March/April 2018
By Katie Pyzyk
In an ideal world, transporting scrap to and from customers by rail is an efficient, easy process. All of the requested train cars arrive on time, every time. The rail carriers pick up the filled cars and convey them to their destination, whether the next town or across the country, in an expeditious manner. Tracking the status of your rail car order or your rail shipment is as easy as tracking a package ordered from Amazon.
Instead, shipping by rail is an increasingly expensive, slow, frustrating bureaucratic nightmare, scrap shippers say. “It’s painful. It shouldn’t be that difficult,” says Greg Dixon, CEO of Smart Recycling Management (Nicholasville, Ky.) and chair of ISRI’s Ferrous Division and ISRI’s Rail Task Force. Others across North America express the same frustrations. Some industries “are always difficult to deal with,” says Tom Knippel, vice president of ferrous sales at SA Recycling (Orange, Calif.) and Rail Task Force member. “Cable television is one, and railroads are another.”
Rail problems are not new for the scrap industry, but deteriorating service, higher prices, and additional fees have become more pronounced in recent years, recyclers say. Small scrap shippers report their rail service being canceled because they didn’t ship enough freight each month. “When only the large [scrapyards] are capable of moving their product, then you decrease competition,” and it negatively affects the entire scrap industry, Dixon says. Even large shippers are feeling the pinch. “It’s not uncommon for us to get proposed 10-, 15-, or 20-percent rate increases at the beginning of each year,” Knippel says. “It gets very difficult to absorb those kind of prices.”
Recyclers describe their rail relationships as one-sided: Rail companies are “here for us only as long as it works for them,” says Jeff Granger, transportation manager at Sadoff Iron & Metal Co. (Fond du Lac, Wis.). Scrap companies—especially those that handle ferrous metal—rely heavily on freight rail for shipping heavy, bulky scrap materials, but the rail carriers are far less economically dependent on scrap. “Scrap is not a priority item for them [because] it is not a major revenue generator,” Knippel says.
Market share data corroborate that assertion. According to the U.S. Surface Transportation Board’s annual commodity statistics, Class 1 freight railroads carried 1.5 billion tons of goods in 2016, and only 1.4 percent of the total, or about 21 million tons, was ferrous and nonferrous metal, paper, plastic, and rubber scrap. Another 18.7 million tons it categorizes as “other scrap/waste,” including municipal solid waste. Together, that’s still less than 3 percent of total rail freight.
Why don’t scrap shippers just use other modes of transportation? It’s not that easy, they say. For medium- or long-haul shipments, especially ferrous scrap, “you need to have a gondola car or a dump trailer truck delivery,” and such vehicles often are not available, Knippel says. Truck and driver shortages are widespread across the country and are likely to get worse, transportation experts say. And the weight and volume of material is such that it would take five trucks to move the ferrous metal that fits in a single rail car. Even when a company has “a sizable truck fleet,” as Sadoff does, mobilizing the fleet for ferrous deliveries is usually more expensive than shipping by rail, Granger says. Thus, despite the many difficulties and higher prices, rail remains the most efficient and cost-effective option for ferrous scrap.
Less Service
Scrap shippers’ biggest complaint about railways is the shortage of gondola cars, the rail car type they use most frequently. They routinely receive fewer cars than they request, a shortage that can cut into a scrap operation’s profitability, they say. “We’ve literally lost millions of dollars from not being able to get products … to market because the cars didn’t show up,” Knippel says. If a scrapyard can’t fulfill an order, it loses that sale, and sometimes the customer “may decide not to do business with us in the future because they can’t count on our supply,” says Angela Armson, logistics coordinator at Sadoff.
To ensure they receive the rail cars they need, scrap shippers say they have resorted to inflating their orders. “It’s common knowledge that if you need 10 rail cars to move your scrap this month, you better order 20. And if you order 20, you might get 10,” Dixon says. One rail carrier, CSX, recently has fought back against this practice, however, by imposing a $300 fee on railcars ordered and then canceled right before or after the delivery date. Dixon says he understands the rationale for such fees, “but the reason [over-ordering] was being done that way is because of a lack of performance by the railroad.”
The rail carriers don’t agree that gondola car availability is a problem. A spokesperson for CSX, the North American Class 1 freight rail operator that supplies the most rail cars to the scrap industry, says it “closely monitors the use of assets to quickly cycle them back to customers. … Our overall car order fulfillment rate currently averages 94 percent. Meanwhile, the order fulfillment rate for mill gondolas is in line with the historical averages, suggesting a sufficient supply of cars to our scrap metal customers.”
