Marine Highway Transport of Toxic Inhalation Hazard Materials (2012)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

36 Market Conditions It is important to note that both ammonia and chlorine are characterized by mature, low-growth markets. Inter- viewees indicated that the ammonia volumes for 2010 and 2011 are probably close to the ceiling for the United States. In other words, this market is a mature market with few, if any, existing service gaps. The hazardous properties of ele- mental chlorine and consequent potential liabilities work against expansion of transportation and storage of chlorine gas itself. These factors indicate that for marine transporta- tion to increase its shipment volumes of either ammonia or chlorine, it will be necessary to attract shipments currently moving by rail; there is not enough expansion in the market for marine transportation services to target new shipments. Ammonia Since September 2008, anhydrous ammonia prices have been correlated with both corn and natural gas prices. The correlation between ammonia and corn likely indicates a demand relationship; higher corn prices indicate larger future planting of nitrogen-using crops, leading to more use of and higher prices for ammonia. Moreover, higher corn prices indicate a greater ability of farmers to pay for nitrogen. The correlation between ammonia and natural gas likely indicates a supply relationship; natural gas is a key input in anhydrous ammonia production, with higher natural gas prices leading to higher costs of producing ammonia (71). It is generally agreed that fertilizer demand is inelastic with respect to price. This means that fertilizer use is insensitive to its own price (72). Data compiled by the U.S. Geological Survey show that there is a weak relationship between the price of ammonia and the consumption of nitrogen fertilizer. Figure 16 and Figure 17 illustrate this (22, 73). According to the U.S. Army Corps of Engineers (USACE), 1,334,000 tons of ammonia were shipped on the inland water- way system in 2009. Approximately 10.3 million short tons were produced in the United States in 2009, and 6.1 million short tons were imported. Therefore, waterborne shipments accounted for 7.9 percent of the total ammonia shipped throughout the United States. Chlorine In contrast to ammonia, chlorine imports are not a viable alternative because of the difficulty in transporting chlorine in bulk. According to statistics from the Chlorine Institute, in 2008, the U.S. chlor-alkali industry produced 11.5 million short tons of chlorine and 12.1 million short tons of caustic soda (sodium hydroxide). The USACE does not report chlo- rine as a separate commodity in its public statistics, but as stated earlier in this report, waterborne chlorine shipments are reported to make up approximately 1 percent of the total. Transportation Rate Pressure Ammonia For ammonia shipments, the weighted average revenue per rail car was $2,825 in the fourth quarter of 2010. (Fertilizer was defined as STCC 2871: “fertilizers exc. milled, mined or otherwise prepared natural boron, sodium or potassium”) (74). At 80 net tons per car, this equates to a rate of $35.31 per net ton. The Barge Costing Model, a model used for a num- ber of years by the USACE in its feasibility and rate studies, estimates the linehaul cost of shipments from New Orleans to St. Louis at $39.79 per ton. While both the rail and barge rates are only estimates, they indicate that the two are close to parity. The cost of ammonia is directly proportional to the cost of natural gas, which comprises more than 80 percent of the production cost of ammonia. The sharp rises and declines in natural gas prices have caused a similar fluctuation in the cost of ammonia. This causes the relative importance of transpor- tation costs to rise and fall as well. For example, CF Indus- tries estimated that it cost $34/ton to ship ammonia from the C H A P T E R 6 Economics of Expanded Operations

37 Gulf to Corn Belt locations in 2010 (this would be $3,060 per rail car) (75). A shipment cost of $34/ton would represent 8.7 percent of U.S. Gulf prices in 2010 ($390/ton) but would have been 5.8 percent of 2008 prices ($590/ton). To put this in perspective, a 10-percent reduction ($3.40) in transporta- tion costs would represent only 0.87 percent of the Gulf price of ammonia in 2010 and 0.58 percent of the 2008 price. It is important to note that U.S. consumers have shown a strong tendency to substitute domestic product with imports when the cost of imports is competitive. This will affect the routing of shipments and the ton-miles of shipments. These figures all point to the conclusion that while in abso- lute dollars the transportation costs might be significant, in relative terms they would have little effect on the production or distribution of ammonia. Therefore, it does not appear that competing on the basis of cost alone would be an effec- tive strategy for increasing waterborne ammonia shipments. The basis of competition would have to be the ability to han- dle large volumes reliably and safely at an acceptable price. Chlorine Since imports are not a viable alternative to domestic pro- duction of chlorine, there is possibly some price elasticity in the cost of chlorine; however, since chlorine is only being shipped by the producers in company-owned barges, an evaluation of the effect of barge rates would be speculative at best. The USACE Barge Costing Model estimates the linehaul cost of chlorine shipments from New Orleans to St. Louis to be $52.39/ton in the fourth quarter of 2010. In recent testimony before the STB, counsel for Consum- ers United for Rail Equity (CURE) stated that rail rates have Figure 16. Consumption of nitrogen fertilizer versus cost—1996 to 2000. Figure 17. Consumption of nitrogen fertilizer versus cost—2006 to 2010.

