‘Insult to injury’: Record rail demurrage adds to shipper costs

Date: Thursday, January 13, 2022
Source: Supply Chain Dive

Railroads set a new record in 2021 — but not a favorable one from a shipper's perspective.

The seven Class I railroads that operate in the United States collected $1.18 billion in revenues from demurrage fees during the first three quarters of 2021. That's the highest annual figure recorded since at least 2011, according to data reported to the Surface Transportation Board. And shippers often ended up on the receiving end of the bill.

The ballooning revenues, created in part by a surge in imports and transportation demand, have raised a critical question which shippers and railroads fundamentally disagree on: Who's at fault for congestion?

The two parties point the finger at each other as to who should take responsibility for bottlenecks — and the associated costs.

Shippers say they were on the hook for fees even in cases where reduced rail service prevented them from accessing their cargo.

In a June letter to the STB, the Fertilizer Institute said CSX reduced service for its member companies from five days a week to once a week amid challenges in hiring, and that led to automated demurrage bills sent to shippers.

"It's insult to injury — here you are having issues either receiving or sending product and it is costing you money to come up with alternatives," said Scott Jensen, communications director of the American Chemistry Council. "And then the railroads are penalizing you in demurrage."

Railroads argue demurrage fees — which take effect when cargo stays beyond a specified time at a terminal — are an essential tool to keep cargo moving. Railyards were overwhelmed with a flood of imports coming from West Coast ports last summer. Carriers said shippers would leave their cargo at railyards due to warehouse space constraints, a lack of truck drivers and shortages in equipment such as chassis.

Storage fees quickly added up as yards remained backlogged with containers. Demurrage revenue reported to the STB grew 33% between 2020 and 2021, the second-highest YoY increase over the past decade (the highest was between 2017 and 2018).

Class I railroads hit a new record in 2021

In an emailed statement to Supply Chain Dive, Union Pacific said it collected more demurrage revenue in 2021 after seeing a 40% increase in container dwell times in its yards and a 20% increase in the time it takes shippers to return equipment in 2021.

Canadian National made a similar claim in an August letter to the STB, in which it wrote congested yards were "primarily the result of logistics challenges affecting intermodal shippers' access to, and decisions on how to allocate, the resources (chassis, draymen, loading dock space, etc.) needed to handle inbound intermodal shipments."

Fee revenue grows as service drops

Shippers say current service issues stem from pre-pandemic cuts made under precision scheduled railroading, an operating model that emphasizes lean networks and maximizing profits.

"One of the concerns that was raised early on in PSR....is [railroads] really trying to run as lean as possible. They're actually taking trains and crews and sightings and all that stuff out of service," said Jensen. "And the concern was, how resilient will that be? Well, here we are."

As part of PSR and during the pandemic, railroads reduced employee headcounts, shifted service schedules, shuttered yards and cut the amount of free time containers can remain at a terminal before storage fees take effect. But when demand rebounded after the pandemic, shippers say carriers struggled to rebuild service.

The dynamic has led demurrage fees, which are charged more frequently in constrained shipping environments, to become a revenue-driver for some railroads. Sean Pelkey, acting CFO of CSX, told investors demurrage and related fees were among the biggest drivers of income for CSX in Q3, for example.

Demurrage revenues skyrocket after PSR is adopted

But many of the railroads insist revenue via demurrage is not the goal.

"KCS sees demurrage as an important tool to keep the railroad fluid and moving and avoid equipment positioning issues for better customer service, not a revenue source that we seek to increase," the railroad said in an emailed statement.

In a statement to Supply Chain Dive, CSX spokesperson Cindy Schild said the company expects demurrage revenue to decrease as supply chain congestion eases, but noted the fees have helped keep the network fluid in an environment where shippers are facing scarce storage space and labor challenges.

"CSX's preference is that our terminals and yards operate with consistent and efficient throughput without the need to charge demurrage, but it's nonetheless a vital and effective way of furthering fluidity within our terminals and throughout our rail network," Schild said.

Regulators step in

Contention around the validity of demurrage charges has pushed federal regulators to take a more active approach in ensuring railroads are clearly communicating charges and only imposing fees as an incentive to speed up network fluidity.

Railroads define demurrage differently, and each carrier charges a base rate that can rise further based on factors such as car type or the commodity being transported. In some cases, railroads increase the per diem fee charged to shippers depending on how long a container dwells at a rail yard, which would have a multiplier effect on revenue. Other times, the sheer number of dwelling containers caused by a congested environment can quickly accrue a high fee total.

Shippers have complained it was difficult to validate charges, and that there was little information on why demurrage was being charged and in which context.

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