BNSF, which supplies the second-highest number of rail cars to the industry, urges “our scrap metal customers to place their orders as far in advance as possible” to avoid spot shortages of rail cars, says Richard Miller, assistant vice president of industrial products. “BNSF always works closely with our customers to ensure they have the rail cars they need when they need them… [and] also offers loading origin guarantees (LOGs) in order to ensure cars arrive by the want date.”
Still, scrapyards complain about carriers’ insufficient communication about how many cars they will receive and when they will arrive. Sadoff employees recount an instance when a gondola car shipment was delayed without explanation, then the cars unexpectedly arrived on a Saturday, when the yard was closed. “We don’t run seven days a week, so providing us cars on Saturday morning doesn’t do us [any] good until Monday morning,” Armson says.
Some scrap companies have resorted to purchasing their own rail cars. SA’s Knippel says owning cars “helps immensely in our overall program” because “having our own fleet gives us some control in car availability.” Dixon agrees owning rail cars can be helpful, but you “still have the issue of moving them,” he says. That strategy has been used efficiently for regular runs, he says, but it would be more challenging for spot moves.
More Fees and Higher Prices
Just as frustrating as gondola car shortages are demurrage fees, which railways charge when customers do not move the rail cars according to the agreed-upon schedule. Demurrage is fair if the scrapyard causes a holdup, recyclers say, but not when the rail carrier is responsible for the delay. Sometimes “car deliveries don’t show up in time, and then they charge demurrage if you don’t get the cars turned over fast enough,” Knippel says. And recyclers see little incentive to return rail cars ahead of schedule, he adds, because “it’s not like you can accrue enough credits to make up for the losses.”
Even more unfair, recyclers say, are demurrage charges related to another sore point—rail car switching. Rail carriers are required to facilitate the movement of freight by rail, even when different carriers serve the shipment’s origin, destination, or the track in between the two. In reality, shippers say, rail company A might deliver cars to the switching point on Monday, and rail company B won’t arrive to retrieve the cars for days or weeks. In the meantime, they are paying demurrage while the cars sit on the track.
Part of the problem is that scrapyards often are “captive shippers”—only a single rail carrier provides service to a given scrap facility, so “if they don’t service us, we don’t have other options to call somebody else,” Armson says. Each of Sadoff’s three processing facilities is captive to a different rail carrier, Granger says.
The railroads probably coined the term captive because it sounds better than monopoly, Granger suggests, “but it truly is a monopoly.” Four rail carriers control 90 percent of U.S. freight rail traffic, according to the Rail Customer Coalition, and 78 percent of freight rail stations are captive to a single carrier. One study using 2009 Surface Transportation Board data found that railroads charge captive shippers an average of 75 percent more than they charge shippers on competitive routes. The RCC, of which ReMA is a member, is seeking reform that boosts competition, streamlines rate reviews, and levels a playing field that’s become tilted toward the carriers due to rail industry consolidation. “In any [industry] where there’s a good marketplace and competition, pricing is certainly better, and you see better service,” says Scott Jensen, RCC spokesman.
CSX is a Four-Letter Word
The newest anxiety facing freight rail customers started in March 2017, when Hunter Harrison became CEO of CSX and quickly announced a turnaround plan. He introduced his “precision scheduled railroading” strategy, which he had previously used to transform three other rail carriers into efficient, profitable businesses—leaving a trail of shipper complaints in his wake. In brief, the strategy is for CSX to run fewer, longer trains on a fixed schedule across longer distances with few stops. Scrap shippers say the plan has resulted in more shipping bottlenecks, long transit times, switching difficulties, and poor communication from CSX.
“CSX has pretty much openly stated that they would like to pick up a car on the East Coast and ship it clear to the West Coast, stopping as few times as they have to,” Dixon says. That might be the most efficient way to operate a railroad, “but it’s not practical” for scrap shipping, he says. Sadoff has the same concerns. “Our industry is made up of a lot of small car shipments and a lot of ‘touches,’” says Sadoff’s David Borsuk. “Instead of [sending] 100 cars to a consumer, we may need three to five cars and a lot of touches” to add or subtract cars along the way.
The scrap industry is not alone in its frustration with CSX. Many companies and industries complained about the company to the Surface Transportation Board last year. In response, the STB launched weekly reviews of CSX’s performance last summer and held a listening session for customers to air grievances and receive responses from the carrier. Harrison apologized to customers for mistakes made in implementing the new strategy, but he defended precision scheduled railroading.
