Moore on Pricing: Rail merger activity just beginning

The briefly considered merger of the Norfolk Southern (NS) and Canadian Pacific (CP) railroads is illustrative of the changes rail shippers should be watching for in both intermodal and bulk rail services.

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The briefly considered merger of the Norfolk Southern (NS) and Canadian Pacific (CP) railroads is illustrative of the changes rail shippers should be watching for in both intermodal and bulk rail services. These are smart companies, and they see a billion reasons why opportunity in this “sleepy” industry is better than many shippers realize.

While some shippers celebrated the failure of the attempted NS/CP merger, others point to the loss of a “Canadian alternative” for land bridge services via U.S. West Coast ports as a negative to competition. It’s argued that the addition of a fully integrated east-west carrier with a preference for Canadian ports would present some competition to the and duopoly serving the west coast. Those with vision are looking at North America as one market and are seeking new routes to and through the continent.

We’re seeing the development of alternatives of a different sort for intermodal. These include an enlarged Panama Canal due to be ready this month, a future Nicaragua canal capable of handling the newer mega ships, and the re-igniting of work at Mexican ports including the Port of Lazaro Cardenas (API-LAC) in recent years.

On the bulk side of rail, the urgency for a merger of an eastern railroad with a Canadian carrier has relaxed a bit as the oil market has softened. According to the U.S. Department of Transportation (DOT), the volume of oil by rail increased from 20.3 million barrels in 2010 to 383.2 million barrels in 2013 before the oil price collapse.

A major corridor was the Bakken area in North Dakota to upstate New York for consumption in the   Northeast. This volume could be routed through Canada if a single—merged—competitor were to be introduced.

So, what is the fit for NS with the CP? According to the U.S. Chamber of Commerce, the South has the highest population and the most economic activ¬ity. Both population and economic activity have grown faster in the South and West than in the Northeast and Midwest. And with the need for oil and gas grow¬ing domestically and port space for export to an energy gulping Europe, the Southeast U.S. seems like a smart place to connect Canadian oil and gas fields.

The CN can already reach the U.S. Gulf coast, so a Southeast link would be well suited to CP’s aspira¬tions. However, this is just one attempt at what surely will be many to lock up transcontinental rail routes.

Shippers can bet that additional investors beyond Warren Buffet are looking at the rich assets and cash flow of the North American railroads. The merger and acquisition activity between carriers as well as between rail carriers and large 3PL organizations will redraw the map in the NAFTA market.

What about the billion reasons? U.S. DOT expects rail tonnage to increase domestically by 1 billion tons by 2040. It’s a finite resource, thus prices and margins will continue to climb. And with that in mind, it would be wise for shippers and large buyers of products moved by rail to pay close attention to the whole North American transport picture.

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Article Topics

DOT · June 2016 · Rail Freight · All Topics
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