Pedro Menendez, Vice President Global Supply Chain
USG Corporation
Chicago, IL 60661
Keynote Speech
MARS Winter Meeting – January 16, 2008
Opening
The great American writer Paul Theroux once said, “Anything is possible in a train.” From the perspective of all here today, he is, of course, absolutely correct. Rail transport certainly transformed USG Corporation when it began operations more than a century ago. It enabled us to keep the cost of raw materials low and ship our building products anywhere in the country. As a result, USG literally helped build America.
Rail shipping continues to play a critical role in the success of USG today and we remain a strong supporter of MARS. I’m very impressed with the breadth and depth of the meeting agenda and it’s futuristic theme, which encompasses legislation, safety, technology, security, the emerging ethanol market, industrial development, investment and the economy.
What a ride it’s been over the last five years as the rail industry has run the full cycle of supply and demand. We have all learned a lot along the way, but one thing is certain, the rail industry of today is healthier, more focused and better prepared for the future than it was just five short years ago. For the first time in decades, the industry is investing and planning for growth—growth for their customers and investors alike. And while that’s great news for the industry, we must avoid the temptation of pausing and resting on recent success. The reality is, while the “future” has great growth potential, it comes with new challenges, new hurdles and new issues that are important to everyone here today.
Let’s touch upon a few of those key issues and challenges:
Legislation
The legislative horizon for rail and the entire transportation industry is quite broad and diverse—environmental, security, funding, investment tax credit, hours of service and the current hot one: re‐regulation. Not since the adoption of the Staggers Act in 1980 have we seen such a full agenda. As is usually the case, the call for new laws or changes to existing laws is driven by groups and individuals who are not satisfied with existing conditions in the industry.
Over the last five years, the rail industry has seen many changes. One of those changes was the decline in the railroad labor pool that challenged the industry’s ability to serve during a period of high market demand for rail shipping.
We also saw a drop in average train speed, increase in terminal dwell and we experienced constrained capacity for the first time in years. Capacity issues resulted in sizeable market price increases and introduced us to new terminology like “de‐marketing.” For the first time, shipper demand sometimes outstripped industry’s capacity to deliver and some railroads were not prepared to deal with the challenges. So spreadsheets showing return on investment and competing for capacity became the new norm. As challenging as the last five years were, we at USG view it as “growing pains” for an industry that continues to evolve into de‐regulation and free‐market management that started in the early 1980’s.
So against that industry landscape, I like to offer a few comments on the hot topic of the day: re‐regulation of the railroads. USG does not support re‐regulating the railroad industry.
From our perspective, a few very large shippers within the energy and agriculture communities support the movement for re‐regulating the railroads but the reasons may not be obvious. Without a doubt, the energy and agriculture industries ship huge tonnage on the railroads, primarily via unit trains. They have operated for years under very favorable long‐term contracts that indexed year over year rates and for the most part were silent on fuel cost recovery or surcharge. This segment experienced the same operating challenges of moving freight over the last five years, but their contracts insulated them from two significant shifts in the railroad industry, fuel cost, and supply and demand impact on rates. As these favorable contracts expire some shippers are getting fresh views of the current railroad market and obviously don’t like what they see.
We are happy that some shippers were successful in negotiating long‐term contracts that provided great value for them, but we must progress to the point where all shippers carry their fair share of the load in supporting a healthy and growing railroad industry. USG and many of the shippers in this room have carried the load for others over the last 10 plus years and it must come to an end. Last year the STB reviewed railroad practices on fuel cost recovery and surcharges, and the findings revealed this imbalance. While changes in railroad fuel cost recovery have resulted, the ultimate problem of fuel cost recovery across all shippers remains. The only way this will ultimately correct itself is the eventual retirement of these long‐term contracts and the recalibration of new contracts that are balanced and fair across the entire shipping community.
We must resist the temptation to look backwards to correct and address the future needs of the railroad industry and shippers. Re‐regulation is not the answer. Our legislators set the course in 1980 with the Staggers Act. A course that allowed the railroad industry to join the rest of us in a free market environment based on supply and demand, competition and innovation. As I mentioned earlier, we see the railroads still evolving through the de‐regulation process. They have learned a lot about running and managing a free market railroad over the last five years and are better off today for it. We cannot afford to stop the progress.
I know that USG’s views on re‐regulation may differ from your own. Regardless of any differences, we believe that it is important that Washington hear the voice of all shippers and stakeholders on the subject. USG has done its part so far – more than 30 of our plant managers around the country have written their legislators in Washington to share USG’s perspective. This is the most important legislative issue