Mexican Port Gets American Connection

By Ronald D. White

June 20, 2006 12 AM PT

Times Staff Writer

The freight train that left Mexico’s Pacific coast on Monday inaugurated daily service to the U.S. Midwest and points beyond, carrying the high-roller hopes of a U.S. railroad and a small Mexican harbor to grab a share of the Asian cargo boom.

The 7,000-foot train is run by Kansas City Southern, which spent $1.5 billion for a controlling interest in every foot of track from the port of Lazaro Cardenas to Laredo, Texas. From there, the route heads north to Kansas City with connections along the way to Chicago, New York, Atlanta and other cities.

The start of daily rail service is a big step in the plan to create a bustling waterfront out of the quiet port at the far southern tip of Michoacan state. Mexican officials and the Missouri-based railroad already have gained some heavy-duty allies, including the world’s largest operator of port terminals and the world’s largest shipping line.

“We think Lazaro Cardenas is the growth mechanism for trade on the West Coast,” said Art Shoener, Kansas City Southern’s chief operating officer.

Until now, Kansas City Southern and Lazaro Cardenas have been relatively minor players in their fields.

Kansas City Southern controls one-fifth of the track and posted one-tenth of the revenue of railroad giants Union Pacific and BNSF. Lazaro Cardenas handled fewer cargo containers in all of 2005 than the ports of Los Angeles and Long Beach typically move in one week.

But the port has a naturally deep harbor, direct dockside rail access, room to grow and relatively cheap labor. In addition, the railroad said it planned to lure shippers with competitive rates and shorter transit times.

Some transportation experts are predicting that Lazaro Cardenas could become the overflow option when the next big congestion crisis hits U.S. or Canadian ports or the Panama Canal.

“We take it very seriously. There is a good chance that this will be a viable trade lane for Pacific trade into the U.S.,” said Rick Paterson, a USB analyst.

The nation’s busiest container complex, Los Angeles and Long Beach, rebounded from almost disastrous congestion in 2004 to easily handle an even larger amount of cargo in 2005.

So far in 2006, all of the major West Coast ports “are performing soundly. They are all growing as quickly as they can,” said Joshua Schaff, seaports analyst for Moody’s Investors Service.

But several experts are concerned that a traffic jam lies somewhere ahead, if not at the ports then at the inland rail and truck corridors that serve them.

“You have prominent shipping lines like APL warning that we are pushing too much cargo through a pipe that is not expanding quickly enough,” said Randy Cousins, a BMO Nesbitt Burns railroad analyst. “That’s why something like this has the potential to succeed.”

The big four U.S. railroad companies -- Union Pacific, BNSF, Norfolk Southern and CSX -- will spend a combined $7.3 billion on capital improvements in 2006. But their on-time performance and average speed continue to deteriorate because of the overwhelming demands on their limited infrastructure from the staggering growth of international trade and other shipping, said Charlie Banks, president of R.L. Banks & Associates, a transportation consulting company in Washington.

“The shipping lines are looking for alternatives, and one of them is Mexico,” Banks said.

In addition, Mexico is repositioning itself in a world in which its manufacturing base is eroding and its labor is considered relatively expensive by Asian standards. Part of that repositioning, Banks said, is as a logistics and supply chain corridor for goods heading to the U.S.

Indeed, Kansas City Southern is pushing its rail service as a shorter route from the Pacific coast, saving shippers money. The railroad said its route from Lazaro Cardenas to Houston is 532 miles shorter than the BNSF route from Long Beach to Houston.

Another factor in the project’s favor is a labor pool that is less expensive than the one represented by the International Longshore and Warehouse Union, whose U.S. dockworkers command some of the highest blue-collar wages in the nation.

“The labor situation would be appealing. Everyone is looking to save money,” said Don Hodges, whose Hodges Fund prominently features railroads such as BNSF.

For its part the ILWU, which counts 14,000 dockworkers in its ranks, “does not plan to take this lying down,” said spokesman Steve Stallone. He said the effort amounted to a plan to outsource U.S. port jobs to Mexico. Although the union has no firm plans on how to respond, Stallone said the union would support efforts on the part of the Mexican dockworkers to organize.

But the likelihood of lower wages for dockworkers isn’t the only draw. There may also be fewer environmental pressures on expansion at a port like Lazaro Cardenas.

John Husing, an Inland Empire-based economist who follows the vast warehouse and distribution network that serves Southern California’s twin ports, said any discussion of the local ports and their growing traffic always turns to the question of whether pollution can be reduced.

“Here every new project will require a simultaneous effort to clean up the air. I have not heard a discussion that hasn’t had an ironclad link to that,” Husing said.

In such an atmosphere, a new port with a new rail service could profit.

One who thinks so is Gonzalo Ortiz, general manager of Hutchison Port Holdings in Lazaro Cardenas. The giant Hong Kong-based terminal operator has begun a $200-million expansion of its terminal in the Mexican port.

The new train service “is just in time to assist customers with peak season and is a clear indicator of the growth of traffic and capacity planned for this port,” Ortiz said.

A.P. Moller-Maersk, the world’s biggest shipping line, is among those who will use the expanded port, Kansas City Southern said.

Still, West Coast port officials said they weren’t terribly concerned about losing business to Mexico.

“You could say that there is an industry need for alternative points of entry into the American and Mexican markets,” said Mike Wasem, a spokesman for the port of Tacoma, which handled the equivalent of 2.1 million 20-foot containers in 2005. Cargo traffic there is expected to grow to 3 million 20-foot containers by 2010.

The port of Los Angeles, the nation’s busiest container port, probably would lose some business to Lazaro Cardenas, said Jim MacLellan, director of marketing. But he added, “We do not expect its effects to be significant on our operations.”

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Moving cargo

The harbor of Lazaro Cardenas on Mexico’s Pacific coast ranks 34th among North American cargo container ports (2005 ranking*):

1. Los Angeles, 7.5 million

2. Long Beach, 6.7 million

3. New York/New Jersey,

4.8 million

4. Oakland, 2.3 million

5. Seattle, 2.1 million

6. Tacoma, Wash., 2.1 million

7. Charleston, S.C., 2.0 million

8. Hampton Roads, Va.,