Background of the Event
Canadian National Railway (CN) and Canadian Pacific Kansas City (CPKC), the two largest rail companies in Canada, announced rail service shutdown on August 22 due to labor disputes, making around 9,000 railway workers locked out. This event quickly garnered widespread attention. Despite the prompt government intervention and the enforced arbitration to resume operations, this brief shutdown still significantly impacted chemical shipments in North America.
Decreased Chemical Rail Volume
North American rail volume for the week ending August 24, 2024 totaled 41,785 carloads, down 14.9% from the previous week and down 9.3% year over year, according to data issued by the Association of American Railroads (AAR). The 4-week moving average (4wma) stood at 47,005 carloads, down 3.3% sequentially, but still up 5.8% from the seasonal trendline, as represented by the average for 2014-23.
In the US, 4wma chemical rail volume came to 32,895 carloads: down 0.9% sequentially, up 6.8% year over year, and up 4.1% from the region’s seasonal trendline. In Canada, 4wma chemical rail volume came to 13,107 carloads: down 9.1% sequentially, down 6.4% year over year, and up 11.1% from the trendline. In Mexico, 4wma chemical railcar volume came to 1,004 carloads: up 0.4% sequentially, up 19.6% year over year, and down 5.6% from the trendline.
The chlor-alkali market has raised concerns about a potential strike. Since chlorine and hydrochloric acid (HCl) are both used in water treatment, suppliers in Canada are pushing for a strike to be delayed or for its products to be considered essential so as to prevent a threat to municipal water supplies. To mitigate potential supply disruptions, Canadian chlor-alkali producers and their U.S. counterparts near the Canadian border have been trying to build up on-site inventories for buyers. However, the effectiveness of such contingency plans depends on the duration of the strike. Wildfires across central Canada have made inventory building more challenging as the fires have encroached on critical rail lines.
In the polymers market, Canadian polyethylene (PE) and polypropylene (PP) producers like Nova Chemicals and Heartland Polymers took preemptive measures against a rail strike as early as May by shifting some of their inventories to warehouses in the U.S. to minimize supply disruptions to U.S. customers. Additionally, these Canadian producers also made plans for storage within Canada to prepare for potential rail shutdowns. As long as a strike would not last more than a few weeks, market participants generally believe its impact on the overall market would be minimal. Polyvinyl chloride (PVC) customers in Canada had taken actions earlier on stockpiling, yet the need has been lessened due to Canada’s weak economy and construction sector. Polystyrene (PS) distributors in the eastern and western regions have prepared resin supplies, but warehouses in Canada were oversupplied and turning away extra railcars.
In the chemical market, a Canadian rail strike would impact the cross-border trade flows of butadiene (BD). A BD producer in Sarnia, Ontario, primarily serve clients in the Midwest, which could experience supply disruptions due to the railway strike, exacerbating the tightness to the U.S. market. In comparison, concerns from the ethylene, aromatics, isocyanates, and polyurethane (PU) markets were fewer, as most buyers were able to sustain supplies by truck. Methanol market participants also didn’t express significant concerns.
Economic Impact
The shutdown of Canadian rail has led to a substantial impact on the North American economy. Canadian railroads transport about USD 277 billion worth of goods annually, and around 75% of exports are handled by these two rail companies, according to the Railway Association of Canada (RAC). Rail transport accounted for about 14% of the total bilateral trade of USD 382.4 billion between Canada and the U.S. in the first half of this year.
The rail shutdown could cause a direct economic loss of USD 341 million for Canada, not accounting for indirect effects such as damage to consumer and business confidence, according to Moody’s Corp. The disruption in the supply chain will impact multiple industries across various countries in North America, including manufacturing, agriculture, retail, and more.
Challenges of Intermodal Transportation
Intermodal transportation plays a significant role in the North American logistics system, accounting for roughly 37% of the total transportation volume. Many retailers such as Walmart, Target, Procter & Gamble and Canada Goose utilize this mode of transportation. Around 66% of cargo arriving at the Port of Vancouver in Canada is moved by rail and truck to final destinations.
Impact on Industries
The American Apparel and Footwear Association has warned that as back-to-school shopping season approaches, about 30% of apparel and footwear move by rail, and any delays could have negative impacts on the supply chain. Moreover, the agriculture sector faces severe challenges in transportation. Especially for grains and agricultural products reliant on rail transport, ensuring their smooth transportation during harvest seasons is crucial.
Market Outlook
Canadian railway operations have gradually resumed thanks to the government intervention and the initiation of arbitration procedures. However, market participants remain closely monitoring the expiration of labor contracts for longshore workers on the East and Gulf Coasts, in anticipation of a potential strike disrupting supply chains once again.
While the recent rail shutdown was brief, it highlighted the vulnerability of the North American logistics network and its high dependence on rail transport. To mitigate the impacts of similar events in the future, enhancing the resilience of supply chains will become a crucial agenda.
