A Mexican government agency says Kansas City Southern (NYSE: KSU) and two other national rail lines have the opportunity to fix rail rates on certain routes serving much of the country’s industrial production.
The Investigative Authority of the Federal Economic Competition Commission (COFECE) determined that a lack of competing transport options on 31 routes in the state of Veracruz could encourage the railroads serving that region to fix their transportation rates. Those railroads are KSU’s Mexico operations and two subsidiaries of Grupo Mexico, Ferrosur and Ferrocarril Mexicano, also known as Ferromex. The authority published a portion of its preliminary opinion on March 21, and the commission will continue to investigate the issue and issue a final resolution by mid-October.
KSU disagrees with the authority’s conclusions, and it will file a challenge to the preliminary findings, the company said on March 25. If COFECE still supports the preliminary findings in October, Kansas City Southern will seek recourse.
KSU “will exercise all of its rights under its concession and the law to ensure that any actions considered by the Agency are workable and consistent” with KSU’s rights, the company said on March 25.
The agency monitored how the railroads administered their shipping rates on the routes in Veracruz because the state supports 11.1 percent of Mexico’s chemical production for industrial purposes and 47.9 percent of the country’s petrochemical industry.
The railroads have an inherent advantage to the markets there because they have the capability to safely carry chlorine, ethylene oxide, anhydrous ammonia and caustic soda, according to the agency.
The agency conducted its study from September 2018 to February 11 of this year.
Because Mexico’s industrial production is tied to the adequate and timely transport of these substances, the railroads have even greater leverage, the agency said.
“Faced with the market power the rail companies have, users (the producers of the chemical and petrochemical substances) are susceptible to unilateral service suspension, which could generate a production standstill of industrial consumer products,” according to a COFECE summary.
If users have to resort to other transportation modes, it could not only result in additional costs but also create repercussions along the logistics chain, the summary said.
Should COFECE support the agency’s findings when it rules in mid-October, the proceeding would then go to the Railway Transport Regulatory Agency. That office would consider options such as trackage rights or fee regulations to ensure competition.
KSU said it transports chemicals on seven of the 31 routes in question, and it generates less than $3 million on those routes.
The agency’s preliminary opinion will have no impact on existing business and operations, KSU said.