Years before Guns N’ Roses released “Welcome to the Jungle,” they set off on an adventure along the West Coast toward Seattle that would later become known as “The Hell Tour.” Their elected mode of transportation, a 1977 Oldsmobile with a U-Haul trailer, broke down and sent them hitchhiking for 40-plus hours, carrying only their guitars. They missed several shows and played on borrowed amps when they finally arrived.
Does this remind you of the 2020-2022 global supply chain? What started in 2009 as a steady growth streak for worldwide transportation demand was reigned in and hit hard with the COVID-19 outbreak in early February 2020. Since then, the global supply chain has undoubtedly been on its own “Hell Tour.”
In second-half 2021, all indications were that the world was working its way out of this Hell Tour and getting on track for record growth in just about all sectors (33.1% in 3Q2021 based on the Federal Reserve). The growth was and continues to be explosive in the United States, so much so that supply of goods and the method of moving that supply (from ship to truck to rail to barge) continues to be a real challenge and looks to be for the foreseeable future.
While our focus in this article is centered on rail as one part of the shipping artery, it cannot go unrecognized that the problem with delayed imported goods starts at the ports. U.S. imports have faced delays for weeks/months, not days, and at costs that are exorbitant on anyone’s budget. At any given time, there have been 30 to 60 plus ships in the Long Beach and Los Angeles port system trying to unload containers. For the return trip, the focus remains on trying to reload the ships with empty containers going back to Asia to be refilled. East Coast ports are faring a little better, but not markedly so, and bulk commodity berthings are stuck in the quagmire. As for exports, rail traffic from and to those ports is causing an export resource drain for the many products the U.S. ships oversees.
One of the hardest hit industries has been agriculture. Many of the containers that would be rerouted to agricultural loading locations are being sent back to ports empty because the controllers of the containers don’t want any further delays in getting their containers back to the export port. Because the U.S. exports approximately 25% of the grain shipments it produces in container or via bulk ships, container shipping companies make significantly more money bringing goods to the U.S. than from the U.S.
Other industries feeling the pain include scrap metal shippers, mineral shippers, fertilizer shippers, coal mines and general bulk commodity shippers that require a bulk ship vs. a container ship.
The result is a not only an export stagnation, but also an overflowing reduction of domestic traffic being handled. These two separate and distinct markets get in the way of each other, causing further bottlenecks in the rail system. The cause of the delays are repetitive with the now-old news. Shippers are having difficulty in transporting products with pent-up or increased demand due to a COVID-19-induced manpower shortage, unwillingness of labor wanting to come back to work, and skilled labor not being readily available to bring back from furlough. While news is made in the more dramatic sectors (it’s hard to ignore when 90 container vessels are waiting to unload when the normal backup is one or two), there are more delays occurring in the domestic business than is accounted for.
When we look at what’s powering the nation, there have been and continue to be coal-fired utility plants running short of coal for steam generated electricity. In some cases, these companies were as high as 50% behind their planned coal take. That causes true reason for alarm in an industry that is working hard to upgrade its infrastructure and go green while still supplying energy to the existing grid. Meanwhile, aggregate, sand and gravel shippers, which generally operate in closed loop systems, are seeing delays of 25% on dedicated trains and 15% delays on the manifest side. Grain shippers are paying $100-$200 over railroad railcar auction sites and the secondary market to get railcars and trains booked to address bulk shipments to domestic markets. Scrap metal shippers running to U.S. steel mills are having a price differential upwards of $300 per railcar simply to show up with a load of scrap ready to be processed. We’re certain the list of commodity-specific delays is significantly longer, but you get the message. Overall, it continues to be a Hell Tour.
Meanwhile, what about the railroads? No one hates a delayed railcar more than a railroad. The same series of events that caused the pandemic-induced shortages for the shipping community are the same ones that are causing delays in the rail industry. The herky-jerky attempt to bring a sense of normalcy to these resource demand imbalances are requiring shippers to take a new look at their logistics.
What’s the New Transportation Look?
America is resilient, and we’re all in the process of working our way through these challenges. The intertwining of truck, barge and rail freight with ocean freight is uncanny. What are some of the action items being taken?
In late 2021, Walmart, Home Depot, Cosco, Dollar Tree and many others started chartering ocean going vessels to exclusively transport their products. These retailers want to control a bigger part of their destiny. If you’d been to most any retail store during 2021, you could certainly tell their shelf space wasn’t being fully utilized. Most certainly, there are bulk shippers considering their own vessel charters or ownership that didn’t ever think it would be on their radar screen.
Manufacturers are diversifying sources for critical materials and components. This might include geographic diversion with the same or alternative suppliers. It’s a small wave now, but a prolonged pandemic will continue to push manufacturers to consider “near-shoring,” bringing back manufacturing to North America. At times like these, the cost of not having product readily available far outweighs the labor savings found in the Far East.
Reconsideration of inventory levels is another focus. Raw materials may very well be the lowest cost of the entire process. Just-In-Time inventory approaches are getting a new look. Is JIT inventory, supported by a long physical distance subject to many supply chain disruptions, a better investment than simply having more widgets on hand?
Is This Cost of Doing Business Worth It?
We are a railcar lessor, rail fleet manager and rail transportation solutions provider, so we have a lot of first-hand logistics, supply chain and specifically railroading experience. Our clients remind us frequently that the values of having and not having railcars available to timely ship product ranges from $45 to more than $250 per railcar. This is over and above any railcar rental or maintenance costs. This theme seems to be repetitive across many commodities. What value do you place on having a railcar available to load or not?
Examine logistics bottlenecks and consider alternative plans. The ocean-going industry is hogging the limelight with ships sitting at sea waiting to unload. It’s easy to count the delays and impact with ships. Rail transportation bottlenecks are as relevant but aren’t as transparent. The rail bottlenecks cut across all commodities, and this diversification makes those slowdowns, misroutes and lack of railcar supply less noticeable.
Loaded railcars get quite a bit of attention, so a simple daily review can tell you where your loads are. What becomes significantly more important is the question of “where are my empty railcars for the next load?” Private railcars have grown to comprise almost 80% of the total railcar interchange fleet in North America. The slack in the rail system must be in the private railcar arena. Railroads have such massive investments in track and infrastructure they’ve strategically chosen not to be a primary railcar provider.
As a shipper or receiver, it’s up to you to put slack in the rail transportation system by having your own railcars, plenty of track space to accommodate what you’re going to load or unload on a daily basis, and a location, possibly off-site, where you can store a backup of railcars to fill in for supply chain disruptions. It’s the cost of doing business in the new era.
Darell Luther is CEO and Founder of Tealinc Rail Transportation Solutions.