CN Rail Strike Halts Canadian Supply Chains

CN Rail Strike Halts Canadian Supply Chains

Executive Summary 

  • The Canadian National Railway Company (CN Rail) strike proceeded from November 19 to 27 when an in-principle agreement was reached. Effects from the strike continue to disrupt supply chains in rail-dependent industries across Canada.  
  • Assuming that the in-principle agreement holds, operations will resume at 06:00 local time on November 27, but significant disruptions are anticipated to persist as backlogs are cleared.  
  • 60% of Canadian rail capacity has been compromised with the timely delivery of goods at intermodal sea and ground transportation facilities in the Atlantic, Pacific and Great Lakes, disrupted. For production, immediate impacts are largely determined by dependency on rail transportation for inbound or outbound products.  
  • Lumber, minerals, agricultural products, chemicals, and oil are heavily reliant on rail transport. Some plants began halting production before the strike began on November 19. A failure to resolve the strike would have intensified production impacts and posed expiration risks for perishable goods.
  • Propane and automotive parts shipments have viable ground transportation alternatives, but these alternatives are less efficient and limited in on-demand capacity. The strike has threatened propane supply for agricultural production in Quebec and parts of Ontario, and complicated automotive assembly throughout the Detroit-Toronto corridor.
  • By November 23, the strike had already cost the Canadian economy an estimated CAD 800-1,100 million (EUR 603-827 million; USD 546-750 million). 

Introduction

At 00:01 on November 19, approximately 3,200 conductors, train personnel, and yard workers of the Canadian National (CN) Railway, with the support of the Teamsters Canada Rail Conference, began a strike movement. Effects across Canada began to materialize before the strike was even implemented, and continued to spread as the motion continued unresolved. These effects on Canadian supply chains and global commodity markets are anticipated to reverberate for the remainder of 2019. 

On July 23, the contract governing relations between workers and CN Rail formally expired, opening a period of intensified negotiations for a new contract between the Teamsters union and CN Rail. While negotiations appear to have included some discussions on a lifetime prescription coverage cap and vacation, reports suggest that Teamsters representatives primarily focused on matters of workplace safety and health issues such as overtime and fatigue. 

According to analysis of allegations on social media sources, the safety concerns may be at least partially attributable to severe understaffing of a safety complaint arbitration mechanism, leading to a sense of neglect and vulnerability amongst employees. One change that the union is reportedly advocating to restrict is the use of beltpacks to remotely control trains with one hand, while using another to hang from moving railcars. However, CN Rail has publicly rejected suggestions that ongoing negotiations are related to safety, claiming instead that they are related to worker compensation. On November 15, CN Rail announced that up to 1,600 management and union jobs would be laid off due to adverse economic conditions such as a reduction in US coal, crude, and timber shipments relative to previous years. On November 16, with contract negotiations already dragging on for almost 4 months, the Teamsters union issued a 72-hour strike notice with 99.2% support from union members. CN Rail reportedly called for a binding arbitration agreement to resolve the conflict, but the offer was rejected by the Teamsters union. Industry advocates and CN Rail reportedly pushed for emergency back-to-work legislation, but government representatives spoke against this, instead providing federal mediation assistance and encouraging collective bargaining as the fastest path to resolution. 

Rail Capacity Shock Poses Risk to Canadian Transport Infrastructure

In Canada, 50% of all goods travel by rail at some stage in their shipment. Of this, 60% of rail cargo is carried by Canadian National Rail, a state-owned Canadian Crown company that was privatized in 1995. CN Rail operates 22,000 km of track from Vancouver to Halifax, effectively functioning as Canada’s only transcontinental railroad operator. Additionally, the CN Rail network includes service in the United States from Minnesota and Michigan through Chicago to New Orleans (although U.S. operations are not currently affected by the current developments).

In a statement, CN Rail said that it assigned rail conductor responsibilities to non-striking employees such as rail yard managers who are certified to do so, but that those employees could only meet about 10% of normal capacity described above. Given the circumstances, the sudden reduction in national rail car capacity may cause congestion at the country’s intermodal sea, rail, and ground transportation terminals. 

