Stopping Short

It seems a simple concept: Order a commodity and have it delivered when the contract specifies. However, recyclers know that ordering rail cars has almost become a game of chance. Cars may show up—but not as many as required. Or, they may show up two days late. Not only does it hurt the recycler, but it has a ripple-down effect.

"We order 20 to 30 cars a week. We’re lucky to get 10," says Rick Gertler, executive vice president and COO at Scrap Metal Services, Burnham, Ill.

Gertler says the problem has been going on for some time but seemed to get more prevalent as 2007 came to an end. "We’re lucky here that we are close enough to the mills to get their cars. Or, we release material by truck."

Like many other recyclers, his concern is not the immediate cost of the rail cars. It is simply getting what he needs, when he needs it.

"While you will hear complaints about cost, most recyclers will pay the cost if they can get the number of cars on the date they want them," says Billy Johnson, director of political affairs for the Institute of Scrap Recycling Industries Inc. (ISRI), Washington. At the association’s October board meeting, ISRI members issued a policy statement asking for redress on many shipping issues, including the apparent lack of availability of rail cars.

Complicating the situation is the Surface Transportation Board (STB), which is supposed to resolve shipping problems. It is not just local recyclers but Fortune 500 companies that say STB is more of a hassle than it is worth.

Not all forms of rail transportation are experiencing shortages. "Containers don’t have those issues," says Brian Kane, president of the rail brokerage group at Pacer Logistics, Dublin, Ohio. While domestic containerized shipping is likely out of the question for heavy materials, lighter or less bulky goods—like aluminum scrap—could move in containerized units. Containers also could work for shipments going overseas.

Containers must be properly blocked and braced, and the uneven, heavy nature of ferrous scrap can rule out containers for shipping some grades.

The gondola shortage is felt at both ends of the rail line. Scrap buyers get nailed by rail inefficiencies, too. Many mills want to run efficient, just-in-time operations. It terrifies a steel or aluminum mill manager when supplies of feedstock from recyclers dwindle to a day or two. Now, many mills find themselves forced to stockpile against shipping delays.

"Availability of gondolas is affected by surges in other industries," notes Dennis Wilmot, president of WT&L Corp., a logistics firm in Aurora, Ohio. In addition to peak agricultural or coal-fired power plant seasons, growth in exports has caused temporary displacements. "A boom in exports could mean gondolas are more available on the coast," he explains.

ISRI places capacity near the top of its priority list. According to a report ISRI released, improving the nation’s rail service by increasing capacity, reducing congestion and improving service is imperative for the U.S. scrap recycling industry and U.S. manufacturing.

"We have a rail car shortage, and it is a persistent problem," Johnson says. For recyclers, it is not a seasonal situation as it is for citrus growers or grain farmers. "It’s all the time," he says.

Johnson says ISRI sees reluctance on the part of the rail industry to invest in new gondolas, boxcars and power units (locomotives) to improve the situation.

"Scrap is a commodity business. Prices go up, prices go down. When you can’t depend on how to get material in and out on time, you have a problem," Johnson says.

When the railroad industry was largely deregulated, the STB was created to protect rail users by addressing rail service issues and complaints from rail shippers. However, Johnson and many others say they feel STB has been ineffective in this duty. Bringing a case to the STB is too burdensome for shippers since its costs are extremely high and the process normally takes more than a year to complete. Moreover, the remedies provided by the STB have not always been helpful or effective. A more accessible and shipper-friendly remedy process is needed, Johnson says.

It costs an average $173,000 to bring a simple case in front of STB. "On top of that, the opinions rendered are overwhelmingly favorable to the railroads and not the shippers," Johnson says.

ISRI says it will work with rail shippers and rail shipping coalitions to advance federal legislation and other efforts that support removing the anticompetitive protections afforded to the railroads and which streamlines the STB’s appeals process so that it is more accessible and less burdensome in both time and money for rail shippers.

Wilmot agrees with the ISRI stance. "They (STB) have a very cumbersome and very laborious process," he says.

"If there are significant questions about rates, and you need a remedy, this is not the process," Wilmot continues. "It obviates anyone’s ability to pursue a remedy for rate action."

Wilmot notes that the STB covers only certain commodities. Iron and steel are not covered. However, nonferrous materials are under its purview.

Among the proposed pieces of legislation are the Railroad Antitrust Enforcement Act of 2007 and the Railroad Competition and Service Improvement Act of 2007. Johnson notes that ISRI has no formal position on either, though it supports elements in both.

The antitrust measure came out of Senate committee unanimously. If it passes the Senate, which is possible but not guaranteed, it will go to the House where it is likely to pass. However, President George W. Bush is likely to veto the measure on ideological grounds, leaving recyclers in the lurch.

Meanwhile, recyclers must deal with the daily realities of supply and cost. Gertler’s answer is simple. "We call them daily. We don’t take ‘No’ for an answer."

