In Mexico, Rail is On a Roll
Increasing demand from manufacturers, improved infrastructure and service, and a campaign to grab more market share promise further growth for rail service within Mexico and across the U.S. border.
Rail is hot in Mexico—and getting hotter every year. The country’s largest railroad, Ferrocarril Mexicano (Ferromex), saw its carload volume increase by 6.6 percent in 2011 compared with 2010, and revenues increase by 13.9 percent, according to the company’s chief executive officer, Rogelio Vélez.
Mexico’s second-largest rail carrier, Kansas City Southern de México (KCSM), reports that it moved 15.9 percent more carloads in the first three quarters of 2011 than in the same period in 2010.
These figures represent the growing demand for rail transportation both domestically and between Mexico and the United States.
The “nearshoring” trend is one driver of this growth. Thanks to high oil prices and rising wages, Asia is no longer the obvious low-cost location for companies that manufacture goods for the U.S. market. The increase in corporations building factories in Mexico has boosted the flow of materials headed south from the United States to Mexico, and finished products headed north.
Mexico’s central location is a second factor in the county’s rail renaissance. “It’s in the middle of two hot markets: North America and South America,” says Jim Commiskey, vice president, automotive and Mexico at Dublin, Ohio-based Pacer International, a logistics services provider whose portfolio includes a variety of intermodal freight services. “Mexico provides access to raw goods from the United States, and to countries such as Brazil that produce steel and other manufacturing necessities.”
A third cause is the fact that the rail industry in Mexico has been playing catch-up since the nation privatized its railroads in the 1990s.
“Rail in Mexico was underdeveloped because the state-owned railroad company, Nacionales de México, stopped investing in it in the years just before privatization,” says Vélez. When the private sector took over, the new rail carriers started improving the network and heavily marketing their services. Plenty of opportunity remains to be tapped.
As Mexican railways invest in upgrades that make their services more reliable, shippers are more apt to consider rail—especially intermodal—as a less expensive alternative to long-haul truck, says Paul Hirsch, vice president of Mexico operations at Hub Group, a provider of intermodal, highway, and logistics services based in Downer’s Grove, Ill.
“Many large corporations tried intermodal in the past, when the infrastructure and service providers were inadequate, and found that it didn’t work,” he notes. “Now they are trying it again.”
A Bit of 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. Having spent several years overcoming legal challenges, 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.
Often, the handoff of freight between a Mexican and U.S. railroad involves nothing more than a change of crew because customs import and export paperwork is pre-filed with U.S. and Mexican customs authorities before freight is loaded.
In the case of a UP train crossing onto the KCSM network at Laredo, for example, “the operators get out of the train at the border and hand over the controls to their KCSM counterparts,” Commiskey says. “Northbound KCSM trains are handed over to Union Pacific in the same manner for movement into the United States. Employees operating the trains are required to have personal customs documents and paperwork available for entry into the United States and Mexico.”
Much of the freight that passes through the international gateways serves the needs of the automotive industry. Pacer, for example, launched its “Mexico Direct” service 20 years ago to serve auto manufacturers with factories in Mexico.
Every major automaker in North America, including GM, Ford, Chrysler, Toyota, and Honda, uses Pacer’s services to and from Mexico, says Commiskey. Tier I suppliers that serve those manufacturers make up another significant customer group.
“We also serve a variety of electronics manufacturers, particularly in Tijuana and Juarez, and appliance makers in the greater Monterrey and San Luis Potosi areas,” he notes.
Manufacturers in Mexico ship finished product north to U.S. markets, while raw materials move south on rail to supply production lines in Mexico.
“One appliance maker, for example, ships rolled steel and blanks south to be stamped into washing machines and refrigerators,” Commiskey says.
“More industry is coming to Mexico,” says Bernardo Ayala, vice president, marketing and sales for Mexico at UP. “That is increasing demand for raw materials, as well as the need for transportation services to move those products within Mexico to the ports, or to the United States.”
Automakers also comprise the top customer segment for Hub Group’s services to and from Mexico. 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 our total freight,” Hirsch says.
Some manufacturers in Mexico have chosen that country as a more economical alternative to China. The nearshoring trend drives an increasing volume of freight along the corridor that connects Mexico’s industrial centers with U.S. intermodal terminals such as the one that Kansas City Southern operates in at the CenterPoint Intermodal Center in Kansas City, says Chris Gutierrez, president of economic development group Kansas City SmartPort.
“Transportation costs from Mexico into the United States are 75 to 80 percent lower than from Asia, so we’re seeing a lot more manufacturing distribution coming into that corridor,” Gutierrez says.
Besides touting the advantages of the KCSM intermodal corridor to companies that manufacture in Mexico today, KCS and Kansas City SmartPort are also marketing to companies that currently import from Asia, but are good nearshoring candidates.