Harrison died unexpectedly Dec. 16, two days after he stepped down from the CEO role due to health reasons. CSX quickly named James Foote the new CEO and president. He had joined the company just two months earlier as executive vice president and chief operating officer, having previously worked under Harrison at the Canadian National Railway Co. Foote is “a deep believer in precision railroading,” according to a Jan. 20 article in Fortune, and he has since hired another former CN executive, Edmond Harris, as executive vice president in charge of operations, signaling the railroad’s intention to continue on its current path.
“I don’t think [Harrison’s death] changes the company’s core philosophy” because he was brought on board to cure some of what ails CSX, Knippel says. “I assume that [Foote] will be tasked with the same goals.” Several RCC members also have “strong concerns that rail service issues are going to persist. The current state at CSX certainly doesn’t allay those fears,” RCC’s Jensen says.
In January, Foote updated the STB on CSX’s operations, noting that it had finished phase one of the precision scheduled railroading plan and started the second, and final, phase. He stated that the railroad has become better run, and that Harrison’s vision and legacy will continue. In addition, a CSX spokesperson said in a statement, “CSX’s new [precision] scheduled railroading plan is delivering measurable benefits to many customers through faster transit times, better service and improved asset utilization. Train velocity and car dwell have seen four consecutive months of continuous improvement, now significantly exceeding the prior full-year average.”
Despite CSX serving as a target for rail customers’ criticisms over the past year, it’s not the only problematic company, shippers say. “CSX is getting the bulk of the attention because of some of the major operational changes … but there are problems with other railroads” as well, Jensen says. He does, however, offer a caveat: “I don’t think it would be fair to say [problems have] been to the same degree as with CSX.”
Scrap shippers worry that other rail carriers “will follow CSX’s higher-velocity train model, moving shipments from A to Z without stopping at all points in between,” says Billy Johnson, ISRI’s chief lobbyist—a change that would be catastrophic for the industry’s ability to move scrap.
Regulators At a Standstill
The Surface Transportation Board is the main channel freight rail users have for addressing service problems. Scrap shippers face two obstacles to seeking relief, however.
First, ferrous scrap—which is 85 percent, by weight, of the 21 million tons of metal, paper, plastic, and rubber scrap rail traffic—has been exempt from STB regulation for more than 20 years. The exemption had benefits for the industry when it was originally passed, says Karyn Booth, transportation practice group leader at Thompson Hine, but it provides no benefits today. Revoking the exemption “gives you the option of using the STB to help with rates, service, and potentially competitive switching,” she says.
The STB proposed revoking the exemption for ferrous scrap and several other commodities in 2016. It conducted an analysis of ferrous scrap waybills from 1992 to 2013 and concluded that market dynamics were “significantly” changed since the exemption took effect. The STB’s measure of market power is railroads’ revenue-to-variable-cost ratio, or RVC; it considers an RVC greater than 180 percent a sign of excessive railroad market power. In 1992, the RVC for ferrous scrap shipments averaged 138.6 percent; in 2013, it averaged 229.8 percent for captive shippers of ferrous scrap. A separate ReMA waybill analysis found that 60 percent of scrap and waste rail shipments are priced at RVC levels greater than 180 percent.
Recyclers seem to have a strong case, but few commodities have had their exemptions revoked in the 25 years this regulation system has been in place, Johnson says. ReMA petitioned the STB for such an exemption in 2016, making its case with the STB waybill analysis, its independent analysis, and information members provided.
The ferrous scrap exemption is in limbo due to the second obstacle: STB vacancies. ReMA previously had successfully advocated for the Surface Transportation Board Reauthorization Act of 2015, which increased the number of board members from two to five. All three STB members who were in place at the beginning of 2017 were carryovers from the Obama administration. President Trump named one of them, Ann Begeman, acting chairman shortly after he took office. Daniel Elliott, the previous chairman, became vice chairman; he then left the board in September. The three open STB slots have not yet been filled, leaving the board without a quorum. The Trump administration has been slower than previous administrations to fill vacant positions in general, but conflict over who the nominees will be plays a factor as well, Johnson says. The rail industry is lobbying for former rail executives to get those slots; freight rail shippers oppose such nominees.
Begeman, the acting chair, chooses not to make regulatory decisions without a quorum and has tabled several pressing issues, including the ferrous exemption revocation. “I can understand some frustration from the stakeholders because things aren’t moving,” says Elliott, the former chair, now a partner at Washington, D.C., law firm Conner & Winters. Waiting for more than a year to fill the positions and to proceed with business “is a long time,” he says—longer than normal—but he also notes that “Congress is very busy right now … even if the president nominated somebody, it would take a while before it moves.”
