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In the third and final installment of Chris Blumberg‘s response to our Railroaded Series, possible solutions to the freight car backlog come to the fore. See parts 1 and 2 for more.

Mother Nature, believing that railroads didn’t have enough problems as listed decided to pour gasoline on the fire with the record winter in 2013/2014. Across the entire US record snowfalls and temperatures were recorded of -40 or lower in the Midwest. Class 1 railroads cannot operate a typical 100 to 150 car train in such conditions and were forced to run trains at 50-70 cars adding even more strain on the system with lack of locomotives and crew available.

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Tank car loadings are up from 250,000 car loadings in 2010 to an estimated 800,000 in 2014 in the US representing a significant growth, but not when compared to total weekly car loadings. For the week ended Oct. 11th there were 571,000 total car loadings in the nation, and a total of 22,548,321 carloads since the beginning of 2014. Given this oil traffic represents less than 3% of the total traffic handled by Class 1 railroads. The biggest issue is there are hazardous material speed limits set by the federal government of 50 mph instead of the maximum speed of 80 mph that a freight train can reach. The government is also discussing reducing this even further to 40 mph, which would slow down traffic at the absolute worst time for the current problems being faced.

What can be done to solve these issues? Well, the first and the biggest issue is national and state level support for expansion of lines, to the point that there needs to be a national rail plan. However, this rail plan cannot simply focus on the US, and must also focus on the rail systems of Mexico and Canada as well with them being our largest trading partners.

It would solve major issues with reduction of oil consumption, reduced pollution, and decreased congestion/traffic on the highways which are currently bankrupt. In the short term, the single biggest issue facing the railroads is Chicago where all of the railroads meet. The average speed of freight trains in Chicago is 3 miles per hour due to basically a 6-way intersection of 6 major highways without any over or underpasses.

To solve this issue CREATE was formed to build overpasses/underpasses, reduce car intersections, and allow for the continued movement of all trains without having to stop. However, this program is about 2 billion short in funding and the Class 1 railroads already gave their 30% of the $3.2 billion in funding. Illinois is in massive debt and Chicago is in massive debt as well showing no signs of either government supplying any of the 2 billion still required.

This is a major obstacle that is creating a massive bottleneck for all freight traffic and needs to be solved. If 50 of the largest companies all contributed $20 million each to fund 50% of the remaining $2 billion it would help all parties involved. Billions of dollars were thrown at political campaigns this election season, but given how useful Congress has been in the last decade (the opposite of progress is congress), we will likely see no solution to this problem without major pushes. A new Governor was elected in Illinois and several congressmen representing the Chicago area were up for re-election this year. This is an issue where the politicians can look good solving passenger/freight traffic and reducing number of car intersections, while companies can look like good corporate citizens by reducing environmental pollution and helping products get to customers quicker.

In part one of Chris Blumberg‘s response piece to our Railroaded series, he examined the relative tax bases for highway and rail spending. In this section he looks at the real increases in commodity shipping that are causing rail car backlogs.

In 2008, the Great Recession affected Class 1 railroads just like it did other companies. Carloads dropped about 20%, layoffs happened and the businesses trying to take advantage of scrap prices reduced the total rail fleet by about 10% from 1.57 million. The fleet has yet to recover to this pre-recession level of total cars with the current fleet only reaching 1.42 million.

This, however, paints a slightly misleading picture as not all cars are equal. Roughly 50% of the fleet was below gross load weight of 286,000 lbs. with the majority being 263,000 or even lower. A hopper of GRL 286 can carry 11 more tons of grain over a GRL 263, and even more of lower cars. The latest cars have overwhelmingly been GRL 286, which is at least a 10% improvement in carrying capacity.

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The problem is that not all rail lines can support GRL 286 cars, while the Class 1 rails have upgraded all of their main tracks to GRL 286, there are large connecting sections that are GRL 263 or lower. Class 2 and Class 3 railroads have only upgraded small amounts of their lines, less than 50% of their total miles. The problem becomes even worse when involving Mexico with many businesses relocating production from overseas to Mexico due to the high gas prices.

Now, Mexico has new factories being built and expanded, but the only GRL 286 lines are the lines headed into New Mexico and Texas. This is creating massive congestion and traffic issues with only 3 main lines able to serve Mexico and a 4th line to California being under GRL 286.

This further adds to the congestion on the US rail network, as oil trains are trying to head south to Texas, Asian products are being delivered in LA and sent east, and manufactured equipment is being sent from Mexico. Thus just like highway rush hour there is simply not enough room for all those trains all heading to the central US.

