FTA:'…At the end of 2008, M&G’s long-term contract expired, and the railroad nearly doubled its rates. “We couldn’t believe it,” says Fred Fournier, M&G’s sales chief. He says M&G’s captive plant is now being charged rates that are 140% to 500% above the railroad’s variable costs for labor, fuel, etc. (the industry’s yardstick for valu
Mr. Ward should recognize that history sometimes can repeat itself. 50 years ago shippers did switch to trucks in droves. It could happen again if they take an arrogant attitude with the customer. Personally I wouldn’t say that to a customer nor would I be caught dead making that kind of a statement in public…because I wouldn’t want to piss off the people who pay me. NS isn’t CSX’s only competitor…trucking is more expensive, but not by that much when all factors are taken into account. M & G’s business could be made to work with trucks, and I’ll bet that a few trucking folks who read that article have already placed their calls to that shipper.
I am not sure that I agree with you. Yes, absolutely, there are some companies that can go to trucking. However, if a significant percentage of such companies did so, several elements of the infrastructure surrounding trucking could not handle it. Trucking rates would far exceed rail rates. Furthermore, there are several types of freight that would be impractical to move by truck–trains just have too much of an advantage.
My concern is that railroads are going to kill the goose that lays the golden egg and take this too far. In circumstances wherein there are two competing railroads, my preference is for the government to butt out. In circumstances of captive customers, however, it is my hope that the STB shows a little more teeth before Congress directs them to do so.
Gabe
P.S. Glad to see this thread with a little more activity.
A noble idea, perhaps, but how would you determine what is the fair amount to charge, without it becoming a long, drawn out lawyer vs. lawyer tag team event?
What would you have the STB do? There is no good way for them to determine what the railroad rate “Should” be. If they try, they’ll just transfer money from one corporation to another corporation and screw things up in the process. We’ve got a 60 history of government regulating rail rates. The result wasn’t good.
In any event, the claim that M&G Polymers is somehow captive to CSX is unsupportable. The established standard for being “Captive” is that the customer has no viable alternative to one railroad. That alternative does not have to be a second railroad serving the facility… M&G has such a viable alaternative. They’re located on the commercially navigable Ohio River and they have a dock.
They’re shipping buik product. If their logistics people can’t figure out how to use Ohio River barges to provide effective competiion for CSX then those folks can’t do their jobs. All M&G has to do is barge its output to a river-rail transfer on a short line and it has opened up competition. That’s going to cost something, but that extra cost will be the limit on CSX rates. There is rail rate limiting competition available, but apa
Lest we all forget - The Staggers Act was implemented in 1980 - because of the floundering financial status of the rail industry - even those who weren’t in bankruptcy weren’t financially healthy. Customer industries of that era dictated the pricing power - With the implementation of Staggers and the return of Class I carriers to relative financial health - pricing gets negotiated amongst near equals. Negotiating pricing is not for the squeamish - on either side.
As I understand it M&G is now renegotiating after the expiration of a 10 year contract - a lot of things have transpired in 10 years on both sides of the negotiation - the prices for EVERYTHING involved in the cost basis for the carriers has increased - in many cases exponentially.
It is time for M&G to step up their game rather than whine about it.
A couple of posters here have mentioned that they were stock holders in NS and CSX. Since research is part of stock ownership, I thought I would follow the trail. [#offtopic]
1.) Who is M&G Polymers ? one of their websites notes they are 6 years old) There current ownership is apparently: M & G Finanziaria s.r.l website at: http://www.gruppomg.com/index.php
I knew, from having worked in the plastic container bsiness that at some point Swell Plastics morphed into Constar as a part of the Dorsey (Trailer) Empire .
Admittedly, this story becomes long, and involved, but it is a tale of mergers. morphing; intermixed with finances, bankruptcies, and outcomes. Also why, and how a large plastics (PET) feedstock plant winds up in an unincorporated community in West Virginia. On an old, [C&O] (?), B&O RR line that has itself been merged into the CSX RR. Might also be background for the problematic negotiations for a rail shipping rate discussion that has apparently almost gone into its own ‘ditch’ (?)
I know Italians do gondolas, but maybe, not Ohio R. Barges? [oX)]
According to their own website they’ve been around since the 1950s and are based in Italy. They entered the US market by purchasing the Shell polymer business a few years back. They are among the world’s largest polymer manufacturers with operations in Europe, Asia, South America, Mexico and the US.
