American Chemistry MattersA Blog of the American Chemistry Council

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As freight rail competition wanes, manufacturers pay a heavy price

Will this be déjà vu all over again? Recent GDP data suggest the economy may be cooling off and North American freight carloads are down 2.4 percent so far this year compared to 2012. Less demand would suggest shippers could expect lower freight rail rates.

However, if history is any guide, that may not be the case.

When this same situation happened two years ago, Bloomberg reported that railroads “are being buoyed by pricing power that allows them to raise rates faster than inflation even as the U.S. economic recovery cools.”

This “pricing power” is unique to the railroad industry. The railroads are protected by government policies from having to compete against one another under rules put in place by the Surface Transportation Board (a federal agency in the U.S. Department of Transportation). Most other American businesses, including chemical producers, have to play by rules that are grounded in free markets and competition.

But since four major  railroads (called Class I railroads) control 90 percent of all traffic, and since 78 percent of freight rail stations are captive to a single railroad, the sky is truly the limit for freight rail rates regardless of whether demand is up or down. Many shippers and their customers face skyrocketing costs to ship their goods.

In fact, a recent ACC member survey showed that in addition to freight rail rates increasing more than other modes of transportation, railroads have imposed substantial increases in fuel surcharges and other charges (such as storage charges) for a majority of member companies.

This is beginning to add up for chemical shippers and their customers. According to a recent ACC study, railroads charged a $3.9 billion premium on chemical shipments in 2010 alone – a 75 percent increase from five years earlier. A survey found that many chemical shippers have a tough time meeting customer demand due to soaring freight rail rates and limited access to competitive transportation options.

All of this is taking a toll on American business and producers, as well as the broader economy.

ACC urges policymakers to enact reforms that increase access to competitive freight rail service. Just recently, ACC wrote a letter to Chairman Bill Shuster (R – PA) and Ranking Member Nick Rahall (D – WV) asking for a seat at the table on the House Transportation and Infrastructure Committee’s “Panel on 21St Century Freight Transportation.”

The chemical industry ships 189 million tons of products by rail each year. The industry’s products play a pivotal role in our economy. And chemical shipments represent 14 percent of railroad revenue. ACC and its members are thus key stakeholders in U.S. freight transportation policy.

More importantly, we believe shippers’ voices are needed to provide lawmakers and regulators with a more complete perspective on transportation policies and their impact on the broader economy.

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