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July 14, 1997 02:00 AM

PLASTICS INDUSTRY UNEASY OF CONRAIL SPLIT

Steve Toloken
Assistant Managing Editor
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    WASHINGTON—The plastics industry—one of the nation's most rail-dependent industries — is casting a wary eye toward the split of Conrail's railroad network and asking a basic question: Will it get stuck with the bill?

    Norfolk Southern Corp. and CSX Corp. want to take over Conrail Inc. in a $10 billion deal they say will increase competition and redraw the map on rail service east of the Mississippi River. But some plastics industry officials are asking whether it will further reduce rail competition.

    The United States had 41 major railroads in 1980; it has nine today.

    Norfolk Southern and CSX plan to pay roughly twice what Union Pacific paid for Southern Pacific last year, when the purchase price is compared to revenue, said Maureen Healey, director of federal environment and transportation issues for the Society of the Plastics Industry Inc., in Washington. NS and CSX plan to pay $2.76 per $1 of Conrail revenue, compared with $1.34 by Union Pacific, SPI said.

    ``Who will pay the costs of the acquisition?'' she said. ``The plastics industry worries that the shipper community will be handed the bill in the form of higher rates, further aggrandizement of captive shippers and monopolies paired with duopolies.''

    The stakes of any railroad merger are high for plastics, because three-quarters of the resin moves by rail and rail transportation accounts for 20 percent of the cost of raw materials.

    SPI officials stress that they have not taken a position on the merger, but the trade association did join a coalition of shippers this summer that aims to pressure Congress to change laws that ``from all aspects favor railroads,'' said Lewis Freeman, SPI's vice president of government affairs.

    That marked the first time shippers have organized to go to Congress as a group, but the effort is in its early stages and could take several years to come to fruition, he said. SPI is jointly studying the proposed merger with the Arlington, Va.-based Chemical Manufacturers Association. CMA cut its own deal last year in the UP-SP acquisition.

    The railroads and some observers, however, argue that splitting Conrail will boost competition. Both Norfolk Southern and CSX say that the merger would end Conrail's government-created monopoly in the Northeast and bring head-to-head competition to New York and New Jersey, markets that have not seen it for more than 20 years.

    Each railroad would have more than 20,000 route miles in the eastern United States.

    ``For the first time since the 1960s, we will have two balanced Class I railroads competing throughout the eastern United States,'' CSX CEO John Snow said in a statement to federal regulators.

    Most of the processors and resin suppliers contacted said they still are digesting the 15,000-page merger application give to federal regulators, but some welcome it.

    A spokesman for Pittsfield, Mass.-based GE Plastics said it ``will result in faster, more reliable transit time'' and said splitting up Conrail will yield efficiencies.

    NS noted that St. Louis-based injection and blow molder Contico International Inc., which gets 150 million pounds of plastic a year by rail, told regulators it supports the deal because it would open a previously closed market to competition.

    Norfolk, Va.-based Norfolk Southern's revenue from chemicals has grown 25 percent since 1990, and plastic resins are its principal chemical commodity, company officials said.

    Cost pressures from trucks, barges and other carriers act to keep rail prices down, preventing the companies from raising rates simply to recoup the cost of the merger, said Chris Jenkins, chemicals marketing vice president for Richmond, Va.-based CSX.

    Generally, the rail consolidation and deregulation of the past decade have lowered rates as carriers cut costs and eliminated unprofitable lines, said Robert Delaney, vice president of transportation industry analysis firm Cass Information Systems Inc. in St. Louis.

    ``I can understand the [plastics] industry being concerned, but the experience with mergers has generally been favorable,'' he said.

    But one rail analyst for shippers, who asked not to be named, said government figures indicate Conrail's revenues from shipping chemicals — about 22 cents a ton — are higher than the roughly 18 cents per ton for NS and CSX, generally because shippers had choices getting to Conrail territory, but not after they got into its territory.

    Eliminating Conrail would mean that some shippers' traffic into the old Conrail network in the Northeast is going to be captive to either NS or CSX for the entire trip, the analyst said.

    Michael Klass, president of Shortline Services, a Cleveland-based consultant for small railroads, said the deal will open the Philadelphia-to-New York corridor to competition, but ``when you get outside of that narrow band, to a certain extent, there is less competition because you have this route consolidation.''

    SPI estimated that rates on noncompetitive routes are 15-60 percent higher, and a report from Escalation Consultants Inc. in Gaithersburg, Md., found that rates were at least 40 percent higher for captive traffic on the Houston to Atlanta run.

    The railroads have agreed that any shipper that had access to track from two carriers before the merger but would lose one will still be able to use two railroads, said CSX spokeswoman Cathy Burns. However, details such as how much the carrier with track will charge the other one for its use have to be worked out, she said.

    CSX said it plans to pay for the merger not by cutting service or boosting prices, but by getting larger. The carrier will abandon only 29 of the 4,500 miles of new track it is acquiring, she said.

    ``It is not that we are anticipating that we will raise prices,'' Burns said. ``We will grow the business.''

    SPI also is concerned with the carriers' plans to invest in facilities to help them take traffic that now goes by trucks, rather than on improvements such as new switching that more directly benefits rail-dependent traffic like plastics, Healey said.

    But CSX's Burns said that only about 10 percent of the $500 million the railroad plans to spend on new facilities would go toward such intermodal traffic. The improvements include $220 million for massive, nonintermodal, upgrades in the Midwest, she said.

    ``I don't think there is a tremendous shift,'' she said. ``There is an eye toward intermodal'' that will help them capture some of the 86 percent of products that move by truck on the East Coast, she said.

    Rail analysts are unanimous in expecting the Surface Transportation Board in Washington to approve the merger next year, but Michael Mattia, a staff member of the Washington-based Institute of Scrap Recycling Industries Inc., said any pull that shippers have will come in ``fine-tuning'' the split.

    One of the strongest actions shippers could take is to convince Congress to lift the antitrust exemption that railroads have and give authority to approve mergers to the Justice Department, which is much more stringent than the STB, Delaney said. That would also give a role to states, where plastics have more lobbying power, he said.

    ``Members of the Surface Transportation Board have a different outlook on what provides competition,'' SPI's Healey said. ``We did not think the UP-SP merger was competitive. They will probably see this as competitive.''

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