Executive Summary
The $31 billion merger between Canadian Pacific, and Kansas City Southern is the first major rail merger in America in over 20 years.
According to the United States Bureau of Transportation Statistics, total North American transborder freight stood at $132.6 billion between 2021 and 2022.
The Mexican freight rail network includes 16,724 miles (i.e., 27,000 kilometers) of track, and about 88% of the tracks are operational. Of the operational rail in Mexico, 75% is operated by the concessions granted during privatization. 18% is part of the secondary railway network, and the remaining 7% is privately owned.
Mexico’s goal is to grow total (domestic + cross-border) rail freight usage to 40%, up from 26%.
Of the more than 900 million tons of goods transported across Mexico’s border in 2021, 85% was moved by trucks, 12% by rail, and 3% by maritime and air shipments.
The impacts on industrial real estate of increased cross-border rail freights are discussed.
Introduction
Yet another piece of good news for nearshoring proponents is the $31 billion merger between Canadian Pacific, and Kansas City Southern. The entity will be called the Canadian Pacific Kansas City (“CPKC”) and is North America’s first transcontinental railway. The merged rail line includes around 20,000 miles (i.e., 33,000 kilometers) of rail and the integration of the companies is expected to take over three years to conclude. The new entity will be the 6th largest freight railway company operating in America, and is the first merger between two major North American railways since the 1990s.
The merger approval withstood stiff scrutiny from the Surface Transportation Board, over a two period, which considered over 2,000 comments from the public. The agency said the merger would help shift 64,000 truckloads a year to rail, easing congestion and pollution.
The Mexican portion of the merged railway passes only through Texas, and then to Monterrey, and all the way to Mexico City, with several stops along the way. This may seem like a limiting factor, but it’s likely not. Texas is responsible for much of the American renaissance occurring in domestic manufacturing, and leads the trade engagement with Mexico. In 2022, Texas was Mexico’s number one trading partner.
North American Transborder Freight
According to the United States Bureau of Transportation Statistics, total North American transborder freight stood at $132.6 billion between 2021 and 2022. About half of that total, or $65.2 billion represents the trade between Mexico and America, up 17.2% from the previous year.
Truck and train freight between the three countries are expanding in both directions, with truck shipments increases slightly edging out increases in rail shipments. Canada relies less on rail shipments given the type of trade that occurs between the nations, and that much comes via pipelines (i.e., oil and gas).
The chart below shows trade data on incoming containers, by train and truck, at the top land border crossing points between Mexico and America. The data is from the Bureau of Transportation Statistics. Rail traffic is poised to grow substantially, and the trade disparities favoring Texas border crossings are likely to grow even further. Texas dominates rail trade into Mexico, and as such is expected to benefit disproportionally from increased cross-border rail freight shipments.
Mexico’s Rail System
Mexico’s freight railway is owned by the national government, but operated by a variety of private entities under concession agreements they purchased from the federal government. The privatization occurred in 1995 when the government sold six regional concessions. The first concession was purchased by Kansas City Southern, the target in the aforementioned merger, and today the second largest Mexican freight railroad company.
The Mexican freight rail network includes 16,724 miles (i.e., 27,000 kilometers) of track, and about 88% of the tracks are operational. Of the operational rail in Mexico, 75% is operated by the concessions granted during privatization. 18% is part of the secondary railway network, and the remaining 7% is privately owned. Currently, trains move 70% of the cars produced in Mexico, up from 30% ten years ago. Rail is the main method of moving fuels, cereals, minerals and metals in the country.
Of the more than 900 million tons of goods transported across Mexico’s border in 2021, 85% was moved by trucks, 12% by rail, and 3% by maritime and air shipments. When accounting for both domestic and cross-border shipments, rail accounts for 26% of the total volume of freight transported.
The stated aim of the federal government is to grow total rail freight usage to 40% (from 26%) because it will reduce congestion on the roads and result in 75% less pollution. Safety should also improve given the relatively poor state of Mexico’s internal road infrastructure, which is maintained by the government. Conversely, the rain lines are maintained by the railway companies and have a superior safety track record. As part of privatization, the Mexican government agreed to expand the rail, but to date this has not materialized. The Chinese government has floated the idea of funding large Mexican rail expansion projects, but so far those haven’t been actioned.
Impact on Real Estate
As rail use increases, industrial developments tend to be more concentrated along the popular rail lines. Intermodal developments permit the offloading of materials and reloading onto trucks or other preferred mode of transport. At major train depots the intermodal industrial developments are mammoth and many in number. The facilities are located generally in areas where land is abundant and cheap. Expanding capacity is rarely a major hurdle so long as the demand for the use is predictable and long-term in nature. This is in contrast to the difficulties associated with developing last-mile infrastructure.
The Texas Mexican Railway International Bridge in Laredo, Texas is the busiest railway bridge in North America and operates at maximum capacity processing 26 trains per day. In 2020, ground was broken on a second $27 million parallel bridge which will double capacity and add efficiencies since each bridge will be focused on traffic going only one-way.
Rail has challenges which impact real estate. Every train which leaves a station with full containers, should return with equally full containers. This requires a matching of exports and imports, and the acrobatics to pull this off is no small feat. Often train shipments are governed by long-term and strict shipping agreements with guarantees in place as to quantities to be shipped. These limitations of rail freight shipments mean that changes in the real estate needs tend to happen in a relatively slow and predictable manner. Trucks will continue to play a major role in most shipments given the flexibility they provide, and ability to operate profitably where smaller quantities of good are involved.
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