By Mark R. Smith, Contributing Writer
Like most industries, rail has its share of issues to address: cost controls, supply chain issues, worker availability, the decline of coal, an interesting juxtaposition with the trucking industry and the ubiquitous issue of competition.
Still, long-term, demand for freight transportation – for commodities other than coal – is expected to grow as the population and economy expand. The growth rate, which is projected by most economists to rise about two percent annually, supports the U.S. Department of Transportation estimate of total freight demand growth of 35 percent by 2040.
By the numbers, the Washington, D.C.-based Association of American Railroads promotes an October 2018 study from Towson University’s Regional Economic Studies Institute. It revealed that, in 2017, the operations and capital investment of America’s major freight railroads supported approximately 1.1 million jobs (nearly eight jobs for every railroad job), nearly $219 billion in economic output and $71 billion in wages.
The study also stated that the railroads generated nearly $26 billion in tax revenues and summarized that millions of Americans work in industries that are more competitive in the global economy due to the affordability and productivity of America’s freight railroads.
What Josh Putterman, managing director of Bluejay Advisors of Jacksonville, FL, is seeing, “still,” he said, “is great demand for transportation services and still much pressure on the trucking industry. [While] it may have slowed during recent months, after a 2018 that was the best year ever in trucking industry, [there were] comparable results in 2021.”
With trucking being rail’s primary competitor, Putterman said, “Railroads are taking advantage of the tight capacity in the trucking market by increasing their prices, since its players can see the overall demand for shipping services.”
“Volume, week over week and year over year, is actually down by a couple of percentage points, depending on the commodity,” he said. “Right now, coal is going gangbusters on a year-over-year basis, for instance, but intermodal is down compared to the very high increases we saw in a strong 2021.”
The biggest theme in transportation last year was the well-documented congestion in the nation’s ports, “most notably at L.A. and Long Beach. Together, they’re larger than most of the east coast ports combined,” said Putterman. “That backup was driven by the reopening of much of the economy, as well as the upsurge in demand and replenishment of inventory. ”
“Today, however,” he said, “it’s not nearly as backed up as it was.”
But what’s the flip side? “While some of that [congestion] from L.A. and Long Beach is improving, it is shifting to the east coast, primarily to Charleston and Savannah,” Putterman said. “They’re now getting backups similar to those [that developed on the west coast], though not nearly as severe.”
What remains to be seen is the effect of the war in Ukraine, the impacts of a reduced trade with Russia and the shift in the supply chain, “which I think will rear its head, primarily in the agriculture and energy sectors,” he said.
Andrew Ralston, head of economic development at Tulsa Ports, explained the relationship between shipping via barge and rail, as it relates to his location.
“We’re two separate geographic locations, with inland barge and rail ports connected to industrial parks. We ship two million tons of agricultural and steel products via barge, and have increased our rail shipments from 10,000 to 12,000 cars per year from our Catoosa port in the past five years.”
As for the effect of the COVID-19 shutdown on industry, Ralston said they weren’t as heavy as a more casual observer might think. “Even given the recent supply chain issues, via rail we’ve not been as affected since we don’t currently deal with intermodal containers (used for importing/exporting). We mainly handle bulk commodities including grain, chemicals for agriculture and steel (rolled and beamed).”
He said Tulsa Ports’ greatest opportunity for growth will be on the intermodal side. “The ability to receive and export intermodal containers would increase rail traffic by thousands of cars per year,” said Ralston. “This current gap is due to administrative issues, rather than lack of infrastructure.”
“In other words,” he said, “our clients that are going intermodal are trucking in containers to and from Kansas City and Dallas. If a company from Tulsa is shipping outbound or inbound, it will primarily go by truck to those two rail hubs.”
If this all sounds like its time for an upgrade, it is. “So,” Ralston said, “we’re working to build supporting infrastructure for unit trains and intermodal shipments to come in and out of our ports. We’re working with railroads and shipping lines to offer the opportunity for container flow. Because we’re a smaller market, we’d like to eventually be an intermediate stop on the intermodal network and help alleviate the issues we’re seeing today.”
While the nation’s much-publicized supply chain issues have not affected Tulsa Ports, “there are other issues,” he said. “Like many ports and industrial parks, workforce availability (including truck drivers) is something we are spending a lot of time and effort on.”
Once barges and rail cars get in, “they transload to rail and truck, and the product is shipped to up to 23 states,” said Ralston. “If the client is shipping domestically, they typically ship by truck because it’s faster, but often more expensive. They opt for rail when shipping to and from the coasts, especially for heavy commodities and intermodal shipments.”
The evolving needs at Tulsa Ports are resulting in action: underway is its large rail project at the Tulsa Port of Inola, a newly established 2,200-acre rail site and industrial park that was acquired in 2019. A federal INFRA-grant through the U.S. Department of Transportation made the project possible, with monetary matches from public and private partners.
It’s going out-to-bid soon and “we expect the total cost to construct it will be north of $12 million,” said Ralston, noting the rail infrastructure already has its first client. That’s Sofidel America, a tissue paper manufacturer, which built a 1.8 million-square-foot warehouse, cost $400 million and employs 380 workers. The project will cover roughly 5.5 miles of rail and will connect to Union Pacific and be operated by WATCO.
Such projects are also rising in other regions of the U.S. as the strength of the rail industry is bolstering various sectors, “such as electric vehicles or battery projects, particularly in the southeast,” said Mark Williams, president of the Columbia, S.C.-based Strategic Development Group (SDG). “That progress is dictated by locations where original equipment manufacturers want to manufacture batteries and assemble cars.”