Such points of impact may include the Ports of Halifax and Montreal on the Atlantic, the Ports of Vancouver and Prince Rupert on the Pacific, and ports in the Great Lakes such as Thunder Bay. In ground transportation, intermodal facilities in Saskatoon, SK reported delays as early as November 19, and rail workers in Halifax reported temporary layoffs as of November 23.  Supply chain managers can anticipate residual delays from such facilities to persist in the days following the resolution of the strike.  

Industrial Impacts Vary by Rail Dependence

Impacts to industries vary, depending on their dependence on rail infrastructure. The movement of hydrocarbons, mined goods, and foodstuffs were most immediately impacted. Specific impacts to individual industries are detailed below. 

CN Rail transports over CAD 250 billion (EUR 170.14 billion; USD 187.5 billion) worth of goods annually, all of which has been compromised as a result of the strike. Economists Brian DePratto and Derek Burleton at Toronto-Dominion Bank estimated that if the strike were to last for 5 days (resolving on November 23, for example), the total impact on the Canadian economy would be between CAD 800 million (USD 603 million; EUR 546 million) and CAD 1.1 billion (USD 827 million; EUR 750 million). 

If the strike were to continue until the dates below, the economists estimated impacts on the Canadian economy as follows: 

Theoretical End DateCAD (millions)USD (millions)EUR (millions)
November 23800 – 1,100603 – 827546 – 750
November 302,2001,6541,500
December 53,1002,3312,113
Sources: Reuters, BNN Bloomberg

Further, impacts on commodity markets are likely to be felt by customers in China, Japan, and Indonesia who receive goods such as lumber and agricultural products from Vancouver and Prince Rupert.  

Automotive

Canadian and American automotive assemblers and suppliers are deeply integrated, sending an estimated USD 30 billion (EUR 27 billion; CAD 40 billion) in automotive parts to Canada for value-added processes or final assembly. In turn, an estimated 5,700 rail cars are utilized annually to send assembled vehicles from Canada to the United States. Due to the high volume of cross-border shipments in North American automotive production, disruptions in the automotive industry have the most potential to reverberate south to the United States, particularly in the Midwest where automotive production is largely clustered. However, the anticipated impact on the automotive industry is more of a complication than a disruption, as automotive parts and finished vehicle shipments can often be temporarily reassigned using ground transportation alternatives. 

Chemicals and Petroleum 

Chemicals and petroleum transportation account for 20% of CN Rail revenue. In the petroleum industry, rail transport functions as the primary alternative to pipelines, and is often used in Canada to supplement pipeline capacity. In September, CN Rail transported 180,000 barrels of oil per day,  accounting for approximately 60% of all crude-by-rail exports in Canada. 

For chemicals, approximately CAD 38 million (USD 28,574,000; EUR 25,928,000) of goods are transported by CN Rail daily. Industry sources reported that companies who recently contacted Canada Pacific Railway, a different carrier, were informed that the company did not have additional capacity available. In anticipation of the strike, multiple unspecified chemical plants shut down operations on November 16. Losses of up CAD 1 million (EUR 680,000; USD 750,000) per day have been reported at the largest chemical plants.

Other Extractable Industries 

Representatives from the extractable industries, such as lumber and mining, expressed concern that a lack of an expeditious solution would be deleterious to their industries. Leaders in the mining industry, particularly potash mining, foresaw the potential for layoffs should the situation continue ceteris paribus. On November 25, Nutrien Limited announced that it will temporarily shut down its largest potash mine, located in southeastern Saskatchewan, for 2 weeks beginning December 2. On November 26, Rio Tinto declared force majeure on aluminum shipments from Canada and stated that they “expect supply disruptions to continue past the end of the labor dispute” as backlogs and inventories return to normal.  

