George Kerevan: Buffett right on track as global freight set to bypass Europe

Published on Tuesday 17 November 2009 20:16

THE recession is transforming the global freight business. I know that sounds dull, but there is a lot of money to be made in moving things around, as ace investor Warren Buffett has reminded us.

Buffett's Berkshire Hathaway fund has just paid $34 billion (20.3bn) for the Burlington Northern Santa Fe railway. BNSF operates one of the largest rail networks in North America, with 32,000 route miles in 28 states.

Buffett is no railway anorak. Remember his famous maxim: "I will tell you how to become rich. Be fearful when others are greedy. Be greedy when others are fearful."

He is betting that rising oil prices will make rail freight much more competitive than road transport over the next few decades. The 2.2 million registered trucks that carry most US long-haul freight average a paltry 5.1 miles to the gallon. Here in Europe, despite our green credentials, only 10 per cent of freight goes by rail. In America, the figure is 41 per cent and due to rise further when Congress extends a 25 per cent tax credit to all new rail freight expansion. And Buffett intends to invest heavily in new rail infrastructure.

But hard-nosed Buffett is concerned with more than milking subsidies: he is interested in building a complete global logistics system. That future lies in the growing economic nexus between the Asian tiger economies and US consumers – a nexus that shuts out Europe. Buffett expects a massive rise in container traffic delivered across the Pacific by ship to revamped terminals on the US west coast, and then shipped inland by a modernised BNSF.

Buffett is not alone. George Soros has just bought 14 per cent of Global Ship Lease, a US company that leases out giant container vessels for the Asia-America run.

Buffett's is not the only game in town. The Panama Canal can handle container ships carrying 4,000 20ft containers, or "twenty-foot equivalent units" (TEUs). But ships now carry 15,000 TEUs. To reach the US east coast, they must go round the world via the Suez Canal – an expensive option. New locks are being added to the Panama Canal to accommodate bigger ships, to be completed in 2014. This will open the prospect of giant container ships from Asia docking at New Orleans and freight being distributed inland up the Mississippi.

To fend off this competition, the six main US container ports on the Pacific coast, all of which are serviced by Buffett's BNSF, are in China as we speak to persuade Asian shipping lines to use their facilities rather than going through the Panama Canal.

The Mexicans also want in on the game. They are offering easier – and cheaper – access for Asian container ships. Freight will then be shipped across the US from new distribution hubs in Texas. The Alliance Texas hub, near Fort Worth, was opened in 1990 and now provides 28,000 jobs. Developers are building another "inland port" in southern Dallas. BNSF bought 198 acres there in 2008.

The intense private-sector competition to provide this infrastructure has not been clocked in Europe, where we tend to be patronising about US domestic transport. But the future could be passing Europe by.

In Germany, the centre-right government has frozen the tax on freight trucks and directed that, in future, it will be invested totally in roads, rather than 38 per cent going to rail. Germany is responding to a short-term crisis in its road haulage industry, while the Americans are thinking longer term.

The European model also favours splitting infrastructure management from transport operations, especially in rail. That has competitive advantages, but it makes a US-style investment programme unlikely. Sweden, which pioneered the split, has now embarked on an equally controversial reform by merging the management of the national road and rail networks into a single agency, along with airports. That may sound super-efficient, but it could also be a bureaucratic nightmare with no-one understanding the needs of the separate parts.

We should note also that while new, private rail freight operators were attracted by the liberalised European Union, more recently many have been absorbed by the traditional national operators such as DB and French National Railways, which dominate the market. Public cash for new logistics infrastructure will be in short supply in Europe in the coming decade. America's private-sector alternative could be Europe's undoing.