Mexico Needs Rail Freight to Take Rightful PlaceMon, 09/01/2014 - 11:36
The privatization of Mexico’s railways in 1995 has led to steady rejuvenation in the industry. A report released in the first quarter of 2014 by the International Transport Forum of the OECD declared the sector to have made continuous improvement in the last two decades. According to a report titled Railway Freight Development in Mexico, railway traffic in the country has doubled since the reforms, its contribution to GDP has increased 56%, and its share of transportation has improved by more than a third. Mexico’s railways now carry more freight than any railway in the EU apart from Germany, more than those of France, Spain, Italy, and Austria combined, and as much general freight as Brazil. Nearshoring trends in North America have also played a major role in Mexico’s railway industry boom, while the country’s leading rail company Ferromex and close competitor Kansas City Southern de Mexico (KCSM) have both reported notable growth levels in recent years. The performance of these two is on par with many of the busiest rail freight systems in the world, as they run the most productive freight railways in all of Latin America.
The announcement of potential reforms to the sector that relate to the exclusivity of the concessionaire rights granted to Ferromex and KCSM at the time of the privatization has led to recent ripples in the sector. The rights granted are not due to expire for another 13 years and remain in place for a further seven years beyond that to support infrastructure management. Notwithstanding this, Mexico’s lower house has approved a bill that would open up these concessions to increased competition by forcing the owners to share line operation. The bill has been put forward in response to concerns that the duopoly has led to stagnation in infrastructure development, although ultimately the railway infrastructure remains under the ownership and responsibility of the public sector. The Reform on the Regulatory Law of the Railway Service, approved in February 2014, and currently under debate, proposes opening up the sector by obligating the existing concessionaires to share their lines or risk having the concessions revoked. In addition, the government will be able to revoke a concession if the lines are not sufficiently well maintained. The OECD report advises against creating uncertainty surrounding the concession agreements and instead advocates joint public private efforts to support infrastructural development in the coming years.
Despite present uncertainties about exactly how the sector will develop in the coming years, investment is continuing and further growth is inevitable, with increased manufacturing for the North American automotive industry in Mexico leading to heavy logistics demand. US railway goliath Union Pacific owns a 26% share in Ferromex, and Mexico is playing a major role in the company’s bottom line. Bernardo Ayala, President of Union Pacific Mexico, explains: “The automotive industry accounts for about 40% of our business in Mexico, making it our largest segment. In 2013, 10% of our total revenues came from Mexico, representing US$2.1 billion. We are also still forecasting growth for which we are excited.” The company predominantly moves finished vehicles northbound and auto parts southbound. Auto parts move in box containers and vehicles on auto-racks or multi-levels, which include bi-level and tri-level rail cars. Ayala explains that bi-levels are generally used for suburban units and pick-up trucks, and tri-levels are used for smaller compact models.
Ayala believes that competition in the Mexican railway sector is strong and the segmented nature of the market has resulted in healthy growth. “There is a lot of competition, which is very good for the customers, and ultimately the integrated network has allowed a lot of growth. Each railroad has different competitive advantages. Ferromex might have a very good offering to one location in Mexico, which is also served by KCSM, but the service offering for that particular area might be better with Ferromex. We will opt for whatever option has the best synergies, and of course the customer is free to choose any kind of combination,” Ayala explains. “All parties involved are working hard to make sure the right product offerings are in place nationwide, including ensuring an adequate number of railcars to handle the increasing amount of shipments. Railcars are contributed to a national pool, and whichever company has the most cars has the ability to handle more freight and therefore a competitive advantage,” says Ayala. To this end, Union Pacific is assigning more railcars and creating new offerings, such as the Autoflex, which can be converted to either a bi-level or tri-level depending on the configuration needed.