Scrap Metal Services is fortunate in being close to many of its customers. The railroad would rather drop cars back at their nearby yard than haul them empty to a location farther into the country.

Kane questions whether many of the issues recyclers have are really because of a shortage of rail cars. "Most of the issues are not flat-out shortages. Rather, they are cars in the wrong places or out of sequence," he says.

Gertler says he thinks that some of the problem is caused by certain mills, with their just-in-time programs. He reasons that mills figure it cheaper to store stock in the rail cars than it is to off-load scrap, store it, and then move it again to their furnaces. "If a mill has 200 or 300 cars, that takes a lot of capacity out of the system," Gertler points out.

The general consensus is that the cost of rail cars went up in December and, with the winter weather affecting everything from car traffic to throwing switches in rail yards, both movement and supply will remain tight for the rest of the winter. Wilmot sees a continued tight market for rail cars over the next several months. "Given a typical January, we should see tightening of supply that will continue into February," Wilmot says.

"Supply is not going to improve, in any case," he says, adding that he sees the situation staying relatively the same or tighter over the next four or five months.

There may be some relief on the coasts. According to the National Retail Federation (www.nrf.com) and Global Insight, traffic at the nation’s major retail container ports dropped below last year’s levels for the fourth month in a row in November 2007. "The slow pace of container traffic growth is forecast to continue due to weakness in the U.S. economy," Global Insight Economist Paul Bingham says. "All covered U.S. ports are operating without congestion from the harbors to the gates and are rated low for congestion through spring." Global Insight covers North and South America, Europe, Africa, the Middle East and Asia.

"Retailers are carefully managing their inventories so that they won’t be forced into unplanned discounts," NRF Vice President for Supply Chain and Customs Policy Jonathan Gold says. "Matching supply to demand is a basic principle of sound business practices." Fortunately for them, stocking shelves can be planned on a weekly or monthly basis—not daily or hourly as it is with scrap.

October is traditionally the peak month of the year as retailers stock up for the holiday season, but the figures indicate September as the peak month for 2007.

November was estimated at 1.36 million TEU (20-foot equivalent unit), down 3.5 percent from a year ago. If the estimate holds true when actual numbers come in, it will mark the fourth month in a row that cargo failed to meet last year’s levels. (August was down 1.4 percent from August 2006 and September was down 1.9 percent from September 2006.)

Volume will continue to trend downward through February, traditionally the slowest month of the year, but levels should be above last year in most months. December is forecast at 1.34 million TEU, up 2.6 percent from December 2006, and January 2008 is forecast at 1.31 million TEU, up 1.1 percent from January 2007. February 2008 is forecast at 1.23 million TEU, down 6.1 percent from February 2007. March 2008 is forecast at 1.35 million TEU, up 6 percent from March 2007, and April 2008 is forecast at 1.43 million TEU, up 7.8 percent from April 2007.

All U.S. ports covered by Port Tracker—Los Angeles/Long Beach; Oakland, Calif., Tacoma, Wash.; and Seattle on the West Coast, and New York/New Jersey; Hampton Roads, Va.; Charleston, S.C.; and Savannah, Ga., on the East Coast, and Houston on the Gulf Coast—were rated "low" for congestion going into December, the same as the previous month.

ISRI’s Johnson says that most recyclers are willing to swallow higher costs—if only they can get the number of cars they require delivered to their siding on time.

One answer to the supply end is to purchase rolling stock for your own account.

Wilmot says it can be worthwhile for a company to own its own cars. "Owning outright or leasing gives you the guarantee of supply," he says. While you will have control of availability, you will be subject to the same issues with car movement that any rail shipment has in the winter.

Another benefit to owning your own cars is you can assure availability of the right kind of car. Wilmot notes that a company shipping lighter material might want to go with a taller, 4,000-ton flat-bottom gondola that can handle 40 percent more material. Since weight is not a limitation, the recycler can ship more material.

There are two kickers here. One is that a new gondola will cost about $125,000. A second is that it takes a long time to turn a car. On average, Johnson says, it takes six weeks for a gondola to make a round trip. So, a car loaded in Ohio and sent to Alabama in early February will not be back home for reuse until mid-March.

On top of that are the paper barriers. A short-run shipment, say, from Chattanooga, Tenn., to a mill in Georgia, will entail several expensive surcharges as the car goes from one short line to another. "In some cases, it costs as much for the surcharge as it does to ship the material," Johnson notes. While ISRI does not want all surcharges killed, it does ask for them to be less outrageous.

Gertler has looked at the possibility of purchasing rail cars for the family business. "For short, one-line hauls like ours, we can’t justify something like that yet," he says. "We’re still too small."

Johnson concludes, "We’re not trying to run the railroad or tell them how to run their business. Just get us the cars, and get them on time, and we will be happy."

The author is a contributing editor to Recycling Today and can be contacted at curt@curtharler.com.