Nobody rides free

Nobody rides free

Matthew Rose would like to double the $2 billion a year his railroad is putting into capital im-provements. Rose, chief executive of BNSF Railway, says the additional spending would help the carrier keep up with import-driven cargo growth.

Trouble is, that investment is difficult to justify when the rail industry's return on capital lags at 6.5 to 7 percent a year. In a speech at The Journal of Commerce's 6th Annual Trans-Pacific Maritime Conference last week in Long Beach, Calif., Rose suggested tax credits to encourage investment in expanded rail capacity.

If there was a common theme to this year's TPM conference, it was the I-word: investment. Speaker after speaker alluded to the need to invest in the transportation system. Marine terminal operators described plans for new and expanded facilities for ship-to-shore transfer of containers. Brian Maher, chief executive of Maher Terminals, described his company's development of a terminal at Prince Rupert, British Columbia, to transfer trans-Pacific containers to rail. Tony Scioscia of APM Terminals reviewed his company's expansion plans. Ron Widdows, APL's chief executive, re-newed his pitch for federal support of freight transportation improvements.

Chang Kuo-cheng, vice chairman of Evergreen Group, said the Taiwanese shipping company has designed its 7,024-TEU S-class ships to make them more environmentally friendly. The new vessels will have fuel tanks positioned behind double hulls to prevent spills, and have been designed to burn low-sulfur fuel and operate from shoreside electrical power in port. The extra cost for the changes will be approximately $5 million per ship.

After years of losses or marginal profitability, ocean carriers had a good year in 2005, when double-digit returns were posted almost across the board. This year, the tide appears to be running less in the carriers' favor. Raymond Maguire, managing director and head of transport research at UBS in London, unnerved carriers at the TPM conference by suggesting that container rates could drop 15 percent this year, resulting in a 50 to 75 percent drop in carrier profits.

Albert Pierce, executive director of the Transpacific Stabilization Agreement, which represents nine carriers that handle more than 60 percent of U.S. containerized imports from Asia, noted that ocean carriers face rising costs. He said ship lines are facing 25 percent increases in rail rates when intermodal contracts are renewed, and that ocean carriers are paying higher rates for container leases and ships chartered during the tonnage squeeze of a couple of years ago.

As Pierce noted, the boom in container trade from China represents a structural shift, not a temporary phenomenon. Cheap imports, encouraged by big-box discounters, have helped keep U.S. inflation down for an extended period. It's been a good run, but eventually, somebody has to put money into the system that makes this happen. Nobody rides free forever.