Commentary: future of U.S. railroads’ chemical transport looks strong

During 2018, the Association of American Railroads (AAR) cited a yearly growth rate of 3.8 percent. That represents about 61,100 carloads.

This cumulative chemical growth from year 2013 has been about 12 percent in total railcars. In contrast, overall U.S. rail carloads from all commodities during the same period are down 10 percent.

On a tonnage basis, chemicals account for about 11 percent of the total U.S. rail tons originated.  

The transport of chemicals  accounts for about $10.5 billion of annual U.S. rail revenues. That is approximately 15 percent of total gross railway company revenue. That’s an average – for a few railroads, chemicals account for 18 percent to 20 percent of total revenue.  

Chemicals might be the most profitable segment, depending upon how your rail costing systems measure railroad profits. Based upon a revenue-to-cost ratio, railway chemical profitability can be in the 180+ percent range.  

Overview of Chemicals

Using standard commodity digit codes, six chemical groups comprise the core U.S. rail market. Those segments include industrial chemicals (STCC 281), plastics and synthetic fibers (STCC 282), soaps (STCC 284), paints and allied products (STCC 285), gum and wood chemicals (STCC 286) and fertilizers (STCC 287).  

Courtesy of the AAR, the chart below identifies the railroad industry’s recent chemical share market distribution – using tons originated.

As a market reminder, the three energy sector commodities of petroleum products, crude oil and natural gas are closely linked to chemicals. They are not chemicals; however, they are the basic feedstock for the chemical industry.

Using general business product names, here in another way of noting the five largest chemicals descriptors moved by railroads, listed in descending railroad volume:

• Polymers and resins
• Ethaline and derivatives
• Ammonia
• Gas fraction processing chemicals
• Propylene and methanol  ​

By geography, the U.S. has five large railroad-served chemical production markets (“chemical clusters”):

1) The largest chemical cluster is along the Gulf of Mexico in Louisiana and Texas

2) The Delaware River Valley region of Delaware, New Jersey and Pennsylvania

3) The chemical/energy hubs near the Ohio River Valley, Pittsburgh, Pennsylvania and West Virginia

4) The Chicago & northwest Indiana complex

5) Southern California  

Outstanding growth ahead

The combination of energy-related feedstock and downstream chemicals should be the next railroad commodity business surge.

Take polyethylene as one growth chemical for the railroads. Dow Chemical, Chevron Phillips Chemical and ExxonMobil Chemical are all commissioning polyethylene plants in Texas. The consulting group Accenture recently forecast that U.S. polyethylene capacity would generate4.6 million metric tons of new annual polyethylene exports by about 2020. How much is that? It would require about 255,000 standard 20-foot shipping containers to move it for just the potential export market.

Other experts like Graham Brisben and Taylor Robinson of PLG Consulting have recently projected that as much as $125 billion will be invested to build new petro-chemical industrial facilities in the U.S. by the year 2025.  

Another $100 billion or more has been announced. Forecasting due diligence suggests that perhaps many of those might not get built… But from the ones that are built will come a great deal of railroad tank car and covered hopper car traffic.

One calculated market view suggests that as many as 250,000 added rail carloads per year could result by about 2025.  

If that is correct, then added railroad revenues could approach $1 billion annually.

To support chemical growth, here are the railway investments required. New chemical sector tank railcar and covered hopper freight railcars required from the related chemical and natural gas shale might exceed 18,000 to 20,000 units. That’s a rail car investment approaching $3 billion.

Railway yard, railway bottleneck single track sections and selected railway bridge investments might be needed to support an improvement in daily train movements. These improvements might account for another $1.5 billion in railroad company investment.  

As one example, the railroad bridge at Beaumont, Texas (used by three Class 1 railroads – BNSF, Kansas City Southern Railroad and Union Pacific) is a restricted daily volume structure.

Another example of supporting capacity investment is Union Pacific’s nearly $500 million Brazos, Texas yard project – expected to open sometime in 2020.

Using the Gulf Region as a railway/chemical market view

A variety of expert sources pick Louisiana and Texas to land about two-thirds of this next generation of chemical production plants.

In response, within the Corpus Christi to New Orleans chemical corridor, chemical shippers can expect that there will be different levels of competitive rail carload service from not only the Union Pacific but also from BNSF and Kansas City Southern (KCS). Why? Both BNSF and KCS compete within this Texas and Louisiana market and within that corridor.

Check your railroad commercial atlas and railroad station guides for more specific railway company access.

Possible disruptive growth from technology  

There is an even higher chemical market outlook. It would be driven by the use of high-tech recently developed in Saudi Arabia – which could be replicated here in the U.S. The disruptive new process name is crude oil-to-chemicals (COTC).

COTC might more than double the profitability derived from each barrel of crude oil.

Here are the fundamental economics. Integrated refining and petrochemical companies currently earn about $9 for each barrel of refined crude oil. Using COTC, they might be able to more than double that amount.

How? The COTC process increases the output of a barrel of oil to a possible range of 60-80 percent chemical production and non-fuel products.  

If it works, and if it is deployed in the new facilities, that higher per barrel productivity might come on-line between 2023 and 2026. A 2018 IHS Markit economic assessment predicts the process might then increase net margins to as much as $17 per barrel. That would add even more rail freight business.

Need to know more about rail and chemical markets as they might impact you? Check the technical work papers presented on June 11th and 12th at the Houston Downstream 2019 Exhibition & Conference. There you’ll find more technical specifics about chemical shipper transport innovation and changing market demand that is in part related to future rail freight.

Due Diligence reminder

Many projects get announced and are subsequently played up by media coverage. But some of those projects never get built. As with the crude oil by rail surge of 2008 to about 2013, there is always the danger of overbuilding.

Market hype surrounding the U.S. Permian shale gas and oil fields has created a commercial enthusiasm that tends to overlook previous commodity super-cycle reverses.  

One recent American Chemistry Council group examined  how railroads, trucks and ports might handle the coming wave of chemical production. Using a future optimistic forecast of up to 36 million metric tons, experts suggested a massive need for 270,000 railcars. However, the correct translation is “added annual chemical carloadings.” That is not the same as newly built railcars.

This rail market view has ignored the impact of trade conflicts. However, this outlook might change given current trade disputes.

As always, your contrarian scenario observations are welcomed by FreightWaves.