Exactly that will happen on the Memphis Regional Megasite, where Ford Motor Co. and SK Innovation will build the West Tennessee Blue Oval City project, as well as another project in Glendale, Ky.; all told, they will receive $11.4 billion of investment.
In a separate deal, the $1.29 billion Toyota Battery Manufacturing, North Carolina will rise in the Greensboro-Randolph area. “[They’re] served completely by rail,” said Williams, who noted that exactly how much a project is served by rail, as opposed to trucks, varies greatly.
“Different sectors have different logistics for inbound and outbound,” he said. “Also, it’s a struggle to find industrial sites of larger than 100 acres for such projects. It takes five to eight years for the seller to bring them to market due to infrastructure requirements – and then once a site is sold, the market gets tight again.”
And the looks of potential locations can be deceiving. “Out west and sometimes even in the southeast, there appear to be wide open spaces available,” said Williams, who recently wrote Corporate Site Selection and Economic Development: A 30-Year Perspective, though in many cases the government actually owns much of the land. And often, it’s not usable. “Developers have to avoid wetlands, topography issues, endangered species,” etc.
What the industry needs is “a pipeline of sites to eliminate those site supply gaps” in the market, he said, “but that’s not happening as often as needed. Of course, they also have to be feasible for a rail spur, with the right topography, and road and utility infrastructure. Those selling points are critical.”
But even with the issues in finding land, SDG had plenty of work. Today, the company is working on a large project in the northeast “and rail will be critical to its success,” said Williams, adding that it’s also “working on similar projects in Arizona, Texas, South Carolina and other states. So progress is being made and the demand for rail is still strong.”
That demand is being acknowledged by the big players as well as the short lines. Ean Johnson is vice president of economic development for Denver-based OmniTrax, which falls into the latter category: the short line operator runs 23 properties around the U.S. Its locations connect with Class 1 systems like CSX, Norfolk Southern, Union Pacific and BNSF, “and with Class 2’s, which are larger short rails with bigger footprints, like Willing & Lake Erie and Iowa Interstate,” he said.
Johnson said OmniTrax owns most of its properties, with some under lease and 70 percent dual-service, meaning that they can connect to more than one Class 1. “We short lines pride ourselves on being hyperlocalized and working with local partners,” he said, “in a way that Class 1 railroads might struggle to, due to their larger footprints.”
He thinks the success of the rail industry tends to parallel industrial development, which is one of today’s thriving sectors. “Many projects that were in the tire-kicking phase a few years ago are now happening,” he said. “Given the Covid-19 pandemic, the demand for industrial space has risen, so it’s simply a matter of finding a space in the right place with proper infrastructure.”
That’s meant that some potential users are looking more at rail than they were a few years ago. “We’re seeing upticks from various markets, including steel and grain, and EV battery space for vehicles,” he said, “but we expect the market to grow for other applications, too.”
While Covid-19-induced supply chain issues are effecting the market, in this case it’s in a good way. “Demand for rail has risen due to those very supply chain issues,” he said. “It has popped up as an option that many companies want to explore, which is also due to trucking industry issues such as lack of drivers, gasoline prices, hours of service and environmental concerns.”
Speaking of environmental concerns, Johnson feels that rail is part of that answer, too.
“You can move 500 tons of product for 500 miles on one gallon of fuel,” he said, “so rail is fitting right into the environmental footprint of many companies.”
Again noting the importance of keeping that development pipeline flowing was Chris Ingraham, group vice president of industrial developments for Atlanta-based Norfolk Southern. What he noticed most about today’s market is how the size of projects such the aforementioned has significantly grown.
“Capital investment in projects used to rarely eclipse $1 billion,” he said, “but now we have a dozen or more that are north of that figure.”
“Steel, aluminum and batteries for electric cars (sound familiar?) are the hottest markets,” Ingraham said, adding that he thinks “every major car manufacturer is looking into setting up an electric battery factory. We’re figuring out how these potential customers will be serviced now.”
He pointed out that most plants that are owned by domestically-based auto manufacturers and have rail access, while the foreign manufacturers usually do not. “That’s because the foreign manufacturers have difficulty getting rail to the inbound assembly line section of the plant. It’s much easier to get parts from Detroit or the elsewhere in the Midwest.”
Two other hot players in today’s market, the steel and aluminum sectors, are in play more due to environmental factors.
“Sustainability is very important to a plant’s customers. Remember, many of the older mills were integrated steel facilities with blast furnaces,” said Ingraham. “Today, a huge electrical short is created to melt metal, which leaves a much smaller carbon footprint. There are several such facilities in the works.”
Like Ingraham and others, Putterman thinks all of the railroads are doing quite well today, though challenges remain. “One is that the Surface Transportation Board (STB), led by its chair, Martin Oberman, has been more challenging to the Class 1 railroads than any other chair in decades.
“Oberman is taking a much keener interest in rail,” said Putterman. “The STB has a number of ongoing proceedings as they address the concern that the Class 1 railroads are increasing profits without growing volumes sufficiently.”
Bio: Odenton, Maryland-based Mark R. Smith joined Expansion Solutions after having written about site selection among the vast number of topics he has covered in the business universe. That part of his career began in 1993 when he joined The Daily Record, a Baltimore business and legal publication, where he delved into the worlds of economic development and commercial real estate, among numerous other industries; in 2003, he was named editor-in-chief of The Business Monthly, another Maryland publication that covers the scene in the Baltimore-Washington Corridor counties.
Concurrently, he’s written at length about the film and video industry for a variety of publications, and about his other loves, including music, sports and leisure.