Agriculture has also helped swell cross-border traffic. “Bartlett Grain and other agricultural commodity traders have consolidation points in Kansas City and move their freight to Mexico,” says Gutierrez.
Along with those major customer segments, some less-obvious industries are boosting volumes on Mexican rail lines. “The growth driver for Ferromex in 2011 has been new railroad cars that are built in Mexico,” says Vélez.
Volume in that category surged 88 percent in 2011. Loads of glass bottles increased by 86 percent.
Ferromex parent Grupo Mexico, which operates a large copper mine in Sonora, Mexico, was responsible for another volume jump. In 2010, the mine reopened after a three-year strike.
“Sulfuric acid shipments resumed in 2011, driving Ferromex’s 58-percent surge on that commodity,” Vélez says. The railroad transports the sulfuric acid, a by-product of copper extraction, for export to the United States and Chile.
Another important factor in the growth of Mexican rail is the emergence of the Port of Lázaro Cárdenas, on the Pacific Coast, as an alternative to container ports on the U.S. West Coast. “Lázaro Cárdenas is largely a bulk port, but in the past four or five years it has expanded its container activity,” says Gutierrez.
New Container Magnet
Hutchison Port Holdings opened the first container operations at Lázaro Cárdenas in 2007. “Since then, Lázaro Cárdenas has been the fastest-growing port in North America,” says Patrick Ottensmeyer, executive vice president, sales and marketing at KCS, whose sister railroad KCSM provides the only rail service at the port.
Lázaro Cárdenas can currently handle approximately one million 20-foot equivalents (TEUs), and that figure is expected to grow in the long run to 2.2 million to 2.5 million TEUs.
Mexico has announced plans to name a second container concession at Lázaro Cárdenas, which ultimately would offer similar capacity to the Hutchison facility.
Kansas City SmartPort has worked with KCS since the late 1990s to market the Lázaro Cárdenas-to-Kansas City rail corridor. “We pushed both the U.S. importers and Asian exporters to consider the corridor not only for their freight moving into Mexico, but freight coming into the United States,” Gutierrez says.
That strategy seems to be paying off. “As of December 2011, our container traffic through Lázaro Cárdenas was up 31 percent through September,” says Ottensmeyer. “With continued expansion of container operations at Lázaro, KCS should post solid double-digit volume growth for an extended period.”
Along with improving its capacity to move containers, Lázaro Cárdenas will open a new bulk handling facility in 2012. “This facility will increase the volume of heavy, bulk commodities, such as coal and iron ore, that could move through the port,” Ottensmeyer says.
Whether containers are moving to and from the ports, or within Mexico, intermodal transportation still offers railroads and intermodal service providers a great deal of opportunity.
“The United States is a mature intermodal market,” Hirsch says. “Shippers understand the pros and cons, the rate structure, and the seasonal peaks.”
Not so in Mexico, where most freight still moves by truck. “Carriers and service providers still have plenty of market share left to capture by selling the economies of intermodal transportation,” he notes.
The improvements Mexican railroads have made to their infrastructure constitute a big selling point. Shipping by rail in Mexico used to be an adventure. “A shipment could take 10 days or 30 days to get to its destination,” says Hirsch. “The carrier wouldn’t be able to tell you when it would arrive.”
Commiskey cites the upgrades KCSM has made to its terminal in Monterrey as another significant improvement.
“In 2007, the ramp in Monterrey was inadequate for the market,” he says. Both the road leading into the facility and the ramp itself needed to be upgraded, and the facility needed to be modernized.
All that has changed. “The ramp is completely paved,” Commiskey says. “KCSM added a line of track, so there is plenty of room to park equipment, and new lifts speed unloading. The whole terminal is surrounded by chain-link fence and barbed wire, so it is very secure.”
The railroads have been making similar upgrades throughout Mexico, and those investments have produced significant benefits for shippers.
Ferromex spent $330 million on new equipment and infrastructure enhancements in 2011, including $72 million to improve the rail line and $35 million to update railyards and support track.
“We’ve invested $2.1 billion in infrastructure upgrades in the 13 years we’ve been operating,” Vélez notes.
Along with upgrading rail infrastructure, Mexican railroads and their U.S. partners have been improving security, helping to ensure that freight moving within Mexico or across the border arrives undamaged and free of contraband.
“Both KCSM and Ferromex work hard to ensure that safety procedures in Mexico are equal to the ones in the United States,” says Ayala at UP. Those safety measures include using x-ray machines to examine railcar contents, dogs that search trains for hazardous items, and high-speed cameras that monitor passing cars for open doors or broken seals.
If contraband is detected on a train, customs officials can isolate individual intermodal containers for inspection.
KCSM boasts a strong security record. “In 2010, the customer claims rate for theft, vandalism, or accidents for all shipments moving on KCS in Mexico was 0.02 percent,” Ottensmeyer says. “That means 99.8 percent of all loads we transported were moved without a customer claim.”
