Canada’s two main railroads shut down on Thursday after contract talks with a labor union failed to reach a deal, forcing businesses in North America to grapple with another big supply chain challenge after several years of disruptions.
The sprawling networks of Canadian National and Canadian Pacific Kansas City are crucial to Canada’s economy and an important conduit for exports to the United States, Mexico and other countries. The stoppage is forcing companies to find other modes of transport, but for some types of cargo, like grains, there are no practical alternatives to railroads.
“The longer this goes on, the impacts are going to be extremely painful for supply chains, especially for products that don’t have alternative modes of transport,” said Brian Whitlock, an analyst at Gartner, a research firm.
Canadian National’s network extends into the United States, and Canadian Pacific Kansas City has operations in the United States and Mexico. The companies’ networks outside Canada are still operating because their American and Mexican workers are covered by different labor agreements.
How bad could it get?
Canada has recent experience with rail labor disruptions. Strikes in 2015 and 2019 ended in days. The country’s federal government has the power to press the rail workers union, the Teamsters Canada Rail Conference, and management to accept an arbitrated settlement.
But the government has declined to step in this time, at least so far. Prime Minister Justin Trudeau and his Liberal Party rely on the New Democratic Party, which was partly founded by organized labor, for the parliamentary votes it needs to stay in power.
A weeklong strike would cause about $1 billion of economic losses, according to Patrick L. Anderson, chief executive of Anderson Economic Group. But a long stoppage could hammer Canada’s export-dependent economy and the businesses around the world that rely on its goods.
The Railway Association of Canada, an industry group, estimates that half of Canada’s exports are moved on trains and that railroads carried goods worth 380 billion Canadian dollars, about $279 billion, in 2022.
The stoppage is occurring as global supply chains have recently been rattled by other shocks.
In the last year, attacks in the Red Sea that have forced container ships to avoid the Suez Canal. Low water levels at the Panama Canal reduced the number of vessels that could use that passage. And much of the Port of Baltimore shut down temporarily after a container ship brought down a nearby bridge.
In addition, companies have begun to divert goods away from U.S. ports on the East and Gulf coasts, in anticipation of a potential strike by dockworkers over a contract dispute with terminal operators.
What goods will be most affected?
Most concern in the Canadian rail shutdown centers on agricultural commodities, like grains and fertilizer. Trucks can’t handle these products because they are typically transported in huge volumes over enormous distances.
Ninety percent of Canadian-produced fertilizer going into the U.S. market is delivered by rail, according to Fertilizer Canada, an industry group. A coalition of agricultural groups said this week that the “inability to cycle products through the supply chain could limit producers’ ability to deliver harvested crops.”
The automobile industry could also be hurt because cars and trucks assembled in Canada are shipped by rail, according to the Global Automakers of Canada, a group that includes companies like Honda and Toyota.
The North American auto industry is tightly integrated, and cars sold at dealerships in Toronto, St. Louis or Mexico City come from factories in Canada, the United States or Mexico, with parts from all three countries.
The rail shutdown could also lead saw mills and pulp and paper plants to close as they run out of room to store products, according to Derek Nighbor, the president and chief executive officer of the Forest Products Association of Canada.
Coal used for steel making in Asia travels on dedicated trains from mines in Alberta and British Columbia to ports for shipment. Most of those mines have limited storage capacity.
What are the workarounds?
Trucking companies are rushing to step in and move some of the goods stranded by the rail shutdown. But since each freight train carries the equivalent of 300 truckloads, a rail stoppage could lead to a surge in truck demand that creates much higher trucking rates, according to C.H. Robinson, a logistics company in Eden Prairie, Minn.
American and Canadian companies that were big users of Canadian ports are shifting to U.S. ports. C.H. Robinson began advising customers to make that change in May, when the rail union held a strike authorization vote. Of the U.S. customers that switched, the company said, some 80 percent are exporting through the ports of Los Angeles and Long Beach in California, and the rest through Seattle and Tacoma in Washington State.