Rising Fuel Costs: Who's Paying?

As the price of petroleum has risen, the increased costs have been spread around so that no one gets caught bearing too much of the load.

When fuel prices go up, margins go down. That about sums it up—at least in a general sense. However, when you get down to the particulars, there are all kinds of subtle permutations. For instance, do rising fuel prices affect trucking, railroad, and barge companies the same way? Do they, in turn, pass these increases on to recyclers in the same way? Do rising fuel prices make trucking any less attractive to recyclers? Is the impact of these increases any different for recyclers who own their own fleets as opposed to those who rely on external transportation?

To get some perspective on this subject, we spoke to representatives from the trucking, rail and barge industries, a broker who deals with all three, plus some recyclers.

A VIEW FROM THE TRUCK CAB

“I don’t think anybody expected these prices to stay high for so long,” says Gary Carrocce, vice president, operations, R & J Trucking Inc., Boardman, Ohio. “We’re getting to the prime season when fuel prices should be coming down. Prior to last October, fuel was about 15% of our operating cost. Now it’s 21% to 22%.”

Carrocce says he bases his surcharges, which average about 6%, on the weekly prices set by the Department of Energy. “Back on November 29, 1999, the price per gallon of diesel fuel was $1.30. On May 22 it was $1.43. Last year, the price per barrel was $11. We thought it would drop to $23, but, at the moment it’s at $30.33.”

Exacerbating the situation, Carrocce says, is the driver shortage. “Everybody is competing for drivers, so we have to provide higher wages and more benefits,” he notes.

He adds that he sees his recycler customers building the increased rates into their pricing. He says that since all modes of transportation are affected by the price increases, he doesn’t see how that is making trucking any less attractive as the first choice for recyclers. When asked whether the higher cost of fuel has caused him to manage logistics any more efficiently, he replies, “for many years we’ve had to manage our logistics carefully.”

Pat McHenry, transportation advisor, Puget Sound Truck Lines Inc., Spokane, Wash., points out that fluctuations in fuel prices don’t take place in a vacuum. “Basically, when business is good, price is not an option for supplies who have to ship,” McHenry says. “When business is down, then suppliers shop to find the cheapest price. We sell service. Those who want the service stay with us. Others shop around.”

McHenry says that, in talking to other trucking companies, he finds that many are turning their trucks back to the dealers since they can’t run them, both because of the fuel increases and the driver shortage. “The real problem will be in the [late] spring,” he says. “Usually, it’s slow between January and April, but this year it’s been busier than usual. The people who use us all of the time, we take care of first. And we’re dropping accounts that are not profitable.”

What this implies for the recycler, McHenry adds, is that the law of supply and demand might continue to keep trucking prices up, due to a shortage of trucks, as well as the fuel surcharge, which, at Puget Sound Truck Lines, is currently 5%. McHenry also says that his company has also been managing logistics for a long time, such as keeping trucks full, so there is no real change there. “We do think that the fuel prices seem to be leveling off,” he says.

Although most of the transportation specialists interviewed report that they put their price increases into temporary surcharges, Carmen Mormino, executive vice president, Jack Gray Transport Inc., Gary, Ind., says, “We just play it by ear and put the increases into our rates, from about 4% to 7%, depending upon the route and the volumes. When fuel goes back down we’re willing to discuss adjustments. Those that have material that can’t be trucked are staying with us. We can compete with rail up to a certain point, but beyond that, people are going to ship by rail anyway.”

In terms of future fuel prices, Mormino says, “I see prices going down a little bit, but not where they were last year. I don’t see any miracles happen. The way I’ve seen it with the oil [companies] is that they bring the price way up, then drop it a little bit, and get what they wanted anyway. What it comes down to is plain and simple. If we don’t make money we can’t survive and goods don’t get moved.”

RAIL VOLUME UP

Tom White, a spokesperson with the Association of American Railroads, Washington, reports that “overall, our waste and scrap material category is up 8% this year, and most of that is probably going to be scrap steel.” He adds, however, that this category isn’t broken down by material, and includes a wide range of materials—everything from scrap paper to scrap steel to plastic to recycled hazardous waste.

Whether this increase is caused by recyclers shifting from truck to rail because of the fuel prices, White responds, “It’s hard to say. It may be because the steel market is up. Coke is up 8%, about 7% of that in the eastern steel processing area.” White adds that, since he’s talking from a national association perspective, he doesn’t have a feel for how the dynamics of fuel price changes are affecting individual railroads.

Susan Bland, public relations manager with Norfolk Southern Corp. (NS), Norfolk, Va., reports that NS has recently gone through the most complicated merger in railway history. In brief, Norfolk and CSX have received permission to roughly split the operations formerly belonging to Conrail. After some initial adjustments, service has now greatly improved, Bland says. Those who ship by rail continue to do so, and Norfolk Southern is attracting new customers, she says. But she attributes this more to the consolidation changes at the company rather than fuel rates.

Fuel rates have gone up for rail operators as well, however. “About a year ago fuel for rail was about 45 cents per gallon, and that has trended up to 75 cents to 89 cents per gallon,” says Bland. “These are the public rates. As private contracts come up, the fuel increases are factored in.”

