NAFTA Rail Revenues Set to Grow

In my last bog I looked at how the near-shoring movement and a host of other factors are contributing to an economic boom in Mexico.  I also discussed how the privatization of the Mexican rail industry has led to the improvement in Mexico’s rail network.  These enhancements combined with lower costs and faster customs clearance processes (as compared to truck) are expected to positively impact on cross-border intermodal growth.  In this blog, I will examine some specific activities that are under way that could propel significant growth in cross-border (e.g. Mexico – U.S.) rail traffic.

Mexico’s Rail History

Mexico's current rail system started to take shape in 1995, when the Mexican government announced its privatization plans. U.S. railroad Kansas City Southern (KCS) and Mexican company Transportación Marítima Mexicana (TMM) formed a joint venture to buy the Northeast Railroad concession. KCS bought out TMM's share in 2005 and changed the railroad's name from Transportación Ferrovaria Mexicana to Kansas City Southern de México (KCSM).

In 1998, mining corporation Grupo Mexico and U.S. railroad Union Pacific (UP) joined forces to buy the Northwest Concession, creating Ferromex.  In 2005, Grupo Mexico bought a third Mexican railroad, Ferrosur, which operated in southeastern Mexico. Grupo Mexico is currently merging Ferrosur with Ferromex.

Ferromex and KCSM offer cross-border service in partnership with KCS, UP, and BNSF Railway. The U.S. and Mexican railroads pass freight from one jurisdiction to the other at six major border crossings. The U.S. sides of these crossings are in San Ysidro and Calexico, Calif.; Nogales, Ariz.; and El Paso, Eagle Pass, and Laredo, Texas. 

Intermodal Revenue Growth Potential

Manufacturers in Mexico typically ship finished product north to U.S. markets, while raw materials move south on rail to supply production lines in Mexico.  Intermodal traffic currently represents only 2% of the potential addressable market for cross-border truckload shipments that is projected to be in the range of 2.6 million truckloads per year. By comparison, intermodal service between Los Angeles and Chicago has a percentage market share in the mid-40s on all surface moves.  Clearly there is a largely untapped market for cross-border intermodal service.

Here is what some of the key players are doing to capture some of this traffic on rail.  Mexico's two largest privatized railroads, KCSM and Ferromex, are investing heavily in intermodal terminals and shifting organizational cultures to cater to customers by aggressively courting new sales with programs like scheduled deliveries for auto parts for automaker Honda.

Ferromex

Ferromex is a member of the National American Container System and has a long-term agreement with BNSF and Honda to jointly ship time-sensitive parts between a Honda complex in Marysville, OH, and Guadalajara. The two railroads also operate joint integrated carload services at the El Paso border crossing and another auto parts shipping service. Ferromex has a new intermodal facility in Guadalajara, which can handle 20,000 containers, up from 7,000. Border crossings have become smoother through agreements and streamlining of customs procedures, but there is still progress to be made.

Kansas City Southern (KCS) Railway

As highlighted in a recent JOC article, compared to Ferromex, Mexico’s largest domestic railroad, Kansas City Southern de Mexico, appears best positioned to tap the boom in manufacturing for U.S. and Canadian markets. KCSM is finishing up a major intermodal hub in Toluca, the capital city of the state of Mexico. The first phase of the fast-track project is a $15 million development comprised of parking facilities, specialized continuously welded track and extended sidings. Recent work includes four tracks dedicated for RoadRailer use, which handle 5,000 lifts a month, but have a capacity of 35,000. Second phase development calls for an additional eight tracks, as demand increases.

KCSM is also a member of the National American Container System and is working with other railroads on cross-border corridors, including the "NAFTA Express", the "Aztec Eagle," and "Trans-Border Express" services. The railroads’ network connects to the top six major North American railroads, providing shippers access to major markets, including Charlotte, Chicago, Detroit and New York. KCS estimates it’s primarily north-south network channels about 70 percent of Mexico’s gross domestic product and roughly 75 percent of foreign direct investment.  KCS’ establishment of a “modern U.S. standard” of service, results from a $300 million dollar investment in lines and terminals.  Traffic flow collaboration with intermodal intermediaries J.B. Hunt, Schneider National and Swift Transportation, as well as the other Class I railroads, has h also elped boost volume.

There are 10 automotive assembly plants in Mexico, nine of which are being served by KCSM and Ferromex. KCS currently owns 40% of the total carloads served between KCS and Ferromex. By 2015, the auto production is expected to rise by 41% i.e. one million units in Mexico. Also, the current plants are expected to extend their existing operational capacity, which will also lead to a rise in carloads for KCS.

KCS de Mexico serves the nine automotive plants run by Chrysler, Chrysler Fiat, Ford, General Motors, Nissan and Volkswagen, along with their suppliers. Honda, Mazda, Nissan, Audi and BMW are expected to open their plants by the end of 2014. Automotive production is expected to grow more than 30 percent by 2015. 

Seventy to seventy-five of Mexico's steel production is transported through railcars. Data from 2011 shows that 18.1 million tons of steel was produced in Mexico.  The newest surge in volume growth likely will come from the expanding steel industry, with manufacturers Ternium, Deacero, Steel Technologies and Metal One expected to handle 3.5 million metric tons of steel annually starting in 2014.

The railroad’s reach in Mexico stretches beyond serving the maquiladoras. KCS de Mexico’s largest southbound commodity is U.S. corn, some $6 billion worth of which was exported to Mexico last year. The carrier hauls 3.1 metric tons of grain to Mexico annually, and is working with Canadian Pacific Railway to further boost shipments out of the nation’s breadbasket.

Con-way Multimodal

Con-way Truckload and Con-way Multimodal, two subsidiaries of U.S. freight and global logistics company Con-way Inc. have announced the launch of a new North American intermodal product that integrates the strengths and capabilities of both organizations to deliver a high-value, high-reliability offering for intermodal shipping.  The new service will work with all major Class 1 railroads and offer full nationwide service for intermodal moves. The integrated service leverages Con-way Truckload's expertise in Mexico through its CFI Logistica subsidiary, where it has 10 offices, an extensive drayage network and 40 years of in-country experience, and Con-way Multimodal's resources, systems and freight procurement expertise.

"With changing global trade patterns and the rise in near-sourcing, Mexico is increasingly a location of choice for manufacturing and distribution," said Saul Gonzalez, president of Con-way Truckload. "This new collaborative service with Con-way Multimodal allows us to immediately expand our portfolio for customers, adding an intermodal option to complement our well-established long-haul and regional over-the-road services. We are able to create additional value from our extensive network of Mexico sales and drayage operations, providing customers with dedicated capacity and new service capability."

Other Key Players

Both the Hub Group and Pacer have been involved in Mexico’s cross-border movement of automotive freight for some time.After that, Hub's intermodal volume to and from Mexico consists of what's known as FAK—freight all kinds. Appliances, food products, beverages, and industrial products make up 60 to 70 percent of their total freight.

While rail service has been available to and from Mexico for some time, rail service improvements and the focus by some major players should help spur growth.

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