The continuing shortage of truck drivers is prompting metals suppliers to consider rail transportation. Demand for rail service already far exceeds the supply of railcars, however. With shippers in other industries snapping up most of the available cars, metals suppliers see mostly disappointment at the end of the tunnel.

By Dan Markham,
Senior Editor

The well-documented shortage of over-the-road truck drivers, coupled with the skyrocketing price of fuel, has service center operators scrambling for transportation that is both available and affordable.

For some, that means rail service. But transporting steel by rail can be even more challenging than moving it by truck.

Capacity issues, intense competition for track and railcars, and more profit-minded railroads combine to put an even tighter squeeze on beleaguered shippers in metals and other industries.

For metals producers and distributors, there is an upside in their fight to secure a place on the rails. They supply the steel and aluminum the railroads need to replenish their fleets.

Starting in late 2005, orders for new railcars exploded, says Peter Toja, an analyst with Economic Planning Associates, Smithtown, N.Y. Rail companies ordered more than 26,569 units in fourth-quarter 2005. That sizable number was dwarfed by the 35,991 cars ordered in the first three months of 2006.

“Railcar builders are poised for a banner year this year, next year and, for practical purposes, many years after that,” Toja says. “Replacement pressures are quite strong.”

The volume of new orders has created a backlog of about 86,900 railcars. At the current rate of production, Toja says, railcars ordered today won’t be delivered for nearly 15 months. That delay means the railroads can’t exactly respond quickly to changes in demand for rail services.

“You can’t call out and say, ‘Give me 150 coil cars tomorrow,’” says James Schaaf, director of marketing-metal products for Norfolk Southern Railroad, Norfolk, Va. “If you’re looking for a covered coil car, you have to go to a build program. There may be spot leases coming up, but you’re not going to see an appreciable number of cars being made available.”

While this backlog of orders is a good sign for metals consumption, filling them won’t necessarily alleviate the transportation woes of steelmakers and service centers. That solution depends on the types of railcars the railroads order.

Statistics from the Washington, D.C.-based Association of American Railroads show that metals products represented just 3.2 percent of all commodities transported by train in 2004, well behind industry leader coal, grain, chemicals and others. Since cars needed to transport metals, such as covered coil cars, are different than ones used to move coal or grain, the first decision that affects rail availability for metals suppliers is made when the railroads place their orders.

“You’re competing for the capital dollars the railroad has to buy the kind of car you want,” says Gordon Gustafson, chief commercial officer for ADS Logistics, Homewood, Ill. “If a railroad has the opportunity to buy a coal hopper vs. a covered coil car, they look at what’s going to give them the best return on investment.

Though metals companies are using rail transportation in greater numbers, their growth doesn’t match that of coal or grain. New ethanol requirements, in particular, have spiked shipments of both corn and its byproduct, dried distillers grain, Toja said.

To keep pace with demand, the railroads are embarking on a record-setting capital investment campaign, with more than $8.2 billion in infrastructure spending projected for 2006, according to the AAR. The number eclipses the old record of $7.1 billion spent in 1998 and is 24 percent ahead of the $6.6 billion spent in 2005. The $8.1 billion figure represents 17.8 percent of the industry’s revenues, far beyond the average capital investment across industries.

“Railroading is one of, if not the most, capital-intensive industries in the country,” says Tom White, a spokesperson for the AAR. “It takes something like $2.50 in invested capital to get $1 in revenue.”

The outlay by rail company CSX Corp., Jacksonville, Fla., is typical of this increased spending. During the previous two years, CSX made $1 billion in annual capital investments. In 2006 and 2007, the company has increased that figure to $1.4 billion.

While much of the investment will go toward more cars and locomotives, the railroads have also earmarked money for track additions to increase the amount of traffic the rail system can handle.

CSX will add long-passing sidings on several of its northeastern tracks, “essentially giving us double track capabilities,” says Gary Sease, spokesman for CSX. Similarly, Burlington North-ern Santa Fe has an-nounced plans to eliminate all single track on its transcontinental line. In each case, a little track expansion at stress points can go a long way toward relieving congestion.

“That can have a big impact, especially if you’re talking about a heavily used main line. The trains have to stack up, and it becomes a domino effect,” says AAR’s White. Like building railcars, adding track isn’t cheap. A single mile of track costs an estimated $2 million, he adds.

Despite the rail industry’s investment efforts, experts predict demand for rail services will continue to outstrip supply as long as the metals market and overall economy remain hot.