Bland says she does not have a sense of what fuel prices will do the rest of the year. “It depends where you are,” she says. “We operate in 22 states, as well as Canada, and we seek ways to bring down our costs any way we can. We do not hedge and literally look at the price of fuel every day to take advantage of whatever might be available.”

Bland says that NS sometimes has arrangements with barges and sometimes competes with them, but does not have a sense of exactly how the price increases affect them. What she does say, however, is, “fuel price increases affect everybody. It’s how you put your plan together to deal with it that matters.”

ROLLING DOWN THE RIVER

Joe Claes, president, Robert Miller & Associates, St. Louis, says that supply and demand plays a greater role in determining whether people will use his barge service or not. “There is very little relationship between what people are willing to pay me and what it costs me to ship it,” Claes says. “In the fall, they will pay three times as much as they do in the spring.”

That doesn’t mean that fuel price increases don’t hurt Claes’ company, however. “About a year ago, we were paying an average fuel price of 50 cents per gallon, and now it’s 80 to 85 cents per gallon. That translates to an increase of $800 to $900 for us when scrap is shipped from New Orleans to St. Louis. It takes 8,000 gallons a day to barge between those two cities, so fuel is a significant part of our operations.”

When asked whether the rising fuel costs cause him to manage his logistics more closely, Claes’ response is, “You bet! If you can put a surcharge on, it’s never enough. People don’t want to pay any more than they have to. They feel you factored the increases into your rates. It leaves you always playing catch-up.”

Terry May, marketing director with Celtic Marine Corp., Baton Rouge, La., is a broker who works directly with all three modes of transportation—trucking, rail and barge. His primary business is barge, however, so he can add a few additional thoughts on that subject.

“We’re very much affected by increased fuel costs that have to be passed along to the customers,” May says. “Sometimes the customers are willing and sometimes unwilling to absorb them. Contractually, barge companies may not have the instrument or opportunity to pass on these costs. Sometimes the contracts are made prior to the escalating fuel prices. It’s often a bit of a juggling act to pass on costs that were anticipated by either them or their users.”

There are basically two kinds of barge companies in this regard,” May says—the barge companies that own towboats and those that don’t. “There are very dynamic numbers that can change from one day to the next, and it’s a much tougher situation for those companies without towboats.”

The companies with towboats can better manage the situation, he says, because they are not at the mercy of a larger company that may want to exploit the situation to increase their margins. At best, the companies without towboats are dealing with another company as they try to manage their fuel costs.

In some respects this situation is analogous to recyclers who have their own truck fleets. They are in a little better situation than are those who have to depend upon external trucking.

May reports that, for the most part, all three segments of the transportation industry are relying upon temporary surcharges that keep on being renewed, as needed, as opposed to rate increases. “What I’ve seen in the barge industry are surcharges on the average of 5% to 8%, but nothing as high as 8%,” May says. “And I have heard surcharges going as high as 10% for trucking.”

In terms of what sector of transportation is most affected by fuel increases, May says, “the trucker is out there every day at the fuel pump. He’s most affected.” He says tow boats can buy up to 40,000 gallons at a time for one price, and that can last them four to five days. “Railroads are in better shape for they can buy much more,” May says. “Railroads are relatively large and might be buying in advance and hedging prices.”

MAKING THE CHOICES

Whether fuel prices are stable or rising, scrap facility operators and other recyclers have to make shipping choices.

“We’re experiencing a 30% trucking surcharge,” says Earl J. Weber Jr., general manager, Garden Street Iron & Metal Inc., Cincinnati. “We have shipped some by rail before, but now are leaving rail alone because of poor service. And the mills we work with are relatively close, so we’d jus as soon stick with trucks.”

Marc Sidell, of Seattle Iron & Metals Corp., Seattle, uses both outside trucks as well as his own fleet. “The outside trucking companies are passing on surcharges to us of about $200 more per load. With our own trucks, we charge our customers about a dollar more a ton.”

Sidell says his fleet is used for short distances, and he has not been particularly affected by changes in rail pricing, for short or long runs, which have not been that significant for him.

Sidell is not pessimistic about the future of fuel prices. “Some people are saying fuel prices will go up to $3 a gallon. I don’t think so. In fact, I think they’re actually starting to go down.”

The increased prices have not affected the logistics of his operation, he says. “We still have to ship goods, so we still do the same things we’ve always done.”

Jay Robinovitz, general manager of the Schnitzer Steel Industries facility in Tacoma, Wash., says, “Rising fuel prices have certainly had an impact on transportation for both inbound and outbound [shipments at] our recycling facilities. We’ve had surcharges from trucking, rail, and barges. ”

Robinovitz says his company uses both external trucking and its own fleet. “Fuel costs continue to elevate all of our transportation and operations costs, but we can control our own fleet a little better, and have a better chance of avoiding wide price fluctuations and gouging.”

At this point, Robinovitz says, “We believe material is moving. It’s just narrowing the margin across the boards. We’re shipping the same way as before, but just paying more.” The company is trying to manage logistics more efficiently, but a phenomenon like these fuel increases really can’t be managed away.

In terms of what’s going to happen with fuel prices in the second half of the year, Robinovitz says he doesn’t want to speculate. But he certainly speaks for all recyclers when he says, “I can only hope prices will decline.” RT

The author is a freelance business and technical writer.

June 2000
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