Doesn’t sound like they’re whining to me. According to the article their new plant in TX has access to several rail carriers. They’ve got options…as Ward says they can go truck (his suggstion even if tonque in cheek)…they can go barge…or they can move their plant. If shipping via CSX becomes uneconomical they can also move the plant to MX where other costs are lower as well…not so far fetched as they already have operations there and are already experienced in global production.
I don’t see anything wrong with CSX attempting to raise rates to what they need…that’s business. But when the head of the company makes statements like (let them ship truck) he’s really missing the point as shippers do have options. Many have gone offshore to avoid costs here… which is why we constantly whine about China and Mexico. Shippers can move and they can shutdown.
Sounds to me like CSX should send a team in to M&G to identify what can be done to r
My concern is that railroads are going to kill the goose that lays the golden egg and take this too far. In circumstances wherein there are two competing railroads, my preference is for the government to butt out. In circumstances of captive customers, however, it is my hope that the STB shows a little more teeth before Congress directs them to do so.
Gabe
P.S. Glad to see this thread with a little more activity.
What would you have the STB do? There is no good way for them to determine what the railroad rate “Should” be. If they try, they’ll just transfer money from one corporation to another corporation and screw things up in the process. We’ve got a 60 history of government regulating rail rates. The result wasn’t good.
In any event, the claim that M&G Polymers is somehow captive to CSX is unsupportable. The established standard for being “Captive” is that the customer has no viable alternative to one railroad. That alternative does not have to be a second railroad serving the facility… M&G has such a viable alaternative. They’re located on the commercially navigable Ohio River and they have a dock.
They’re shipping buik product. If their logistics people can’t figure out how to use Ohio River barges to provide effective competiion for CSX then those folks can’t do their jobs. All M&G has to do is barge its output to a river-rail transfer on a short line and it has opened up competition. Th
Would it be fair to let the government compare rates lawyers are charging with rates other laeyers are charging to different clients for different things, to determine a fair price?
It seems like the law of supply and demand tends to set prices a whole lot better than governments have been able to do.
I understand the idea that a railroad shouldn’r charge too much. The problem seems to be in how too much is determined, and by whom. Right now, the free market is trying to determine what the right price is for this relationship between CSX and the plastics company. What’s the opposite of a free market?
I will tell you this much, I would welocme the government restriction of my rates if it would simultaneously permit me to be the only lawyer businesses in Indianapolis could access.
The market should be the deciding factor in what rates are charged. CSX should be free to charge whatever it wants and M&G should be free to look for alternatives. Ideally both parties will come to terms on rates that are mutually beneficial. Why involve the government?
One other element is always the elephant in the closet when it comes to rate discussions. Does the company setting the rate really want the customer as a customer.
A element that evolved from the implementation of the Staggers act is that the carriers finally began looking at the actual costs involved in servicing customers vs the rates that were being charged. The number of lines closed, abandoned or sold off to short line carriers was a result of this kind of analysis. A tactic that is used in rate negotiations, especially when a customer is viewed as costing more than their business is worth is to set the rate level to the point where the customer is paying the rate to make the business worth handling.
I have no idea of the particulars in this case…it could be when the initial rate was negotiated for Plant A’s traffic, plant A was one of 20-30 customers in that particular serving area and now through market forces and the recession they are the only customer left and as a consequence ALL the overhead involved in the operation and maintenance of that line now falls to the remaining customer to support. Rates are not devised in a vacuum - the market does work - sometimes not in the manner that the parties involved desire.
For the sake of discussion, if you were M&G and CSX was the oil industry would you have the same feelings about the cost of a gallon of gas? The point being made in the Fortune Magazine article is the allegation of a cartel, isn’t that what the American public has been crying foul about for years when it comes to gas. Why involve the government, they are selective in who they get down on and the oil industry is one where their tails are between their legs. Railroads on the other hand, a whole different story.
But the answer isn’t governement intervention, it is a freer marketplace where others may enter as they see fit or where customers can choose alternatives. I hear you on the price of gas, I buy fuel and I don’t have much control over the price I have to pay. However I do have control over minimizing usage and the ability to pass the cost on to my own customers. M&G, likewise, has numerous options including accepting CSX’s rates and passing them on to their own customers in terms of rate increases. That’s how its supposed to work. My only beef with the article is CSX’s seemingly cavalier attitude which in my opinion does nothing for their cause or for the cause of railroading in general. Imagine you go to a nice restaurant and you enquire about customizing a menu item to your liking. The owner comes out and tells you “take it as its presented on the menu or go home and cook it yourself”…its just not good to deal with customers like that.