Norfolk Southern continues to report record demand for its services and equipment, Schaaf says, but the railroad is realistic about the future. “In a market that’s ever-changing and hard to forecast, you don’t ever want to size your fleet for peak demand. If the market softens, you’re definitely going to have a surplus, and you always want to protect against that.”

Meanwhile, the lack of suitable railcars and trucks has left metals distributors scrambling for ways to move product. “There is a big need for both truck drivers and rail,” says Marvin Jurjevic, transportation manager at Steel Warehouse, South Bend, Ind. “There’s a huge strain on the industry.”

Like most service centers, virtually all of Steel Warehouse’s rail shipments are receipts, not deliveries. The service center receives roughly 75 cars per week, while shipping only 6 to 12 cars per month.

Though Steel Warehouse has a rail option at all of its facilities, its use of that mode varies depending on the origin of the steel.

Similarly, says Roger Sippey, executive vice president of Chicago-based Feralloy Corp., the destination of the material plays a large role in whether rail is employed. His company’s Mexican facilities are served heavily by rail, as are plants in California and the Southeastern U.S. Its Midwestern facilities, in contrast, don’t use it as much.

That’s consistent with the general idea that rail makes more sense the longer the distance. John Montgomery Jr. of Southland Tube, Birmingham, Ala., says rail really isn’t an economical option unless the distance is more than 300 miles.

Even then, rail isn’t always cheaper. “It has become more costly in some instances than truck,” Sippey says, particularly when service centers fail to meet the tightened unloading requirements and are assessed demurrage penalties.

One company not having difficulty with its rail program is Collier Metals, a transloader and distributor in Atlanta. Collier has a close working relationship with Norfolk Southern, its landlord. The steel distribution facility was formerly a locomotive repair building.

President Jim Collier says his company’s growth is tied to its tight relationship with the railroad. “We work closely with the railroad trying to determine things we can do on our end,” he says, such as increasing warehouse capacity, adding rail spots and acquiring track mobiles to move railcars.

Equally important is the attitude that transportation companies are partners, not mere service providers. “I feel truly as if it’s a partnership,” Collier says. “When you find good business, bring cars in here loaded, immediately route them back and get them reloaded, that’s good business for them, too.”

Building relationships with transportation providers, whether rail, truck or barge, is critical to navigating a logistics world that is not likely to become less congested any time soon.

“Any customers intending to use rail must make themselves rail-friendly, which means they’ll have to turn cars rapidly,” Gustafson says.

“We need to work in conjunction with our customers to make sure we’re doing everything we can to minimize delays,” concurs Schaaf.

Those who don’t may find themselves struggling to find transportation.

“If we go to a service center that doesn’t manage its inbounds, backs up its property and backs up our yard, that’s detrimental to us. We’re going to talk to his shippers about going there again via rail,” says Darrell Stanyard, director of sales for the metals business unit at CSX.

Another area where metals companies can aid the railroads—and thereby reduce costs—is to deliver more accurate projections on the number of cars needed. “The big thing we try to promote, both internally and with our customers, is accuracy in forecasting,” Schaaf says.

Besides the speed at turning cars, one area of concentration for the railroads is providing cars capable of handling the task expected of them. When a covered coil car or gondola with a hole in the roof is rejected by a service center, it throws more delay into the system.

“We want to put quality equipment in front of our customers, so we don’t get into issues of people having to reject equipment,” Schaaf says. “We have aggressive plans to continue to minimize the number of bad orders.”

Jurjevic is hopeful that the railroads are addressing the issues facing them, including ordering more cars to meet demand. He’s less optimistic about the major issues facing the trucking companies—fuel costs and a decreasing driver pool.

“Unless there’s a vast interest in people becoming drivers, I don’t see it getting that much better. It’s going to take time to get a workforce to cover the number of empty trucks,” Jurjevic says.

While manpower has been an issue for some railroads, the problem isn’t nearly on the same scale. “We don’t have the same challenge the truckers do on the human resources front,” says Sease at CSX, which is adding 1,500 locomotive crews per year. “A two-person train crew can operate a heck of a lot of freight over a long distance compared to what the truckers can do.”

Yet in terms of availability, Gustafson believes conditions will worsen on both fronts in the near future. In the case of rail, the problem for metals suppliers is that railroads are starting to run their operations less like public utilities and more like profit-minded businesses.

“Many still remember the days of a regulated environment when the railroads were forced to handle any and all comers. Now that’s not necessarily the case. They can be more selective,” he says.

“The more attractive you can be to the railroad—not only relative to other metal shippers but other commodity shippers—then the better the shot you have,” Gustafson adds.