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October 1, 2004

11 Min Read
Wheels of commerce: Sagging under the load

Economic weakness over the last few years fueled labor cutbacks and halted investments in a transportation infrastructure that now struggles to meet the raw material and finished-goods shipping needs of a recovering manufacturing sector.

American railroad companies are hiring workers, buying trains, and building tracks in an effort to meet record demand that has clogged vital arteries in the U.S. goods and raw material transport system.

"We''ve been in a situation here for about the last 11 months," explains John Bromley, a Union Pacific railroad spokesman, "where we''ve had record car loadage week to week and that has caught us shorthanded of train crews, and to a lesser extent, locomotives."

"Cars are up about 11% from [Q2 2003]. Obviously, to move trains you need people, locomotives, and track," says Pat Hiatte, director of corporate communications at railroad company Burlington Northern Santa Fe (BNSF). "In terms of people, we will be hiring about 2300 transportation employees this year."

These moves by the number-one and -two railroad companies respectively in the U.S. in terms of revenue are a direct response to a flood of imports and the first inklings of an economic recovery that have swamped an industry dealing with new work-hour limits for employees, a lowered retirement age, and reduced expectations coming off slower years in 2001 and 2002.

"Going into 2003, we made what turned out to be too conservative an estimate of what our business levels would be," Bromley says, "and we didn''t have the workforce ready to go out and meet what''s turned out to be an upturn in the economy." In response, Union Pacific added 1000 conductors and engineers by August, with plans to hire an additional 1000 before the end of the year. At the start of 2004, the railroad company announced plans for layoffs, but record business, federal regulations that allowed employees with 30 years of service to retire at 60 vs. 65, and on-duty time limited to 12 hours left the company scrambling to meet an influx of goods from China, while domestic demand for commodities, including plastics, increased.

Comparing Q2 2003 to the Q2 2004 at Union Pacific, revenues for chemicals, including resin, were up 9%, the largest jump in any group. For BNSF, industrial products, which include plastics, building products, construction goods, petroleum products, and chemicals, were up 10%. According to the Assn. of American Railroads (AAR), those figures were building off a strong 2003 when plastics accounted for a total volume of 474,000 carloads, weighing 43 million tons and generating $1.3 billion in revenue.

According to the most recent report from AAR, railroads rank a distant second to trucks in terms of intercity freight revenue in the U.S., pulling in 9.5% vs. 80.4%. But the plastics industry is disproportionately reliant on trains, especially for raw material delivery, with approximately 85% of resin originating in the Gulf Coast via rail.

Because of this, shipping costs have been on the rise, but according to Gil Tyckoson, executive director of the American Railway Development Assn., costs have leveled off. "I think rates are pretty much stable," Tyckoson reports. "If anything, they fluctuate with the same percentage as the consumer price index, and with fuel costs going up, [raising rates] is a pretty good idea."

To address some of the cost issues, the railroads have taken steps beyond adding personnel. In its second-quarter earnings report, Union Pacific said it has acquired 750 locomotives on short- and long-term leases and has taken steps to increase train speeds through six Texas routes to 60 mph, up from just 40 mph.

BNSF plans to expand its locomotive fleet by 10% within the year to have 4600 road locomotives by the start of 2005. The company has also added second and third main tracks between Los Angeles and Chicago, as well as lines in Wyoming, Montana, and Nebraska to service the coal industry, which accounted for 43.6% of the tonnage carried by larger railroads in 2003.

As the railroads works to feed the nascent recovery of some U.S. industries with the materials they need, Hiatte hopes for clearer pathways. "The way I like to think of the railroad industry is like blood vessels in the human body," Hiatte says. "The key is to make sure things keep flowing as much as they can-try to move what you have expeditiously." - Tony Deligio

Convoy crunch Trucking screeches to a halt in North America

Transportation in the U.S. has been described by Doug Clark, president of Cargo-Master Inc., a transportation brokerage firm in Dallas, TX, as a mess. "It''s the worst capacity situation in the trucking industry in years," Clark says, citing factors such as a driver shortage, high demand, and even higher fuel prices.

July "Beige Book" survey results from the Federal Reserve''s 12 districts confirm Clark''s assessment. The report disclosed that transportation bottlenecks are increasing and in some places curtailing industrial production. Trucking companies in the Cleveland district are operating near capacity and a Chicago district carrier was turning away business due to a shortage of qualified drivers. St. Louis district construction companies said cement in is short supply because ships that normally carry it are tied up shipping steel. In the Kansas City district, some coal-burning manufacturing plants were considering temporary production cutbacks because railroad congestion had slowed coal deliveries.

Coal is taking a back seat to truck trailers as the prime source of revenue, notes Clark. Some carriers are buying new trucks to replace older equipment but are finding that it can take up to six months for delivery due to demand. In many cases when they get the new equipment, they don''t have drivers. A driver shortage has led to higher wages for drivers, and when driver pay goes up and shipping demand exceeds capacity, the rates go through the roof, Clark explains.

As fuel prices rise, fuel surcharges to customers increase, and many contractual rates set in advance are dropped because demand exceeds supply for trucks. Fuel surcharges are determined by the DOE, but the DOE takes an average nationally, which results in a 50% to 60% disparity in surcharges between places like California and the South. "I''ve never seen a contract that didn''t relate to the DOE in a surcharge. [The truckers] have a legitimate beef that they''re not being compensated for the fuel. Fuel surcharge is an average so some don''t get enough to cover their costs." Clark doesn''t see any improvement for the next couple of years.

AG Edwards'' Donald Braughten noted at a recent conference that the "transportation industry right now is in a stage of transition. Within the next 10 years, demand for carriers will increase by 50% with growth of the economy." Clark predicts this trend "will change our world."

