Chemical Shippers get a bargain from the Railroads says the GAO

Trains Magazine General Discussion
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Freight railroads hold transportation costs down for chemical companies

While the costs of products used to manufacture chemicals increase dramatically, North America’s freight railroads are holding transportation costs for chemical companies way down.

Edward R. Hamberger, president and CEO of the Association of American Railroads, challenged chemical companies to name one other part of the chemical supply chain whose rates have decreased as much as their rail transportation rates.

“I don’t know of many other industries charging less for their services in 2006 than they did in 1985,” said Hamberger.

But chemical companies aren’t the only businesses getting lower rates from freight railroads. A recently released report by the Government Accountability Office, which analyzed rail transportation rates from 1985 to 2004 found that “all rate changes were below the rate of inflation and thus all rates declined in real terms.”

Hamberger said U.S. freight railroads “do a remarkable job of meeting the needs of an extremely diverse group of shippers. Railroads move tens of thousands of railcars to and from thousands of origins and destinations every day, at rates that shippers elsewhere in the world would love to have.”

The head of the chemical industry’s trade association cites natural gas prices, not railroads, as the main reason many chemical companies are moving overseas.

“Dow Chemical…had a facility they were going to build in Texas,” said Jack Gerard, President and CEO of the American Chemistry Council during a May television interview. “That facility is now being moved to Oman in the Middle East. Why? Because of natural gas prices.”

And, in recent testimony in the U.S. Senate, Gerard said the “high price of natural gas is driving the global chemical industry out of the U.S. For example, today there are more than 120 world-scale chemical plants – plants costing more than $1 billion – under development arou

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Futuremodel isn’t going to like this, he will put so much spin on it you will go dizzy.

Bert

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I thought there was a thread on here recently, of an article about the chemical companies saying they were being overcharged?

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The chemical shipper served by just one railroad gripes about his rates when he feels he is paying more than his competitor in the next town served by more than one railroad. The problem has been solved over the last quarter century by captive chemical shippers getting access to more than one railroad ( ex. Bayport, TX) or getting his local railroad to cut prices so he will not gain access to another railroad. However, these costs are not high enough to impact decisions on which plants expand or contract. That is driven by feedstock costs ( natural gas ), customer location (China ) or process efficiencies.

The BS put out by the chemical industry about how everybody is captive is just that - BS.

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Actually, Bob stumbled across the key issue - rate discrimination.

But before we throw that back at the AAR, Bob makes a faulty inference. He seems to think that it is easy for a chemical plant to simply construct a build out to a competing rail line to get those competitive rates. The Bayport situation is one of a kind, there are not too many chemical plants who have the nearest rail alternative a stone’s throw away, let alone have the extra capital to fund such a build out. Most chemical plants were built during the regulated era, thus were not planned for competitive rail access, rather built to suit more germaine needs, such as access to feedstocks, available labor, etc.

Rate discrimination. That’s what it’s all about. That is the only interstate cost factor faced by US chemical plants that has such a wide differential regarding high and low rates.

Every US plant pays roughly the same for natural gas. No rate discrimination there.

Every US plant adopts the most efficient production methods that they can. No rate discrimination there.

But when your competitors are paying only half or a third of the R/VC rates that you are, simply because

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[quote]
QUOTE: Originally posted by futuremodal

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I thought he would actually like it. Gives him something to harp on.

LC

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Yes, Bob. The differential between low and high price roughly follows that for gasoline and diesel, except less because there are no boutique blends of natural gas required by certain states. The small differential for natural gas is a function of pipeline distance, and it is insignificant when it comes to placing a plant in New Jersey or Wyoming. It is in no way even close to the widely ranging differential of rail rates, which are based on intramodal competition and the lack thereof, e.g. two distinct extremes. You will not see anything similar to the 106% vs 400% R/VC differential of railroad rates. Railroad pricing is in a class by itself from an analytical perspective, e.g. there’s nothing else like in the world.

It is something they can control if they choose to. It is an internal decision whether to upgrade or not. Most that chose to upgrade are still around, while the less efficient plants have all but shut down by now.

300% difference in R/VC are “not that big”!? Really, Bob, I don’t think that wide a differential is up for debate.

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bobwilcox

There must be some part of “no” that he doesn’t understand.

Average 2004 industrial price for natural gas per 1000 cu ft: New Jersey-$8.65, Wyoming-$6.77

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Petrochemical producers who buy their feedstocks on the merchant market buy virtually all of their feedstocks on ten to twenty year contracts. The prices are much lower than retail prices for natutal gas. However, most producers do not rely on the merchant market for their feedstocks. ExxonMobil, BP, Shell, Chevron, etc. bring it up from their own gas wells.

Concerning location over 85% of the polyetheylene and polypropelene production capacity is in TX and LA. That is because the ethylene and propelene crackers are in those states. I do not expect WY to get its first plastic plant soon.

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Bob

I don’t know if numbers I looked at, which were from the Energy Information Administration, included prices paid under contract, but it seems to me there is enough in there to suggest that there is a significant difference depending on the destination of the product. If the numbers don’t include prices made under contract or the interdivision price set when the feedstock is from wells owned by the producer, the spreads may actually greater. Obviously, I could not state it as a fact, but I’d bet that that the cost of gas for a gas based chemical product is a much greater factor than transportation cost in the total delivered cost.