On top of all these problems we now add a huge new problem of a record 2013 bumper crop for the US and Canada. In total these bumper crops were 20 million metric tons larger in Canada then 2012 and 80 million metric tons larger in the US. To make matters worse, in 2014 the total crop production in Canada dropped back down by 17 million metric tons, but the US increased yet again by an estimated 15 million metric tons for yet another record harvest with a difference of nearly 100 million metric tons of grains from the 2012 harvest of 354 million metric tons.

Due to the problems described above with reduction in fleet sizes and new cars not able to go on all tracks there just simply aren’t enough cars available when they need to be to haul 440 million metric tons of grains per year for 2 years.

Chris Blumberg is a software developer in New York who enjoys studying macroeconomic issues. He wrote an excellent comment our our Railroaded series about grain and railroad backlogs last month. We always welcome other views here at MetalMiner. Here is Chris’ explanation of the issues facing rail transportation other than just increased demand for freight cars from the oil and gas industry.

There is currently a lot of anger being directed at class 1 railroads across Canada, Mexico, and the US over the massive backlogs that all industries have been experiencing this year. Almost everyone places this blame entirely on the railroads choosing oil trains over grain trains as the oil is more valuable and oil companies can pay more for it. But if this the case, and why would a couple thousand extra tank cars per week cause such congestion?

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Let’s start with the US highway system which is the main competitor to the US rail system. US rail companies are privately owned and pay taxes on all the land they own including the rail itself. However, all roads, whether it be city, state, or US, are government property and have no tax base. When expressways and roads are expanded, the counties and states actually lose money by doing this. On top of this, they now become responsible for maintaining the new expansions. Now you might be thinking that our taxes cover all of this. That’s true, that’s why we have a fuel tax, and registration fees. Yet, even though this is correct, the US highway fund is bankrupt and has not been able to cover all the maintenance and expansion since those taxes were first created.

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In 1993 the US government raised the fuel tax to 18.4 cents per gallon of gasoline, and 24.4 cents per gallon of diesel. Back then this was quite a big tax, as gasoline was under $1 a gallon, representing more than 20% of the cost. The problem is the politicians in congress have never raised this tax. Since then, states have been gradually establishing their own gasoline and diesel taxes to make up for this shortfall in funding, with the national average now being 30.89 cents per gallon of gasoline and 30.75 cents per gallon of diesel, for a total of 49.28 cents per gallon of gasoline and 55.15 cents per gallon of diesel.

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The key question whenever a mining operation provides something of value to a traditional authority is whether and when this conduct threatens to trigger the U.S. Foreign Corrupt Practices Act’s (“FCPA’s”) prohibition against bribery of foreign officials. We set the context in Part One of this article.

Put another way, will the gift or financial support likely be viewed by US enforcers as intended to improperly influence the traditional authorities?

Part of the answer to this question will depend on how the US Department of Justice prosecutors, already focused on investigating the mining industry, will come down on the threshold question of whether the particular traditional authority qualifies as a “foreign official.”

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DOJ’s recent shift in focus to enforcement actions involving developing countries where traditional authorities routinely exercise considerable influence over social, familial and business matters adds additional incentive to proceeding with great caution.

That’s why we made a list of 8 Guidelines to Live By for mining companies.

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These days, the term “social license to operate” is commonplace. Its use is testament to an industry-wide recognition that, in many parts of the developing world, achieving local resource growth requires mining companies to go beyond just obtaining government permissions, such as licenses and permits to conduct business. Also necessary is the the much more intangible and informal “social permission” from the local communities and other stakeholders.

Social License: A Modern Mining Prerequisite

Part of the broader concept of Corporate Social Responsibility or “CSR,” the goal in obtaining the trust-based social license is to ensure the local communities’ acceptance not only of a mining company’s general presence, but also of its specific projects. And make no mistake about it; obtaining community approval and buy-in is not just part of being a “good corporate citizen.” Failure to obtain the social license to operate will almost certainly have a very direct impact on whether and when local agencies of elected governments are willing to grant operational permits or licenses.

Local conditions of course vary from country to country and region to region, but frequently the communities and stakeholders of greatest concern to mining operations are indigenous peoples. As part of their long-standing cultural norms and practices, the leaders and elders from local tribes, clans, ethnic or religious groups, and families, as well as military and political strongmen, expect representatives of mining operations to provide financial and other assistance.

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