Mexico’s rail industry is poised for growth, especially in intermodal shipments.
The networks of Mexico’s top two carriers, Ferromex and Kansas City Southern de Mexico, don’t have the same reach as the six Class I carriers that operate in the United States. And the duo’s networks don’t feed a population as hungry for imports, nor can the railroads ship exports from coal mines and the world’s breadbasket.
But Mexican rail volume is growing at a pace last seen on the U.S. rail network shortly after the millennium, and many analysts expect annual low double-digit expansion to continue for the next several years. Mexico’s bustling manufacturing sector, which drives traffic to and from the U.S., and the country’s growing ports are the major engines now. As the rail systems continue to improve, especially on east-west lanes, more shippers are expected to shift loads from trucks to rails, regardless of whether those shipments ever leave the country.
Before government privatization, which began in the mid-1990s, railroads transported roughly 7 to 8 percent of Mexican freight. That share now is about 20 percent, said Bernardo Ayala, Union Pacific Railroad’s vice president of Mexico markets. That U.S. railroads haul about 40 percent of the nation’s freight shows just how much more Mexican volume can shift from trucks to the rails.
Cross-border rail traffic by value in 2011 rose about 14 percent year-over-year to $94.7 billion, according to the Bureau of Transportation Statistics. Truck trade between the U.S. and Mexico rose 11.4 percent to $296.8 billion in the same period.
Privatization spurred the investment of billions of dollars in Mexican rail networks, providing auto manufacturers another reason to shift more production from Asia to south of the border. Trade increased with the North American Free Trade Agreement, and customs improvements help trains whiz across the border while trucks wait for hours to clear customs.
The automotive sector continues to grow, with Mazda, Nissan, Volkswagon and Honda prepared to invest about $2 billion over the coming years. The industry doesn’t just drive shipments of auto parts from both directions, but also volumes of raw materials, including plastics, steel and chemicals, said James Commiskey, Pacer international’s vice president of business development, automotive.
Kansas City Southern de Mexico, wholly owned by Kansas City Southern Railroad, is better positioned to tap this manufacturing growth because its network is more concentrated on the north-south lanes than its competitor Ferromex, which is partially owned by Union Pacific Railroad, said Anne Landstrom, principal adviser of Moffatt & Nichol’s commercial group. Foreign direct investment near KCSM’s lines, mainly in the aerospace, automotive, mining and appliance sectors, totaled more than $18 billion in 2010, and roughly $22 billion was spent last year in the country.
As the rail systems’ service and capacity has improved, so have non-auto industries’ use of the networks. Manufacturers of white goods and electronics are increasingly sending shipments to the U.S. via intermodal rail, while industrial materials, such as soda ash, foundry sand and finished steel, head the opposite way.
“From a shipper’s perspective, if you’re going into the lane used by automotive plants, the service is going to be much better,” Landstrom said.
The same goes for shippers that use KCSM’s lanes connecting Mexico City to the Port of Lazaro Cardenas, the country’s top port. Volume through the port on the Pacific Coast grew more than 30 percent in 2010, making it the fastest-growing North American gateway; the port likely hit a similar growth rate last year, said Patrick Ottensmeyer, KCS executive vice president and chief marketing officer. The railroad spent more than $275 million during the last four years on the corridor between the port and Houston.
The majority of volume from the port heads to and from Mexico, but Ottensmeyer expects the terminals to become a major gateway for shipments bound for Texas and the U.S. Southeast. The route is about 300 miles shorter on the leg between the Port of Los Angeles-Long Beach and Houston, boosting its attractiveness to South American carriers.
The rail improvements truly began to pay off during the country’s economic recovery, as shippers found they could save roughly 20 percent by sending cargo across the border via rail instead of truck. Ease of getting through customs also plays a major factor, Ottensmeyer said. He said it takes roughly 30 minutes to clear a train hauling 250 containers compared with a minimum two-hour wait per truck pulling a single container.
KCSM “has worked with us to develop contingency processes for expedited transit,” said Bill Villadon, APL Logistics’ vice president for global automotive business. “If a product becomes hot, they will let us decamp earlier and truck it the rest of the way.”
This show of flexibility is helping to erode Mexican railroad’s no-longer-apt reputation of being unreliable and inflexible. Just as shippers’ demands prompted U.S. railroads to become a friendlier partner in exchange for container business, Mexican shippers are catching a ride as the renaissance rides south.