(Bloomberg circulated the following story by Rip Watson on July 13.)
WASHINGTON, D.C. — Union Pacific Corp. and other U.S. railroads have more business than they can handle in a strengthening economy, causing delays that forced Midland-based Dow Chemical Co. to idle a Michigan plant and cut Arch Coal Inc.’s profit forecast.
Retailer J.C. Penney Co. also said some of its shipments are being delayed on Union Pacific, which is the largest U.S. railroad by sales and has had the most extensive congestion. U.S. railroads such as No. 3 carrier CSX Corp., which also delayed cargo, haul more than 40 percent of U.S. freight tonnage every year.
Rail-cargo shipments rose 6 percent in the first half and are headed toward an annual total that would exceed last year’s record, the Association of American Railroads reports. The expanding U.S. economy, which grew at a 4.4-percent pace in the first quarter, and a rise in imports from Asia have led to West Coast cargo limitations, primarily at Union Pacific.
“Railroads are in record territory for volumes,” said Bill Huff, director of rail operations for Dow, the biggest U.S. chemical company. “It’s exceeding their capabilities to handle the freight. We are having issues with virtually all the major North American railroads.”
Average train speeds fell 6.7 percent in the first half, and a shortage of truck drivers is further restricting shipping choices. The cargo network last faced major strains in 2002 because of a 10-day lockout of West Coast dockworkers. This year, the U.S. economy is expected to grow 4.5 percent, the fastest since 1999, according to the median estimate in a Bloomberg survey of economists.
Union Pacific is hurrying to hire train-crew workers and add locomotives and railcars and Thursday announced limits on some cargo. The Omaha, Neb.-based company last month said second-quarter profit lagged analyst estimates because of delays. Its average train speed has dropped 12 percent this year.
Burlington Northern, based in Ft. Worth, Texas, set limits two weeks ago on some eastbound international cargo from Los Angeles to prevent congestion as Asian imports rose.
Congestion limited first-half volume growth at Union Pacific to 2.5 percent, as Burlington Northern shipped 11 percent more freight. Cargo that moves by a rail-truck combination, the largest segment, rose 9.6 percent industrywide, the rail trade group says. The increases were 3.3 percent for coal, the second-biggest category, and 5.8 percent for chemicals.
Commodities such as coal and grain and other raw materials such as chemicals are chiefly shipped by rail. About 60 percent of coal burned by U.S. utilities is delivered by rail.
Arch Coal, the second-largest U.S. coal producer, Friday said rail delays and missed shipments reduced its second-quarter profit by 13 cents a share to 20 cents. Spokeswoman Kim Link said the St. Louis-based company is experiencing delays on Union Pacific and CSX, whose train speeds have dropped 4.9 percent.
Dow, which makes 150,000 rail shipments annually, has seen rail transit time rise 12.5 percent, which “adds up to real money,” Huff said. He declined to say how much money.
The company’s idled plant, which ran short of raw materials, is part of a Midland complex that makes products including herbicides.
Rail congestion “is just something we have to deal with on a daily basis,” said Tim Lyons, a spokesman for Plano, Texas-based Penney, the second-biggest U.S. department-store chain. “It hasn’t stopped the flow of goods to the stores by any means. Primarily we are affected on the West Coast.”
CSX, which has several active lines and switching yards in metro Detroit, didn’t return calls seeking comment about congestion on its rail lines.
“We are aware that in some cases alternative methods of shipment will be a challenge, given the huge demand and strain on all forms of freight transportation,” Jack Koraleski, a Union Pacific executive vice president, said in a letter to customers. “We must take necessary steps to limit the volume on our system if we are going to be able to restore our system velocity.”
The capacity squeeze has helped Union Pacific and Burlington Northern raise rates just as U.S. retailers begin stocking up warehouses with items to be sold during this year’s holiday season.
“We are paying very close attention,” said Roger Nober, chairman of the U.S. Surface Transportation Board, which regulates railroads. “I want the carriers to be sure that they articulate to their customers what plans they have in place to meet the fall peak. The ultimate problem is that I can’t make crews, locomotives or new track materialize out of nowhere.”
Nober, who said he hasn’t ruled out hearings to examine the issue, said it can take at least a year for railroads to plan and complete projects to add tracks. New workers can take six months to train.
“It’s like a parking lot that’s got 500 spaces and 750 cars in those areas,” Dow Chemical’s Huff said, saying that delays are most severe in Chicago, New Orleans, Houston and Los Angeles.
Railroads are unable to buy additional locomotives this year to ease the congestion. General Electric Co., among the biggest manufacturers of rail engines, has sold out all 700 units being built this year, spokesman Patrick Jarvis said. The Stamford, Conn.-based company’s production rose at least 33 percent from last year, as companies such as Union Pacific bought new locomotives.
General Motors Corp., the other U.S. builder of rail locomotives, has doubled production from last year and is using all available capacity, spokesman Curt Swenson said.
He declined to say how many units are to be built this year.