By Mark R. Smith, Contributing Writer
For Mike Mullis, knowing when to pop The Big Question when advising a client during the site selection process is very simple.
“The first question a site selector asks any company,” said Mullis, president of Memphis-based J.M. Mullis Inc., is “Do you really need onsite rail?”
“If they say, ‘It would be nice, but it’s not a mandate,’” he said, “they don’t really need it. Many companies are under the general impression that rail saves transportation costs, but that’s not always true.”
That’s because many distribution companies don’t need rail, “They just need easy highway access to deliver their products in days or maybe in hours,” Mullis said.
“The companies that use rail produce and sell voluminous products that are often very heavy,” he said. “For inbound source materials or outbound products, a company needs to be outside of an approximate 500-mile radius to justify rail costs; otherwise it’s cheaper to truck it and often quicker, too.”
While trucking is also a key part of the transportation equation, the economic impact of the rail industry in dramatic. According to the most current information posted on the Association of American Railroads’ website, an October 2018 study from Towson University’s Regional Economic Studies Institute found that, in 2017 alone, the operations and capital investment of America’s major freight railroads that use the nation’s 140,000 miles of track supported nearly $219 billion in economic output.
The industry also supports approximately 1.1 million jobs (nearly eight jobs for every railroad job) and $71 billion in wages, in addition to generating nearly $26 billion in tax revenues.
Another point of discussion today is that companies and consultants are looking much harder at short line rail systems (as in privately-owned), as opposed to the Class I rail systems of the world.
“There are about 600 short systems across the U.S. and some have multiple systems in multiple states,” said Mullis. “They give higher service reliability for less cost, as well as connect to one or more Class I rail systems for North American service deliveries.”
And that relationship is reciprocal. “The Class I systems like the short line systems since they feed rail car volumes to the Class I systems,” he said. “That means better connectivity in a more expedient fashion, as most rail cars are leased and can easily be transferred.”
Mullis gave the example of the BMW factory in Spartanburg, South Carolina, which loads dedicated unit trains with 50-100 cars each that connect directly to the Port of Charleston. As for the rail service at the world’s deep water ports, despite current perceptions in some quarters of a slow economy, they’re reporting business levels at all-time highs.
The reason for the big numbers come down to the interpretations of two of today’s big social issues.
“We’re in a pandemic, not a recession,” he said, and the normal sufficient quantities of products not being produced are often more related to COVID-19-related staffing or raw material shortages. “Companies can’t produce enough product due to the quarantine or because they can’t get help,” he said, “since workers are often making more in government payouts than they did when they were working.”
Another factor contributing to rail’s success is that it’s very hard to find qualified CDL (commercial driver’s license) truck drivers. “One of the greatest shortages we have in the transportation market is finding qualified CDL truck drivers who want to work,” he said. “It’s good pay, but they might not be home for weeks. That’s hard on the drivers and hard on their families.”
Still, that market is evolving. “We’re seeing new trends toward female drivers who often tolerate the challenge since it’s for good money, among other reasons. Ten years ago, you wouldn’t have seen that,” said Mullis. “This shortage is a multi-decade-old problem that’s still getting worse.”
Another factor in the shortage is that consistent rail service lessens the need for truck drivers in North America, as well as globally. “Also, know that federal regulations dictate that drivers can only drive a limited number of hours per day,” he said. “That cuts into their ability to earn, so we’re seeing dual drivers.”
Echoing the comments of Mullis concerning the truck driver shortage was Chris Ingraham, group vice president of industrial development for Norfolk, Virginia-based Norfolk Southern, who also said that it is amplifying the demand for other types of rail service.
“When referring to the rail side, there are two segments to consider,” said Ingraham: Intermodal, where containers or trailers are transported on a flat car; and Direct Rail Service, where origin and destinations are located on a customer’s property, such as at an auto assembly plant, paper mill or a steel facility. The trailers or containers are transported their first and last mile via truck, with the rail transport in the middle.
“Norfolk Southern employs this mode when servicing its largest domestic customers,” said Ingraham, such as Amazon, FedEx and UPS, as well as Hunt and The Hub Group. “Increases in online shopping have driven up demand for intermodal service.”
He said Norfolk Southern mainly ships products from five commodity groups: automotive/intermodal (for finished vehicles); agriculture and forest products; chemicals; metals and aggregated construction materials (like cement); and coal. While those sectors have been strong of late, Ingraham is expecting a boost in the bottom line during the next year as the economy continues to improve as the world works its way out of the pandemic.
“I think things will bust loose,” he said. “Anything related to consumer products are definitely hot, like appliances, washing machines, dryers and refrigerators, and cars. Increased online orders are affecting the demand for shipping boxes and therefore bosting brown paper production. Plastics and alcohol are also doing well, especially hard seltzers.”
However, the fizz has gone flat in the soda market, since people have not been visiting restaurants in the usual numbers.
Consumers have been buying more soda in cans, but “there is also an aluminum can shortage,” he said, “since people are buying so many in stores instead of when dining out.”
So while the industrial side of the market is hopping, Ingraham noted that the service and office sectors are suffering due to the lower levels of activity.
Still, going forward, “The only thing we’re afraid of seeing,” he said, “is a second wave of COVID-19 or having the economy shut down again.”