"Railroads are upside down and don''t know when they''ll have their problems fixed. This puts more pressure on ground transportation," Clark says. "UPS pulled their cargo off rails-too much stuff hung up in the switching yards, making things so crowded they can''t get to it."

Currently, Mexican trucks are stopped at the border, but there''s been legislative push to allow Mexican truckers to enter the U.S., which could straighten kinks in cross-border shipping. The proposed legislation was is in congressional committee at press time, and even if implemented, there would be a 90-day transitional period, delaying any relief until 2005 at the earliest.

Jim Swartwood, purchasing manager for custom injection molder Steinwall, Inc. (Coon Rapids, MN) says the resin price increases he''s encountered don''t seem to be related to transportation issues. "What I have seen is [resin] companies having larger minimum orders and surcharges for some deliveries." Swartwood says that ontime shipments of finished goods has not been a problem for Steinwall.

Steve Wiedenbacher, purchasing manager for Mastercraft Companies (Phoenix, AZ) says transportation travails are reflected in higher resin costs. Almost all of the 25-plus letters he''s received this year from resin suppliers announcing price increases mention three factors: rising feedstock costs, higher energy outlays, and costlier shipping rates.

"Some resin suppliers are adding surcharges due to higher transportation costs, on top of the price increases," says Wiedenbacher.

"These surcharges are supposedly temporary. But, as far as difficulty in getting shipments or ontime shipments of resin, there have always been some problems with late shipments. We get daily shipments from Chino, CA, from GE Plastics. There''s been some slowdown if resin has to come from the East.

"We have no problem getting trucks to pick up finished goods because they want our business. But we''re seeing more delays after they pick up and take the pallets to their hub to transfer to other trucks before going to our customers." - Clare Goldsberry

Color-your-own ABS can save costsBulk deliveries of neutral polymer cut transport and other costs, which processors should benefit from

The ABS business is a cost-driven business for polymer suppliers. Unalloyed ABS is now almost just as much a commodity material as polystyrene, so if it can''t improve its margins by product differentiation, greater profits have to come from trimming the business system to the bone.

Western suppliers are now doing what global market leader Chi Mei Corp. (Tainan County, Taiwan) has done for years: stepping out of the expensive business of color compounding and instead supplying bulk quantities of neutral polymer, letting processors do the coloring themselves. BASF (Ludwigshafen, Germany), which recently introduced the ColorFlexx system in Europe together with various partners in the color masterbatch and materials handling equipment business, says that although last year twice as much ABS was sold in precolored form as in neutral, by 2010 the ratio will have more than reversed, to close to 1:3.

That may just sound like a way of shifting the cost burden down the supply chain, and in the short term, that''s probably just what it is. Processors have to invest in new materials handling and dosing equipment, and they have to get used to sets of logistics. But the reasons for suppliers to go down that road are compelling. In recent months, BASF has rationalized its ABS portfolio from 2000 down to 20, and the number will eventually come down to 10. "This reduction in complexity is accompanied by a substantial material cost reduction," it says.

And in the long term, everybody should win. Yes, the lower prices processors will pay for uncolored ABS delivered to silos or in octabins instead of colored compound in sacks will be partly offset by the extra price they have to pay for the color concentrate, but production and logistics will be simpler: coloring at the machine offers greater flexibility, and it should also be possible to cut warehousing costs while reducing lead times.

Dow Chemical (Midland, MI), which earlier introduced the Promatch system for self-coloring several of its thermoplastics, notes that five years ago a color in the appliances market would last for at least one year and producers of small appliances would hardly exceed 10 colors. "Currently, colors sometimes last no more than three months. Many appliance producers have color portfolios ranging from 20 to 250 colors."

Dow reckons processors can reap overall savings of as much as 20% by making the switch. - Peter Mapleston

Easing your way across the borderAll the regulations and paperwork required to ship to your customers in other countries getting you down?

There''s an alternative that might help alleviate your headaches. Vastera Inc. (www.vastera.com; Dulles, VA) offers software and services that can help you navigate the tangled web of regulations governing cross-border goods shipments-in an expedient and cost-effective manner.

Vastera uses technology, process, and expertise to ensure that its clients'' goods don''t get delayed at the border due to noncompliance with regulations or initiatives such as the Customers Trade Partnership Against Terrorism, Cargo Security Initiative, Patriot Act, Restricted Party Screening, etc.

For example, Wells Manufacturing Corp. (Fond du Lac, WI) manufactures QS-9000-certified aftermarket engine management products, such as switches, sensors, and components for fuel emissions and charging systems. They''re made in a Mexico-based maquiladora, which is a duty-free product assembly zone for trade between Mexico and the U.S. Maquiladora trade eliminates duty payments, but requires stringent government reporting, valuation assessment, and record-keeping.

Wells Manufacturing''s Mexican operation called upon Vastera for assistance in realizing a maquiladora system that achieves operational savings by automating customers'' compliance. Vastera software automatically applies preferential duty-reduction programs such as PROSEC, NAFTA, and Rule 8; streamlines the maquiladara regulatory compliance requirements through automated, rules-based processes; and electronically submits customer-clearance data to Mexico customers to avoid border delays and ensure expedited import and export shipping.

Ciba Specialty Chemicals uses three tools of Vastera''s to enhance their ROI by moving goods across borders faster. Vastera''s TradeSphere Exporter manages ever-changing export requirements and controls, trade regulations, shipping documentation, language barriers, preferential trade programs, and statistical reporting. Vastera provides improved control and accuracy of duty payments, enhanced compliance with government regulations, and faster deliveries.

Companies can purchase Vastera software and manage their own shipping programs or employ Vastera to deliver those services as an outsourced supplier. - Clare Goldsberry

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