The multiple layers of safety and security provisions at KCSM include a focus on maintaining train velocity, which reduces the chance of incidents.
“The trains are really moving now,” says Hirsch. “They don’t stop, so no one can break into a train at rest.”
Whether in motion or stopped, double-stacked intermodal containers loaded into gondola cars present a formidable obstacle to criminals. One container rides low in the car’s well, making it impossible to open the door more than three feet, and the second car rides on top. “Most thieves will target trucks, rather than climb to the top of 20-foot-tall trains with a blowtorch to try to break in,” Commiskey says.
Criminal activity in Mexico has made rail carriers’ security challenges tougher in recent years. At Ferromex, recent initiatives to boost security include replacing private security guards—who are not allowed to carry guns—with armed Federal Police officers. Those officers protect the trains both in-transit and in the yards.
“We pay for the security that they provide us,” Vélez says. But Ferromex has not been able to boost the number of armed officers as quickly as company officials would like.
While the safety of shippers’ freight is of paramount importance, Ferromex also looks to the police to safeguard its own operations. Particularly challenging to the railroad were thieves in the state of Zacatecas who were stealing diesel from engines.
Not only did Ferromex lose money on the fuel, but the thefts interrupted operations. “Fifteen or 20 locomotives were stranded there because we had to refuel them,” Vélez says. Since federal officers started protecting the equipment in Zacatecas in September 2011, those losses have stopped.
Rail transportation in Mexico still enjoys a great deal of growth potential. Rail carries about 42 percent of freight in the United States and 60 percent in Canada, but only 26 percent in Mexico. “If we concentrate on boosting that share to 35 or 40 percent,” says Vélez, “our industry will gain real volume growth opportunities.”
Disasters and Demand
As natural disasters disrupt supply chains, they influence demand for transportation—sometimes for better, sometimes for worse. Rail transportation in Mexico is no exception.
A failed corn crop had big repercussions for one Mexican railroad and its U.S. partner in 2011. “One of our most important commodities is corn from the state of Sinaloa in northwestern Mexico,” says Rogelio Vélez, chief executive officer of Mexican railroad Ferromex.
That region harvests five billion tons of corn in a typical year. “But 90 percent of the crop was lost in February 2011 because of cold weather,” says Vélez. As a result, Ferromex saw its agricultural volume drop by nearly 10 percent in 2011.
“The harvest in 2012 also looks very poor, because of drought,” he adds.
Because corn is a staple of the Mexican diet, however, the nation looked for supplies elsewhere. “The shortage opened the door for more U.S. corn exports to Mexico,” says Bernardo Ayala, vice president, marketing and sales, Mexico, for Union Pacific Railroad (UP). “That gave us a boost at the beginning of 2011.”
Ferromex has been working with both UP and BNSF Railway to bring more corn from the United States to Mexico via its efficient “shuttle train” service. “We run 110-car-trains from the U.S. origin point to the destination with no stops,” says Vélez. “Workers unload them in less than 24 hours.”
Another disaster in 2011 might have caused setbacks for auto manufacturing in Mexico, but did not ultimately reduce demand for rail services. When the March 2011 earthquake and tsunami in northern Japan closed auto parts factories in that country, the resulting shortage of components did affect assembly plants in Mexico. Nissan, for example, halted production in Mexico in April and late May.
But that shutdown simply took the place of Nissan’s usual summer hiatus, which it uses for plant maintenance.
“UP’s freight volumes haven’t dropped; in fact, we’re seeing the opposite,” Ayala says. “The shutdowns by the original equipment manufacturers in Mexico don’t last as long as they did in prior years.”
Opinions vary on the degree of balance in rail traffic between the United States and Mexico.
“It’s fairly balanced: about 60 percent southbound into Mexico, and 40 percent northbound into the United States,” says Bernardo Ayala, vice president, marketing and sales for Mexico at Union Pacific (UP) Railroad.
But the picture looks different for intermodal service provider Hub Group. “Mexico is a three-to-one market for intermodal transportation,” says Paul Hirsch, the company’s vice president of Mexico operations. “Most of our largest customers move freight northbound.”
That imbalance creates a challenge. If Hub’s northbound containers reach their U.S. destinations and find no freight to take back, how can the company cost-effectively move those empties south to reload?
The solution lies in Hub’s partnership with UP. “UP helps us work on rate issues with specific southern shippers so we can make sure we’re competitive,” Hirsch says.
UP and Hub also collaborate on optimizing empty container transportation. UP takes containers to Dallas and Houston, where demand for inbound intermodal service is greater than demand for outbound service.
“Instead of shipping those empties to California where they’re needed,” Hirsch says, “we reposition them in a Mexico market such as Monterrey, load them, then ship them to California.”