US regulators should reject Union Pacific's (UP) plan to purchase Norfolk Southern unless the railroads can prove that the tie-up will enhance competition and improve service, petrochemical industry trade group the American Chemistry Council (ACC) argues.
UP in July unveiled its plans to buy Norfolk Southern in an $85bn transaction that would create the first US transcontinental railroad offering single-network service from coast to coast.
Chemical rail shippers already have experienced rising shipping costs and declining service quality from Class I railroads and are concerned that further consolidation could only make matters worse, ACC chief executive Chris Jahn told Argus. ACC represents numerous large manufacturers, including Dow and DuPont.
Chemicals shippers have "grave concerns" that the merger, the largest to be reviewed by US regulators, would adversely impact rates, Jahn said. The four US-based Class I carriers — UP, Norfolk Southern, BNSF and CSX — already control about 90pc of rail traffic, and further consolidation would only give carriers more pricing power, Jahn said.
"We're very concerned over the current state of play with regards to service, with regards to rates," Jahn said.
The three quarters of ACC members' facilities that are captive to a single rail carrier already face much higher rail rates than those with competitive options, Jahn said. Over the past 15 years, rates for single-served members have risen by more than 200pc, while members with multiple rail service options have seen rates rise by 24pc, Jahn said.
"Too often it has just been the railroads dictating to our members how it is going to work, because they don't have to compete for the business," Jahn said. "They are in a monopolistic situation."
The proposed UP-Norfolk Southern merger would dwarf Canadian Pacific's $31bn merger with Kansas City Southern in 2023 to form CPKC, the largest single US rail operator and the only railroad that links the US, Canada and Mexico.
But because of its even greater size, the UP-Norfolk Southern proposal will face a higher level of scrutiny from US rail regulator the Surface Transportation Board (STB).
While merger applicants historically had to merely demonstrate that proposed transactions would not harm competition, STB revised its rules in 2001 to require that mega-merger partners demonstrate that they will enhance competition.
Past mergers, like the CPKC deal, have led to service disruptions, and the ACC is concerned that the proposed UP-Norfolk Southern combination could disrupt traffic, Jahn said.
"We are open to UP and Norfolk Southern proving to us that they are going to enhance competition and avoid these service meltdowns of the past," Jahn said. "But that is a really steep hill."
UP and Norfolk Southern have said they intend to show US regulators that the new Union Pacific Transcontinental Railroad "will transform the US supply chain" and "unleash the industrial strength of American manufacturing". The merger partners hope to complete the transaction by early 2027.
ACC members want to ship more products by rail in the coming years, if the railroads can surmount their service challenges, Jahn said.
Chemical-related rail shipments could grow by 100,000 railcars/yr by the mid-2030s, and US basic chemical and polymer production is expected to rise by more than 21mn metric tonnes by 2034, according to ACC projections.