38 caused transportation costs to rise to more than 50 percent of the total cost of producing chlorine in many markets. He indicated that rail rates either are or could have been deter- minative as to whether specific plants stayed in operation. Rail rates are now often the single most important factor in whether chemical companies can compete (76). The aver- age rate per carload increased 133 percent between 2000 and 2009. In the same hearing, a representative of the Chlorine Institute echoed this statistic. The vice president of sourcing and logistics for DuPont stated that the company reviewed price and transit times for several of its highest-volume lanes and determined that since 2003, the average rate has gone up 100 percent and the average transit time has gone up 17 percent. The vice president of supply chain for Occiden- tal Chemical (OxyChem) stated that in the 5 years between 2005 and 2010, which included a sustained period of general economic recession, OxyChem rail rates increased from 30 percent to 160 percent on average. A recent analysis of OxyChem’s freight rates shows that rail freight transportation expense accounts for 10 to 15 percent of the delivered price of its products and up to 25 percent of its manufacturing costs. An increase in rail rates has a direct effect on the prices customers pay for not only the primary chemical products but also the downstream goods that are made with these products (77, pp. 138, 144). Specific rail rates are very difficult to obtain. However, in the above-cited STB hearing, a representative of Olin dis- cussed a specific rail rate example. Less than 15 years ago, the initial rate for movement of chlorine from Olin’s Sunbelt plant in Alabama to a customer location in LaPorte, Texas, was less than $1,440 per car. Today, the tariff rate for that same movement is almost $11,763 per car, an increase of over 817 percent from the original rate. The rate is predicated on Sunbelt’s commitment to deliver up to 250,000 tons of chlo- rine (approximately 2,777 rail tank cars) per year. Assuming 80 tons per rail car, this is equivalent to $147.04/ton. Although the statistics include chemicals other than chlo- rine, OxyChem stated before the STB that in 2010 it shipped 63,000 loaded rail cars and incurred more than $220 million in rail freight charges—an average of approximately $3,500 per rail car movement. This equates to $43.75 per ton for an 80-ton load. As explained elsewhere in this report, truck transporta- tion is not considered a viable option for chlorine produc- ers because of shipment volumes and safety considerations. Dow Chemical has explained in public hearings that the use of trucks is not a viable alternative for Dow or many of its customers. Dow and its customers have built their produc- tion facilities around rail transportation. Rail cars reduce the need for permanent storage facilities, which are very costly. In addition, the volume of commodities that Dow ships pre- sents unique challenges for trucks (77, p. 113). Opportunities for barge companies to compete for chlo- rine shipments are severely limited by current distribution patterns and practices. Many water carriers do not accept transportation of chlorine as a matter of policy. Water car- riers are not common carriers under the law, so they do not have to accept chlorine shipments. Most of the major carriers have chosen not to do so. Relative Importance Given the estimates mentioned above, rail rates are com- petitive with water rates in most cases. There is not an inher- ent advantage for waterborne transportation in terms of rates. Furthermore, as this report explains in other sections, the origin-destination pairs for these products preclude the use of waterborne transportation for a high percentage of the pro- duction volume. As an example, many of OxyChem’s plants can only be served by rail, and Olin has stated that there is no reasonable alternative to shipping Olin’s products by rail (77, pp. 142–143). In its filings with the STB, CF Industries stated that its inland plants, despite the presence of a local truck mar- ket, are highly dependent on rail to service their facilities. In 2010, 85 percent of shipments from the Yazoo City, Missis- sippi, plant and over 75 percent of shipments from the Verdi- gris, Oklahoma, plant were shipped by rail (78). It will be difficult for marine transportation service provid- ers to increase their volumes except for a very limited number of origin-destination pairs. Chlorine producers have made it clear that they prefer rail, and current waterborne shipments are performed only with company-owned barges towed by barge companies with exclusive contracts. In the case of ammonia, there appears to be strong rate competition for routes where barge companies can compete. Finally, it is important to keep in mind that while in some instances high rail rates may indicate the ability to compete on price, numerous studies and reports have shown that rail companies will often lower their prices in order to maintain market share or exclude new entrants. For example, compare the case of Olin’s shipments, where there is no modal compe- tition, with OxyChem’s stated average transportation cost by rail. While this would seem to run counter to the railroads’ desire to eliminate TIH movements, they may still compete with barges in order to solidify their relationship with cus- tomers who also ship other products in high volume. Today’s high prices may become tomorrow’s competitive prices with the emergence of competition. Capital Requirements Since trucks are not a viable option for large quantities and long distances, the analysis of capital requirements focuses on marine and rail equipment and facilities. For marine carriers (i.e., barge companies), the capital cost of equipment does not

