Chemical companies seek market-based railway pricing

The American Chemistry Council provided testimony before the Congress-appointed Surface Transportation Board on Dec. 12 in “support of market-based freight rail reforms.”

Image by S.Hermann & F.Richter from Pixabay

Chemical companies want real market references to replace a current model that makes it very costly for many shippers to negotiate rail costs, regardless how big the margin for the railroad.

This was the latest in ongoing efforts for several years by chemical companies against a railroad industry that in recent decades has consolidated and now operates in conditions of limited competition with few suppliers or an oligopoly. For many captive plants, it is a monopoly.

Chemical companies are also trying to get better service, as failure to perform by railroad companies have in some cases caused plant closures.

Congress has created The Surface Transportation Board to help balance the need for profit by railroads with the needs of shippers to obtain reasonable railway costs and service.

Almost entirely privately owned and operated, the U.S. railroads have in recent weeks shown concern that the STB would adopt any changes that on practice would mean a “cap” on railway rates.

Chemical companies need rail

According to ACC, chemical companies shipped some 970 million tons of chemicals in the U.S. in 2018 at a cost of about $56 billion, with 20% of that cost attributable to rail.

In 2018 chemicals accounted for about 7.4% of carloads and 11% of tonnage. This provided 15% of the gross revenue for U.S. Class I Railroads, it said.

The seven Class 1 railroads are BNSF Railway Co., CSX Transportation, Grand Trunk Corporation –(Canadian National), Kansas City Southern, Norfolk Southern, Soo Line Corporation (Canadian Pacific), and Union Pacific.

Considering the annual revenue of the chemical industry at $553 billion, the estimated $11 billion paid to railroads is 2% of the total revenue of chemical companies, the ACC estimates.

The highest-volume chemical carried by U.S. railroads is ethanol. Plastic materials and synthetic resins including polyethylene, polypropylene, and polyvinyl chloride account for 28% of rail chemical tonnage. Much of the rest are agricultural chemicals.

Poor service, high rates

In October 2017 Cal Dooley, president of the ACC, told the STB during a public listening session that poor railway service has ”harmed the large, medium and small companies that ACC represents.”

Delivery delays of 15 days or more and cars sitting in storage yards for over a month were reported while “customer service was unresponsive and uninformed,” he added.

Some service problems have been so extreme that company sites and customer facilities have had to shut down, he said.

The Rail Customer Coalition and the chemical industry have said they have seen prices rise since the U.S. Congress passed the Staggers Rail Act of 1980 to reform railroads. Following that reform, a series of mergers has reduced the number of Class I railroads from 26 to just seven.

Since 2001, real rates for rail shippers have increased 30% while railroad profits per ton/mile have tripled, according to the ACC.

Market-based railway rate pricing?

The ACC wants the board to push for changes to make railway pricing more transparent. Its requests include “greater access to competitive freight rail service.”

One such change would allow a rail customer served by a single major railroad to ask to have its traffic switched to a different carrier at a nearby interchange, allowing competitive bids.

Another important change is, in the case of captive plants, to move to a pricing system in which benchmark market pricing would help find a real comparison.

With the current pricing model, shippers that want a lower rate must design a business plan for an alternative hypothetical new railway service. This is to try to obtain price reductions from what the railroads are willing to offer.

“The Stand-Alone-Cost rate pricing forces a shipper trying to dispute a rate to create, on paper, an entire railroad business with every detail subject to litigation,” the ACC said.

The proposed alternative by the ACC is to develop benchmarks for competitive rail rates. Any disputed rate could then be compared to benchmarks based on what similar service really costs elsewhere. This eliminates the need to go on costly hypothetical rail cost pricing disputes.

Railroads defend pricing, cite investment needs

According to the Association of American Railroads (AAR) published figures, in 2018, U.S. Class I railroads originated 2.2 million carloads of chemicals carrying nearly 182 million tons, second only to coal.

Contrary to the ACC position, the railroad association claims that railway transport prices have actually decreased since the 1980 reform.

“Revenue per ton-mile (RPTM) is a useful surrogate for rail rates,” the AAR said. Adjusted for inflation, RPTM for chemicals was lower in 2017 than in 1981, according to the association.

“Generally speaking, railroads, like firms in other competitive industries, including chemical firms, set their prices mainly based on the value they provide to their customers, not on their input costs,” the AAR said in a recent release regarding its pricing model.

“This market based approach allows railroads to balance the desire of each customer to pay the lowest possible rate with the requirement that railroads be able to attract capital and pay for all the things needed to keep their networks functioning and growing in the future,” it said.

With demand for freight expected to grow 35% by 2040, railroads need to earn enough to ensure safe and reliable service to meet that demand, the AAR said.

It estimated the industry’s ongoing investments at a $25-billion annual rate. Railroads have seen rising demand from the chemical industry in recent years.

By Renzo Pipoli