Similar expressions of concern came from the Forest Products Association of Canada, which relies on rail transport and comprises 12% of Canada’s manufacturing GDP, totaling CAD 73.6 billion (EUR 50.22 billion; USD 55.35 billion) per year in output. In the paper industry, which relies on rail transport for pulp, paste, and finished product shipping, has confirmed disruptions Resolute Forest Products confirmed that it was experiencing disruptions. 

Agriculture

Agriculture and foodstuff production relies heavily on rail transportation across Canada. For CN Rail, grain and fertilizer cargo comprise 16 percent of total revenues, and the strike occurred during the peak season for grain shipments. In the prairies, 50% of all agricultural elevators are serviced exclusively by CN Rail, potentially paralyzing operations in the coming days. Further complicating grain shipments will be a scheduled 26.55% hopper car capacity decrease for grain shipments in December, which may result in a significant backlog of stranded goods. In Quebec, where an early snowstorm struck on the week of November 11 and up to 70% of corn is reportedly still in the fields, farmers have expressed concern that crops may go bad if they are unable to access propane for drying and safe storage. 

Propane

On November 21, Premier Francois Legault claimed that Quebec would be out of propane supplies by November 25. This potential shortage of propane, commonly used for backup hospital power, agricultural needs, and cooking in Quebec, has been the subject of strong accusations by the Teamsters union against CN Rail. While CN Rail maintained that they were utilizing their 10% of available capacity to service container traffic and limit port impacts, the union alleged that CN Rail was unnecessarily excluding propane cargo, thereby creating a crisis in Quebec, where 85% of propane supplies are delivered by rail, to increase political leverage.  

Fortunately, the potential shortage appears to have been mostly averted until December. On November 22, sources indicated that Quebec had a current propane supply of 6 million liters and was expecting deliveries of 14 million liters of propane, likely forcing rationing for the week of November 25.  Also on November 22, Canadian Transport Minister Marc Garneau indicated on that a train with 100 cars of propane cargo (with approximate capacity of 100,000 liters each) had already left Edmonton, Alberta for Quebec, easing fears of a shortage in the province. 

However, in Eastern Ontario, reports indicated on November 22 that propane supplies to grain dryers had been halted, and that a risk was developing for a general supply shortage. Such a shortage would have a considerable effect in Quebec, among other provinces, as Quebec farmers use 30% of propane in province. Reports indicate that trucking capacity would likely not be sufficient to address demand, as a single train typically carries the equivalent of 400 specialized trucks. 

Outlook

Sources commonly anticipated that the strike would only last for a few days, as has typically occurred. Historically, the Canadian government has intervened with back-to-work legislation to force an end to rail strikes due to their critical impact on the Canadian economy and Canada’s reputation as a reliable supplier source and transporter. However, the 43rd Parliament is not scheduled to begin until December 5, and representatives of the current administration spoke against this approach in favor of direct negotiations.  

On November 25, the Teamsters union announced that no real progress had been made, particularly on the matters of workplace safety and health issues such as fatigue. Surprisingly, on November 26, reports emerged that CN Rail and Teamsters Canada reached an in-principle agreement that will reinstate a collective agreement for striking workers pending ratification by union members. According to CN Rail, the results of the union ratification vote will be available within 8 weeks. Details of the agreement are not yet known. Assuming that the in-principle agreement holds, full operations are set to resume at 06:00 on November 26. 

However, transportation delays and production disruptions are expected to persist for the near future as significant backlogs, inventory imbalances, and infrastructural congestion must now be resolved. Recovery will be further challenged by changing weather conditions, which force trains to operate with less cars and at slower speeds as winter intensifies. In the agricultural industry, where many farmers paused harvesting operations to protect crops from rotting, representatives estimate that the strike will ultimately result in a 2 to 3 week service disruption. Reports indicate that 35 vessels are currently waiting for grain shipments at the Port of Vancouver. Representatives from the Canadian Propane Association estimate that it will take multiple weeks for propane supplies to return to normal in Quebec, Atlantic Canada, and Ontario. 

Those shipping with CN Rail in Canada by rail should anticipate residual delays to persist should explore alternate shipping arrangements accordingly. 

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