Commodity markets were watching negotiations between U.S. railroads and unions closely on September 13, as the deadline neared for a strike that would cut shipments of agricultural and energy products, leading to price spikes.
Ten of the 12 major unions reached agreements, leaving only the Brotherhood of Locomotive Engineers and Officers and the SMART Transportation Division.
President Joe Biden and members of his cabinet joined the talks in hopes of helping broker a deal between freight rail companies and unionized workers.
A railroad strike “would have a huge impact on our supply chain,” White House press secretary Karine Jean-Pierre said Sept. 13. “It’s not acceptable”.
Freight railways have already stopped accepting shipments of hazardous and safety-sensitive materials in preparation for the possible work stoppage to ensure sensitive cargo is not left unattended or unsecured, as well as notified of freight delays and suspensions in the days leading up to the September 16 trading deadline.
The strike threat has so far had the biggest impact on prices for ethanol, which is transported mainly by rail, although coal prices have also been supported by the threat.
“Almost all of the ethanol comes by rail and it’s produced in the Midwest. There is no easy substitute for rail and the US government will have to make decisions about blending targets if the movement of ethanol to demand centers is restricted due to a strike,” said Debnil Chowdhury , vice president of refining and marketing at S&P Global Commodity Insights.
• About 70% of ethanol produced in the United States is shipped by rail, mostly from the Midwest to coastal markets, according to the Renewable Fuels Association.
• The United States also imports small amounts of ethanol from Brazil, primarily to the US West Coast, according to data from the US Energy Information Administration.
• Ethanol can also be transported by truck or barge. According to the US Department of Energy, approximately 10% is transported by barge.
• However, the number of barges available has decreased. The barges require around 25,000 barrels to make installation economical, exceeding the typical lot sizes of 5,000 to 10,000 barrels typically traded.
• “Given where the United States is in its crop cycle, a railroad strike would be a significant impediment to the flow of grain and fertilizer needed for fall applications after harvest. The ramifications would be far-reaching as global grain supplies remain constrained due to ongoing conflict in Ukraine and ISU farmers must soon prepare their acres for 2023,” said Pete Meyer, Head of Grains and Seeds Analytics. oilseeds, S&P Global Commodity Insights.
• With ethanol representing approximately 10-11% of gasoline volume in the United States, any disruption in the flow of this fuel to terminals for blending could affect gasoline prices.
• “Pipelines between the Gulf Coast and the Northeast are well utilized, so there is no additional capacity to use existing pipelines as a substitute,” Chowdhury said. “There is space online between the Gulf Coast and the Midwest.”
• The White House, in a statement, touted the average drop of $1.30/gal at the pump since the start of the summer and repeatedly pledged to take action to keep prices on that trajectory descending.
• A railroad strike could also disrupt crude oil deliveries to the United States, primarily Bakken crude oil from North Dakota in the Midwest to USAC and USWC refiners.
• The most recent monthly data from the EIA shows the Midwest shipping 4.619 million barrels of crude to the USWC in June and 930,000 barrels to USAC.
• If the railroads and unions fail to agree on a new contract by the September 16 deadline, utility coal deliveries would be halted ahead of key pre-winter resupply.
• Demand for US coal increased amid the war in Ukraine and subsequent EU sanctions against Russian coal. A U.S. railroad strike could have far-reaching geopolitical effects, as major U.S. export terminals like Lamberts Point and Dominion Terminal Associates also rely on rail service to move marine coal to market.
• The impact of rail negotiations “has already been felt by slowing and/or delaying coal deliveries until Q2 and Q3 of this year and reducing inventories. Almost 75% of the coal that was delivered to electric utilities in the first half of 2022, 150 million st of the 202 million st, was transported by rail,” according to the EIA, Wendy said. Schallom, Principal Analyst, Coal and Power Analysis, S&P Global Commodities Outlook.
• Lower coal supplies due to a rail strike would increase gas demand for power generators at a time when gas storage levels are already about 11% below average over 5 years old and with only about six weeks until injection season.
• Midcontinent Independent System Operator is closely monitoring fall fuel supplies as 79% of coal shipments for MISO’s coal-fired plants are delivered by rail and the threat of a rail strike looming, MISO staff said Sept. 13.
• MISO generators burn Powder River Basin coal, which is mined in Wyoming and Montana and relies heavily on rail for transportation.
• Dwindling coal inventories could have an upward effect on electricity prices given the recent rally in natural gas.
• A potential rail strike would have a negative impact on the shipment of finished and semi-finished steel as well as steel raw materials.
• Philip Bell, President of the Steel Manufacturers Association, said on September 13: “Our supply chains are under pressure and any disruption to freight rail service will hurt our economy by adding costs and delays to a service system already suffering from poor service.”
• If the parties do not resolve their differences through a voluntary agreement, the tubular division of the American steelmaker Nucor said it expects Congress to intervene as it has done in the past to prevent or stop any interruptions rail service, according to a letter sent to customers Sept. 13 and seen by S&P Global Commodity Insights.
• “The timing couldn’t be worse for the petrochemical industry as it finally started to remove all logistical constraints and manage inventory,” said Robert Stier, principal analyst, petrochemical analysis, S&P Global Commodity Insights.
• The greatest impact would be on polymers, including polyethylene, polypropylene and polyvinyl chloride, which are shipped by railcar.
• US producers also use wagons as mobile storage for polymers. Railcars are extremely important to polymer producers on the US Gulf Coast and a strike would significantly disrupt their operations as well as their customers who convert polymers into consumer goods.
• U.S. spot ethanol prices rallied on Sept. 13 following the impending strike, with Chicago Pipeline ethanol priced by Platts at $2.659/gal, up 15.5 cents, while that New York Harbor ethanol was valued at $2.76/gal, up 16 cents.
• NYH prices are up 30 cents since Sept. 8 and Chicago prices are up 25 cents, following higher corn commodity prices.
• Corn futures rallied as the US Department of Agriculture cut its September yield estimate for US corn by 2.9 bushels/acre from its August projection.
• OTC coal prices are already at record highs. The CSX 12,500 Btu/lb railroad coal of the fast month ended at an all-time high of $205/st for the sixth consecutive session.
• Both Illinois Basin fuels at 11,500 Btu/lb maintained their records, with fast month coal finishing at $202.65/t and fast quarter coal at $199.30/t.
• “A rail strike would affect LNG through secondary impacts, primarily around the cost and availability of coal,” said Ross Wyeno, principal analyst, Americas LNG, S&P Global Commodity Insights. “If coal generation were to be curtailed, power generators would rely more on natural gas, which would increase the price of feed gas for LNG export facilities. However, given the exceptionally robust global pricing environment, Henry Hub natural gas prices would need to rise an additional $30-35/MMBtu to incentivize LNG shutdowns, which remains a highly unlikely scenario.
• According to RFA CEO Geoff Cooper, once storage tanks fill up at ethanol facilities, if it cannot be transported, the “only option is to slow down or shut down the plant”.
• The EIA expects ethanol production this year to average 1.01 million bpd, to meet projected demand of 910,000 bpd.
• US ethanol inventories were 23.138 million barrels the week ended Sept. 2, 8% above the five-year average, according to EIA data.