Surprised by Grupo México's moves on FEC? You shouldn't be.

Posted by Hayley Enoch
on Friday, March 31, 2017

                                                          

Two Ferromex units lead a train on CSX trackage at Blue Island, Ill., on Dec. 12, 2015. Trains: David Lassen

What in the world is a Mexican railroad holding company doing a railroad in Florida?


That’s the question on many people’s minds after news broke Tuesday that Grupo México purchased the Florida East Coast Railway for $2.1 billion. To many it seemed
surprising, completely out of left field. With the way that shipping patterns in North America have changed over the past 20 years, though, something like this should have been expected. 

First, some background: Grupo México is a holding company that owns a number offirms in the Mexican mining and transportation industries. To people in the United States, the most recognizable subsidiary would be Ferromex.

Ferromex (a contraction of Ferrocarriles Méxicanos, which translates to Mexican Railroads) claims almost 6,000 miles of track and sees heavy traffic between the U.S. border and numerous ports on the Mexican coast.The railroad is a relative newcomer in the world of Class Is: Ferromex began operations in 1998, after the Mexican government privatized a nationalized railroad system. Allowing private investment in the network, the thinking went, would stimulate and reap financial benefits from changing trade routes and a growing Mexican manufacturing sector. Grupo México purchased a 74 percent stake in Ferromex after the Mexican government granted the operating concession; Union Pacific purchased the remaining 26 percent. The companies invested enough money to bring the line up to modern standards within 15 years. That was no easy task: Much of the Mexican railroad network had fallen into disrepair, and motive power was a hodgepodge of castoffs from American railroads.

So why, again, would a Mexican transportation company want to own an U.S. railroad?

It’s impossible to read the minds of Grupo México executives and know their long-term goals with certainty, but it isn’t hard to imagine how purchasing the Florida East Coast would benefit a railroad that already counts traffic to and from international seaports as one of its main sources of cargo.  Between Ferromex and two other railroads under Grupo México’s umbrella, Ferrosur and Ferrovalle, the parent company has made significant investments in Mexican ports and reaped increased traffic and revenue. The Florida East Coast’s roughly 350 miles of main line run the length of the state and include service to Port Miami, Port Everglades, and the Port of Palm Beach. If nothing else, that would offer the company another subsidiary with a decent chance of turning a profit, especially as cargo volumes and trade routes continue to evolve now that the widened Panama Canal is open.

Ownership of the FEC might also allow Grupo México to offer more seamless service to customers — moving cargo from Mexican ports to Florida and then on to Europe or Africa may be more streamlined than moving them overland through North America. Given Union Pacific’s stake in Ferromex, it is not beyond the pale that businesses in the U.S. and in Mexico might
imagine a benefit from avoiding the involvement of Eastern Class Is.

Regardless of Grupo México’s motivation, the sale should drive home a truth that has become incontrovertible in the last decade and a half: Mexican railroads are an important part of the North American railroad system, even though it might not be politically palatable to some. As more carloads move across the border, and as the railroad industry continues to move towards unit trains and direct-to- destination service, we can expect the Mexican carriers take an even more prominent role.

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