This January, Rep. Peter DeFazio (D-Ore.), who serves on the House Transportation and Infrastructure Committee, and Rep. Michael Capuano (D-Mass.), who serves on the Subcommittee on Railroads, Pipelines, and Hazardous Materials, wrote a letter to the president calling for him to immediately fill the STB vacancies. They specifically cited shippers’ reported difficulties with CSX and the need to bring the STB up to full strength so it can adequately perform industry oversight.
The letter also notes that Acting Chairman Begeman’s fourth quarter 2017 report to Congress outlined improvements in portions of CSX’s performance, but aspects such as car order fulfillment and providing notice of service changes continue to lag. The letter reiterated that although the STB could exercise its authority in its current state—a point Elliott makes as well—the three vacancies prevent it from functioning as intended in the reauthorization act.
The Rail Customer Coalition also sent President Trump a letter in January. Signed by representatives of more than 70 corporations and associations, including ISRI, it urges him to nominate new STB members and name a permanent chair. “The STB plays a critically important role in resolving rail rate and service issues where competition is lacking,” it states. “In order to regain momentum and support U.S. businesses, we must be sure that the STB is fully staffed and comprised of members that will make decisions based on current economic realities and founded on free market solutions.” Further, it states, to ensure the board is “a fair and unbiased arbiter of disputes,” the coalition members “strongly discourage naming rail industry veterans to the Board, especially as Chair.”
ISRI continues its push for filling the STB vacancies and revoking the ferrous scrap exemption. Transportation was one of the key issues members addressed when speaking with their senators and representatives and their staffs during the ReMA Fly-In on Capitol Hill Jan. 31.
One sign of light at the end of the tunnel came March 2, when President Trump proposed nominating Patrick J. Fuchs and Michelle A. Schultz to the Surface Transportation Board for five-year terms. Fuchs is a former Senate staff member; Schultz is a deputy general counsel at the Southeastern Pennsylvania Transportation Authority.
Seeking Solutions
For many scrap shippers, solutions to their freight rail problems are not apparent, especially given the ferrous scrap exemption and the current state of the STB. “The way things are structured currently, we’re reactive and adaptive because we have no recourse,” Borsuk says.
Some companies have had success meeting directly with railroads to lay out their concerns and discuss potential fixes. One firm in the Southwest told Johnson it applied for—and received—a refund of improper demurrage charges that totaled hundreds of thousands of dollars. Others—especially small-volume shippers—believe rail service providers will not take them seriously. At SA Recycling, “we have a little more clout than small companies, and the railroads are quite willing to sit down with us,” Knippel says. “Those that have the smallest shipments are at the most mercy and probably see the most effects of poor service.” ISRI’s Rail Task Force also has heard from members who fear retaliation if they complain to their rail carriers.
For businesses that are concerned about or have been unsuccessful resolving problems directly with the railroad, “One of the first things to do is to work through [ISRI],” RCC’s Jensen says. There is truth to the old adage of safety in numbers. Although ReMA can’t address individual companies’ rail concerns directly, it can compile the complaints and evidence it receives and present that information to lawmakers and regulators.
Elliott encourages scrap shippers to “write letters [to] their senators and congresspersons, try to be vocal, and participate as much as possible in the [STB] proceedings.” Even exempt commodity businesses can express their concerns to the STB, he emphasizes. “It’s worth bringing a complaint [to] the board.”
At one time, the STB didn’t realize rail customers were having difficulties because it hadn’t received complaints, RCC’s Jensen says. Businesses that contact the STB have “helped to open the board’s eyes to some of these issues. … When they hear from individuals, they take it very seriously.” (The STB’s Rail Customer and Public Assistance Program can answer questions and address problems, in part by providing “informal mediation efforts” between shippers and railroads, according to its website. Go to www.stb.gov/RailCustomerPublicAssistance.nsf/Request?OpenForm to fill out an online form, or call 866/254-1792 or e-mail rcpa@stb.gov.)
Scrap shippers say they recognize that rail companies are trying to run profitable businesses, too, but the two industries’ operational practices do not always align. “There’s a lot of good people at the railroads,” Knippel says. “I hope we can come together in the end.”
Katie Pyzyk is a contributing writer for Scrap. Editorial Director Rachel H. Pollack contributed to this story.
Delays, rail car shortages, and extra fees have scrap shippers fed up with the freight rail industry. With regulators at a standstill, shippers are trying to tackle their rail problems on their own.