positions is an AAR document that observes that, on average, for "37 percent of the cycle time, the gondola is empty."

Full cars sitting at consuming mills waiting to be unloaded can also be an efficiency problem, scrap shippers say. As to why this happens, the theories are varied, but most seem to center on the demurrage charged for holding cars beyond the "free time" allowed for loading and unloading. Mattia notes that it is often cheaper to pay the demurrage than to "double handle scrap”; a steel mill representative blames demurrage rates that are far too low; Wilmot says one proposed solution is to have a scale of demurrage charges that escalates more quickly and to higher levels, and to make sure those charges are then actually collected; and Havrilla mentions the curious case of some mills that, because they have their own railroads, "pay demurrage to themselves."

History has also played a role in this situation, says Gus Ellicott, director of material logistics for Keywell Corp. (Chicago), who brings the story back to the 1980s. "Because there was a gondola surplus then, most people did not worry about using cars efficiently," he says. "They felt that they could use them in any way they saw fit. And this mindset still lingers."

Before Jan. 1 of this year, this efficiency issue was further exacerbated by the fact that gondola cars, unlike 92 percent of the national freight car fleet, had free-running status--an odd quirk that allowed gondolas to be used by any railroad, regardless of the car's ownership, thus enabling nonowners to retain use of gondolas for weeks, months, and sometimes years.

But on Nov. 30,1994 , by a 9-4 decision, the member railroads of the AAR  voted to end gondolas' automatic free-running status as of the new year. And so today, railroads can require that their gondola cars be returned--empty or loaded, depending on their designation--to the railroad that owns the equipment unless the owning rail company has given another permission to use the car. To make this new rule work, the railroads are considering several options, including assigning gondolas to pools for exclusive use by customers--perhaps based on location or commodity--and entering into agreements with other railroads for mutual use of gons.

What does this mean to the gondola shortage? According to Bertram, the AAR decision will allow railroads to better control their gondolas, which eventually could encourage investment in new cars. In the short run, however, the picture is not altogether rosy, he says, noting that railroads "may see spot disruptions in empty car supply." Others also see the potential for new problems as the new system works itself out. Doug Starosta, manager of transportation for Chaparral Steel Co. (Midlothian, Texas), for one, doesn't mince words when he says, "in the near term, it will worsen the shortage." In addition, and more specifically, Havrilla notes, "the gondola-poor railroads, particularly those in the West, will suffer, at least temporarily."

Meanwhile, the official AAR  position, as offered by John Carroll, is that "studies have shown that cars in a controlled environment get more trips than those in an uncontrolled environment. We know of no detriment that assigning cars has caused, and, based on our optimization models, we don't foresee any adverse effects."

Turnaround in Sight?

That wraps up the shortage situation today, but the story's ending, he says, is always subject to change. And, indeed, many scrap shippers believe the future will be one of better gondola availability. One positive sign of this, Ellicon points out, is that "2,000 new gondolas are reportedly being built this year for car leasing companies." Furthermore, Wilmot says there's reason to be optimistic, "because now the problem of shortages is at the forefront of everyone's mind, and where there's interest, there will be progress."