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Each day TFO Canada publishes a sample of trade news on the Canadian import market along with any new, updated or changed regulations and legislations regarding international trade; countries in which TFO Canada offers services and on the export sectors which it promotes.

 

Canadian Pacific, CSX Merger Plan Remains Alive

Tuesday, October 14, 2014 > 09:55:22
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(Wall Street Journal – Betsy Morris, Joh W. Miller and Dana Mattiolo)

Canadian Pacific Railway Ltd.’s proposed merger with CSX Corp. is being pushed by perhaps the only railroad boss in favor of consolidation.

And while CSX didn’t accept CP Chief Executive Hunter Harrison’s approach last week, that is unlikely to be the last word.

People familiar with the talks between CP and CSX, reported Sunday by The Wall Street Journal, said discussions are still possible between the two.

“This conversation has been going on in every board room in the rail business,” one of the people said. “Everybody has been running numbers. We’re dealing with a rail network that’s not boundless in its infrastructure. You can take an existing infrastructure and make it work better.”

While Mr. Harrison favors railroad consolidation, many competitors, shippers and analysts worry that mergers could aggravate congestion delays and raise costs. Some shippers blame previous mergers for continued traffic problems, which have been exacerbated by growing amounts of crude oil being shipped by rail.

“I think it’s a common belief that now would not be a good time,” said a top executive at a major railroad, “because of the regulatory change that would accompany it and the upheaval it would cause the industry.”

Mr. Harrison – who also has run CP’s bigger rival, Canadian National Railway Co. – believes consolidation would help untangle and streamline the rail infrastructure. Were CP and CSX to combine, that would, for example, allow a single railroad to deliver coal from mine to utility, reducing handoffs and inefficiency.

Chicago is likely central to Mr. Harrison, who was brought in by activist investor William Ackman to run CP after a 2012 proxy fight. By combining the CSX and CP rail networks, trains would be able to move around the congested Midwestern gateway without the need to hand trains over to another carrier. That takes anywhere between 15 to 42 hours, according to recent data from the Association of American Railroads.

“Look, we’ve got to wake up,” Mr. Harrison said in a May interview. “Here’s all this traffic going through Chicago, and all the rails run down right through the center of Chicago.”

Last year’s record cold and bumper crop of grain led to bottlenecks and delays that took months to clear. Some people are worried that such problems will be repeated this winter and could get worse with consolidation.

“We need more competition, not less,” said Paul Gutierrez, secretary for Consumers United for Rail Equity, an industry group representing companies that rely on trains to ship goods and supplies. “With four railroads controlling 90% of the traffic, this would just create more of a monopoly.We don’t think that’s a good thing.”

In the event of a merger, “management teams would be more focused on integrating operations than fixing the service,” said Mark Levin of BB&T Capital Markets. “With service pretty poor across the industry, the timing of the [possible] merger is interesting.”

Consolidation would increase anxiety for miners, whose shipments to power plants have been delayed behind tank cars carrying oil and gas. CSX acknowledged that coal customers suffered during the last, particularly harsh, winter. Miners worry about more of the same if this winter is no milder and coal demand rises sharply.

Railroad capacity “isn’t able to swing that much” to meet demand, Greg Boyce, the CEO of miner Peabody Energy Corp. said recently.

CSX has said it is coping with increased demand by adding equipment and workers to improve performance. But carrying a mix of energy products, including natural gas, allows CSX to “capitalize on growth opportunities,” CEO Michael Ward wrote to federal regulators last month.


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