39 appear to be a deterrent to participation in TIH transportation; capital costs are recaptured in the freight rate and are manage- able in terms of financing. However, for terminal operators, shippers, and buyers, capital costs are a significant barrier. Ammonia The landside capital costs required to establish an ammo- nia terminal are well defined. Table 12 shows the estimated cost of the various infrastructure components in 2006 dol- lars. Figure 18 shows a 30,000-ton ammonia storage tank. Ammonia storage tanks typically have the following characteristics: • 126 to 170 ft in diameter. • 60 to 105 ft high. • 6 to 12 million gal capacity (15,000 to 30,000 tons). • Usually 1 psig maximum internal pressure (~ -28°F). Marine ammonia terminals must be capable of receiv- ing and holding anhydrous ammonia in a refrigerated state, loading out to refrigerated barges, and reheating ammonia to feed non-refrigerated pipelines, rail cars, and trucks. It takes about 3 years to start up a new terminal (11). The cost of a new ammonia barge is approximately $14 mil- lion (with a capacity of 2,500 tons) (7). Ammonia barges with a capacity around 3,000 tons are currently quoted at around $15 million apiece. Invariably, these barges operate in two- piece and sometimes three-piece unit tows, requiring capital of $30 to $45 million per tow, not counting dedicated tow- boats required for propulsion. New barges do not necessar- ily require a new towboat, but a new towboat could cost an additional $5 to $6 million. Ammonia barges require unit tows because they are refrig- erated and require specially trained crews to operate the refrig- eration equipment en route and conduct transfer operations at each end. In this regard, they are similar to hot oil barges that are equipped with self-contained heating equipment and are used to transport cargoes such as asphalt and coker feedstock. However, the Coast Guard does not mandate unit tows. A barge can only be expected to make seven to eight round trips a year (because of weather, transit time, demand, etc.). To date, ammonia freight rates do not support the capital cost, so new equipment has not been built for some time. The average cost of a rail tank car in 2008 was around $120,000 (18). TFI reports that its member ammonia ship- pers do not own tank cars; rather they lease the cars on a contract basis. TFI estimates the cost to TFI members of replacing current leased cars over the next 8 years (meeting the requirements of the latest FRA proposal) to be some- where between $800 and $1,500 more per car per month and possibly exceeding $100 million per year (34). The typical life span for these rail cars is 30 years (79). Chlorine Marine shipments of chlorine are severely limited by the number of facilities capable of receiving it by barge. There are only two such facilities on U.S. inland waterways (the DuPont titanium dioxide plant in New Johnsonville, Tennessee, and the Westlake Monomers vinyl chloride plant in Calvert City, Capital Item Cost (2006 dollars) Conventional Production Facility 1,500 tons/day with storage $300 million Pipeline 12″ Diameter—1,000 mi $240 million Large Refrigerated Storage Terminal 30,000-ton capacity $20 million Pressure Storage Tanks—30,000 gallons $5/gallon installed $150,000 Ammonia Rail Tank Car Current design: 340 psi Proposed design: 500 psi $118,000 $135,000–$150,000 Table 12. Ammonia infrastructure capital costs (69). Figure 18. Ammonia storage tank (7).

40 Kentucky, both located on the Tennessee River). There are no coastwise shipments of chlorine in the United States. In the interviews conducted for this study, the capital cost of equipment and infrastructure was cited several times as the most important limiting factor for marine shipments. A switch to transportation by water requires suppliers and end users to invest large amounts of capital for infrastructure. This could range from $5 million to $100+ million depending on the size and scope of the project, whereas rail and truck already have infrastructure in place with government and private funding to maintain it. The cost of a new chlorine barge is approximately $6 mil- lion (with a capacity of 1,100 tons) (7). Unlike ammonia, chlorine barges do not operate in dedicated unit tows. They operate in linehaul mode, meaning the barges go into tow with other barges carrying other commodities for other cus- tomers. They would, therefore, not require the acquisition of new towboats. However, even though they have this advan- tage over ammonia barges, many towing companies do not handle chlorine barges due to risk. When moving chlorine by rail, the shipper must consider the cost of new rail tank cars, which is between $140,000 and $150,000 each (80). Risk Railroads clearly consider the risk of TIH shipments to be the most important cost factor (potentially). The total risk associated with many of these materials is greatly influenced by low-probability/high-consequence events. The extent of potential carrier liability far exceeds the levels of commercial insurance that carriers can practicably obtain. While the risk of catastrophic property and environmental damage and loss of life is lower for marine shipments, the possibility of involvement in a large-sum lawsuit exists and must be accounted for in the carrier’s economic analysis.