The right infrastructure is of course needed to support better railcar offerings, leading Ayala to assert: “This is why investment is so important, not only from our side but also from our Mexican counterparts, because we really need a fully integrated network. We are focused on making sure that we have the right assets and investments in place to allow us to provide the best service possible to our customers.” Ayala is confident that the tunnels in Mexico are well-developed and railroads are being continuously invested in, although overall adequate infrastructure remains a challenge nationwide and further investment is needed. “There are good examples of infrastructure improvement right now. For example, Salamanca has been developing excellent infrastructure to support the establishment of the Mazda plant. This sort of investment needs to be kept up and demand dictates the need for additional capacity,” explains Ayala. The government’s infrastructure plan promises further upgrading of roads and ports, as well as proposed city bi-passes, and Union Pacific believes joint public and private cooperation is needed to ensure these plans are followed through in order to improve efficiency and competitiveness for Mexico. Union Pacific itself is investing significantly in improving transport lines. “We are investing in maintenance of the tracks, commercial facilities, and new equipment. This year we are opening our Santa Teresa facility at El Paso, which gives us the flexibility to ship by rail to Mexico and then switch to truck, or the other way around,” explains Ayala. The Santa Teresa base, a state-of-the-art facility representing a US$400 million capital investment for the company, will play an important role in serving the Mexican market, primarily the central northern region. Union Pacific currently has six gateways to serve Mexico and is continuing to invest in track maintenance for those routes. Included in these are Nogales, El Paso, Eagle Pass, Laredo, and Brownsville, all of which Ayala claims will see some investment this year. The upgrading of these gateways also includes technology development and the company is investing in developing CTC technology, which will monitor trains coming into the gateways. Whilst Union Pacific is largely responsible for the US side of the operations, it works closely with Ferromex. “Ferromex also invests heavily to mirror our investments on the US side because investment is obviously needed on both sides of the border to ensure capacity is matched effectively. KCSM is doing the same and is investing in its network,” says Ayala.
While Mexico’s railway network continues to develop, the country’s logistics needs continue to be heavily served by the trucking segment. While only 30% of freight in the US is moved by truck, almost 75% is moved by truck in Mexico. Intermodal therefore has an important role to play in optimizing the freight network, and Union Pacific recently initiated a new intermodal service between Laredo, Texas, and Memphis, Tennessee. “This route allows auto parts to be brought southbound to Port Laredo where they are deramped and trucked into Mexico. At the port of Laredo, we have a pretty large intermodal terminal. We are able to offer steel wheel or through product into Mexico, but we also offer trucking from the border into the country or from Mexico to our ramps at the border. The steel wheel product is a through train coming into Mexico by rail, and once this reaches its destination, it can then be brought by truck to the final plant destination,” Ayala explains
A further way to improve efficiency in the rail sector would be the development of a Mexican version of the US CDPEC program. Industry participants including Union Pacific have been pushing hard for Mexico’s equivalent, the MEC program. “If you have a free trade zone and are able to bring goods directly from the US to that zone, then a lot of pressure is relieved from the borders, helping the entire industry. Zones for the development of specific parts can also be established allowing those parts to be shipped easily from the US to Mexico and supporting greater fluidity. The more steps taken to decongest activity at the border, the more trade will be promoted between both countries,” asserts Ayala. The effective execution of efforts to optimize Mexico’s railway network could undoubtedly see the sector become increasingly efficient, but one area that must also be addressed, according to Ayala, is the security situation. Railway lines continue to be subject to container theft and vandalism of the tracks, which Ayala sees as preventing rail from meeting its full potential in Mexico. “Rail lines, plates, and other materials are removed to be sold, creating a safety issue that must be rectified immediately. Throughout the logistics supply chain in Mexico, there are high levels of theft and vandalism and these issues have to be addressed.”
Overall opportunities remain strong and just looking at the economies of scale involved in automotive sector growth, there is undoubtedly going to be a need for more transportation. Union Pacific believes opportunities to create truck to rail conversions exist as auto producers continue to look to the rail network to address freight needs, and the railway will continue to play a very important role in supporting that growth. “As a network, the US-Mexico-Canada sphere will be an important route for the long-term future. We are going to be very focused on the automotive segment. With big OEMs announcing new production sites over the next year, we expect more investment to support that growth,” concludes Ayala.