With your background, you would have a better handle on this, but I suspect that there is a recognition by railroad marketing people that market or what I would call source competition plays into the decision on setting the rate. If the guy you are doing a good business with says that competition from producers on another railroad have such a rate advantage that he is or will be hurt, I think your railroad would have some motivation to keep him going.

FM has convinced himself that the US Railroads are the cause of all the big shifts in global manufacturing, even asserting that differences between domestic vs. import rail rates have caused the shift of manufacturing from the US to China and other far east origins. What can we say.

Jay

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Same as it ever was, Same as it ever was, (The Talking Heads )

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Jay-In the early part of this decade a world scale plastic plant on the US Gulf Coast will see 50-60% of it’s cost soaked up by petroleum based feedstocks. Physical distribution would represent 15-20% of their costs. Line haul rail transportation would account for 5%. Rail equipment costs and warehousing costs also account for about 5% each.

Geographic competition is very important if the rail rate is a large portion of the cost. If you have a fertilzer plant in SW WY on the UP selling into the Corn Belt you need to worry that the rates are competitive with producers on the CSXT and NS in the South East. If you have a product where the rail rate is 3-5% of the total cost it usually does not make any difference.

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Sorry FM, I usually root for the underdog, but I can’t this time.

Have you ever played “guess what I paid” on an airline flight? Two people on the same plane on almost the exact same seat, travelling at the same time will not always pay the same amount. Mr. Vacation, who booked and paid for his trip some months ago paid $390 for his round-trip from Chicago to L.A. Mr. Businessman in the seat across the aisle paid $690 for a one-way ticket because he bought it yesterday when his plans changed. (prices made up for comparison, but are typical from my experience working at the airport). Mr B will pay $1380 for a round trip compared to Mr.V’s $390. Why is he paying 350% for the same “trip” ? It all has to do with pricing structure and an odd little program airlines call revenue enhancement. Instead of reducing price to get more volume on a commodity that will dissapear and be “lost” , ie a seat on that flight, the airlines

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There must be some part of “distance” Jay doesn’t understand, not to mention percentage differentials:

% differential between NJ and WY natural gas prices as stated above: about 20%
max % differential captive vs non captive as stated above: about 300%

Really, do you want to go down this road of equating price differentials of chemical feedstocks with the price differentials of captive vs non captive rail shippers?

Of course, the reason there is such a small price differential between the low and high end of natural gas prices for industrial usage is this: Natural gas is shipped through open access pipelines, thus the end price is purely market based.

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To your total lack of logical thinking skills, we may add some shortcomings in arithmetic.

Let’s say that the linehaul rail charge of 5% of the delivered cost is what the “noncaptive” shipper pay and and the “captive” shipper has to put out three times as much for freight. Captive shipper total cost is 110% of non captive shipper.

Gas price for producer A is 20% more than producer B. If gas makes 60% of cost for B, then producer A’s total cost is 112% of B.

“purely market based”? I thought you said it was distance.

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A little dated, but the following information is from the “Rail Price Advisor” (lst Quarter, 2003), which is published by Escalation Consultants, Inc. of Gaithersburg, Maryland. This “per ton” information is calculated from the 2001 Surface Transportation Board “Revenue Shortfall Allocation Methodology” (RSAM) study.

Price charged per Ton.
…CXS…NS…BN…UP
Captive Farm Products…$29.86…$21.18…$43.64…$36.47
Non-captive Farm Products …$14.45…$9.72…$18.44…$16.20

Captive Coal…$15.85…$15.79…$18.43…$18.70
Non-captive Coal…$ 7.67…$7.25…$7.79…$8.30

Captive Chemicals…$32.83…$36.08…$48.43…$42.18
Non-captive Chemicals…$15.88…$16.56…$20.46…$18.73

Some “bargain”.

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5%?
[(-D][(-D][(-D][(-D][(-D]

Try 10% to 30%, depending on commodity. 5% may be true for Asian imports, but not for US manufactured goods.

Yes, distance is, or at least should be, the primary determinent of transport cost. In all sectors except the railroads, it is.

And of course, what you are missing is that New Jersey has any number of chemical plants, some that are captive, some that are not. Thus, ALL the chemical plants in Jersey are paying the same relative price for the feedstock, since it is the same distance from wellhead to the Jersey swamplands.

So now we’re back to 0% differential in feedstock price for the various chemical plants, and the 300% differential in rail transport costs for the same collection of plants.

Yep, the railroads are really giving out some bargains there, aren’t they?

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No Dave, since CR was split all of the chemical plants using a significant amount of rail are served by CSXT and NS. Their raw materials come from the Gulf Coast manly by water and pipeline with fill in from the BNSF, KCS, CN and UP via the New Orleans, Memphis and S. IL Gateways. Sure not much choice for these poor souls[:)]

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So what’s your point? Are not the chemical plants still captive via having only one physical connection to a Class I? Or should they all just bulldoze through a few high priced skyscrapers to get that second Class I connection?[;)]