Strategic Development Group, of Columbia, S.C., is currently engaged by Class 1 railroads and investor-owned utilities to evaluate the development potential of industrial sites. President Mark Williams said that the rail market “is evolving as always, but know that the companies that haul heavy, bulky product still rely on rail. It’s less expensive, since freight per ton is much more economical, and even greener, than via truck.”
But like most markets, it’s evolving. In recent years, major railroads hauled significant amounts of coal to fire many of the nation’s electricity generating stations; but when those facilities began a trend of closure for green alternatives, a substantial block of rail business dissipated.
What to do? Invest more heavily in an existing market that held greater potential.
“At that time, major railroads intensified business development toward new markets,” Williams said, “including pursuing new business [from] automobile assembly facilities of Mazda/Toyota, in Huntsville, Alabama; and Tesla, in Austin, Texas.”
Today, development of inland ports served by Class I railroads for that market is active. “Rail connection to inland ports, such as in Greer, and Dillon, South Carolina, is becoming more frequent,” he said. “BMW, for example, sends cars assembled at its Greer facility to the Port of Charleston (S.C.) for export using Norfolk Southern’s service. Transportation of cars by rail removes trucks from the road that were previously trucked to the port for export. Not only is that the greener approach,” but it addresses the lack of truck drivers that has challenged the trucking industry.
Of course, the railroads consider the rates they can charge to haul various commodities; transporting most chemicals, for example, generates more revenue per rail car than wood chips and mean higher margins.
“Growth of some industrial sectors are hot now, like batteries for electric vehicles,” said Williams. “Railroads are pursuing business growth opportunities to and fortunately, they’re quite vast. They want to haul heavy, bulky items like containerized cargo, steel, heavy vehicles, cement and farm commodities and various other products.”
That’s especially true when addressing long distances. “Rail makes the best option,” he said. “The advantage of trucks over rail is for the last mile which isn’t always available by rail. But clients are always comparing prices between the two.”
Also noting the decline of the coal market and how to buttress that part of the business was Colby Tanner, assistant vice president, economic development for Fort Worth, Texas-based BNSF Railway, who pointed out the frequency with which raw materials are carried on its lines. “Our Industrial Products segment transports large quantities of what’s needed to build the infrastructure of cities,” be it steel, cement, lumber or other building materials.
“Think of what materials a market, such as Dallas-Fort Worth, needs to grow,” said Tanner. “It’s predominately moved by rail and it’s the most efficient way to transport it. Our Industrial Products customers can take full advantage of our services when they locate at one of our logistics centers near growing markets, such as Hudson, Colo., near Denver; Oklahoma City; and the Houston suburb of Cleveland, Texas. They save up to nine months of development time when they lease one of our fully-permitted, customizable sites with rail access at a competitive price.”
For BNSF, Industrial Products is only one part of its business, he said, as the railroad also classifies its services into three other categories: agricultural; consumer goods, such as clothing, food, vacuum cleaners, etc.; and coal. All are profitable sectors, even though that last sector, as discussed, has diminished.
“With coal use on the decline, we have repurposed our coal corridor, especially for our growing intermodal business,” he said. “As an example, we now offer a service between the Pacific Northwest and Texas five days a week, allowing our customers to ship between the ports in Seattle and Portland, as well as the major markets in Texas and Oklahoma.”
Moving with the market is how BNSF plans to keep growing alongside its customers. “It always comes down to cost and time, especially with logistical concerns,” said Tanner. “That’s why most companies commit to working with us, especially when they see the streamlined benefits we can bring to their supply chains.”
As the world works out of the pandemic, he, like Ingraham, pointed to new consumer behaviors that have expedited emerging markets.
“Last year, the pandemic created new habits for consumers buying more products online. Our international service is driven by on-dock loading of international containers at West Coast ports with direct service to our logistics parks, which act as inland ports for major markets near Alliance, Texas; Kansas City, Kansas; and Chicago,” Tanner said. “Such market shifts are why we’ve been investing in our infrastructure, allowing us the flexibility to quickly address changing markets.”
For BNSF, that’s meant investing billions of dollars to maintain its network’s infrastructure and expand capacity at its logistics parks, while expanding customer operations at its logistics centers that are “all located in growing areas of the BNSF network,” which he said is “in the best shape of our 170-year existence. We’re poised and ready for the future.”
“The future of overall rail systems,” Mullis said, “will also revolve, in part, around the convenience and flexibility of the short lines. Short lines cannot typically run over Class I systems, so they’re somewhat confined to where they operate,” he said. “Many of them run less than 100 miles. So they have ‘x’ switching units and ‘x’ employees.”
“A great deal of property across the U.S. has rail access, but not all property has onsite rail service. As long as the economy is brimming, there’s no need to reopen a switch at those locations,” he said.
Also, an increased number of trains “might actually cause backups of the daily high-level main line train movements,” said Mullis. “Up to one-mile onsite tail tracks are frequently required on mainline rail systems to keep those mainlines clear and open for higher speed train movements. The rail service providers want to keep higher volumes of trains moving fast.”
For the foreseeable future, Mullis stated, “The rail market looks really solid, viable and cost-effective.
“It’s a fascinating subject,” he said while adding an even stronger economic forecast. “We don’t see anything that’s going to stop this growing economy, except possibly any issues associated with getting the COVID-19 vaccines distributed with bona fide proof that they work long-term.”
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.