Potential US rail strike could cost USD 2 Billion a day

Potential US rail strike could cost USD 2 Billion a day

Multiple rail unions, including the nation’s largest, have failed to reach a labor deal with freight railroads, raising the risk of a strike. The Association of American Railroads estimates that a nationwide shutdown could cause $2bn a day in economic losses. 

The alignment of the four unions that have voted not to ratify a labor deal has provided a clear timeline for strike prep plans among the freight railroads and with sensitive cargo including chemicals.

The Brotherhood of Railroad Signalmen (BRS) announced Tuesday it is extending its status quo period through December 8 to align with the BMWED (Brotherhood of Maintenance of Way Employees), SMART-TD, and the International Brotherhood of Boilermakers. If no agreement is reached by then, a coordinated strike could start on December 9. Railroad unions that voted for ratification have said they will not cross the picket lines and will support their fellow union workers, posing the risk of a nationwide freight rail shutdown.

According to federal safety measures, railroad carriers begin prepping for a strike seven days before the strike date. The carriers start to prioritize the securing and movement of security-sensitive materials like chlorine for drinking water and hazardous materials in the rail winddown.

The Impact

Consumers and nearly every industry in the US will be affected if freight trains grind to a halt next month. One of the biggest rail unions rejected a deal on Monday, joining three others that have failed to approve contracts over concerns about demanding schedules and the lack of paid sick time.

That raises the risk of a strike, which could start as soon as 5 December. It wouldn’t take long for the effects of a rail strike to trickle through the economy. Many businesses have only a few days’ worth of raw materials and space for finished goods. Makers of food, fuel, cars and chemicals would all feel the squeeze, as would their customers.

That’s not to mention the commuters who would be left stranded because many passenger railroads use tracks owned by the freight railroads.

The stakes are so high for the economy that Congress is expected to intervene and impose contract terms on railroad workers. The last time US railroads went on strike was in 1992. That strike lasted two days before Congress intervened.

Protesters with signs outside of the 2022 Berkshire Hathaway shareholders meeting.

US railroad workers prepare for strike as rail companies see record profits

An extended rail shutdown has not happened for a century, partly because a law passed in 1926 that governs rail negotiations made it much harder for workers to strike.

The expected impacts of a rail strike:

Billions of dollars a day

The railroads, which haul about 40% of the nation’s freight each year, estimated that a rail strike would cost the economy $2bn a day in a report issued earlier this fall.

Another recent report put together by a chemical industry trade group projected that if a strike drags on for a month, about 700,000 jobs would be lost as manufacturers who rely on railroads shut down, prices of nearly everything would increase even more and the economy could be thrust into a recession.

Chemical stockpiles run dry

Chemical manufacturers and refineries will be some of the first businesses affected, because railroads will stop shipping hazardous chemicals about a week before the strike deadline to ensure that no tank cars filled with dangerous liquids wind up stranded.

Jeff Sloan with the American Chemistry Council trade group said chemical plants could be close to shutting down by the time a rail strike actually begins because of that.

That means the chlorine that water treatment plants rely on to purify water, which they might only have about a week’s supply of on hand, would become difficult to source. It would be near impossible for manufacturers to make anything out of plastic without the chemicals that are part of the production formula.

Passenger problems

Roughly half of all commuter rail systems rely at least in part on tracks that are owned by freight railroads, and nearly all of Amtrak’s long-distance trains run over the freight network. Main commuter rail services in Chicago, Minneapolis, Maryland and Washington state have all warned that some of their operations would be suspended in the event of a rail strike.

Fears of a Food Crisis

It would take about a week for customers to notice shortages of foodstuffs such as cereal, peanut butter and even beer at the grocery store, said Tom Madrecki, vice-president of supply chain for the Consumer Brands Association.

About 30% of all packaged foods in the US are moved by rail, he said. That percentage is much higher for denser, heavier items like cans of soup. Madrecki said big food companies don’t like to discuss the threat of a rail strike since worries about product shortages can lead to panic buying.

Retail risks

Jess Dankert, vice-president for supply chain at the Retail Industry Leaders Association, said retailers’ inventories are largely in place for the holidays. But the industry is developing contingency plans. Retailers are also concerned about online orders. Shippers like FedEx and UPS use rail cars that hold roughly 2,000 packages in each car.

“We don’t see, you know, canceling Christmas and that kind of narrative,” Dankert said. “But I think we will see the generalized disruption of really anything that moves by rail.”

Automobile angst

Drivers are already paying record prices and often waiting months for new vehicles because of production problems in the auto industry related to the shortage of computer chips in recent years.

That would only get worse if there is a rail strike, because roughly 75% of all new vehicles begin their journey from factories to dealerships on the railroad. Trains deliver approximately 2,000 carloads of vehicles a day. Automakers may have a hard time keeping their plants running during a strike because some larger parts and raw materials are also transported by rail.

Too Many Containers : the new challenge faced by Global Shipping

While there was a shortage of containers at the height of the Covid pandemic, the global economy is now facing the opposite problem: too many containers. 

On top of falling freight rates, data shows container depots — used to house containers after they are unloaded — are now filling up or full. It points to more signs of falling global demand and an impending economic slowdown.

Traders and shippers say the decline in global consumer demand is not a sign the global economy is normalizing after a frantic post-lockdown consumption rush but a downward shift in consumption appetites.  

What has happened now is that the cargo is ‘on time’ again and hence you’ll see a slowdown in new ordering... “There is just not enough depot space to accommodate all the containers,” online container logistics platform Container xChange chief executive Christian Roeloffs said in an industry update this week. 

“With the further release of container inventory into the market, for example from the disposal of leasing fleets, there will be added pressure on depots in the coming months.”

Turning away new clients

Italian container depot owner Sogese chief executive Andrea Monti told Container xChange his depots are full.  “Whatever was coming in and out of, for instance, our Milan depot is quite stuck. And the container volume at the depots is increasing to an extent that we are returning some requests for depot service agreements.” 

“We are in a situation where we are not able to accept new clients for some locations.”

Monti told Container xChange that the peak season of goods shipments — as Christmas looms — “technically did not happen this year.” Retailers are cautious about the high level of inventory they have on hand, Monti said. 

“There is enough inventory with retailers,” Monti said. 

“What has happened now is that the cargo is ‘on time’ again and hence you’ll see a slowdown in new ordering as companies adjust to more efficient turnaround times in ocean freight delivery.”

To combat full and overflowing depots, ports such as the Port of Houston have started levying fees for empty containers sitting in terminals for more than seven days, according to global claims management provider Sedgwick’s national marine manager, Darin Miller. “What many don’t realize is a lot of the time, the containers within the depots are empty,” he told CNBC.

“Often left sitting for weeks on end, the sheer number of containers on ships or at ports, leaves us with insufficient depot space which only exacerbates our ongoing supply chain crisis as it impacts container repositioning and movement.”

Consumers can expect retailers to offer discounts in order to clear inventory, Miller added.

The latest Drewry composite World Container Index — a key benchmark for container prices — has fallen again to $2,773 per 40-foot container. That’s 73% lower than the peak rate in September last year.

Sailings canceled

Blank or canceled sailings are also on the rise in what is usually the opposite, as the year’s biggest spending period approaches.

A blank sailing happens when a shipping company decides to skip a port or an entire leg of its schedule to manage changes in demand and capacity. There is a significant dent in consumer demand which then leads to less demand for freight and cargo, and therefore, a proportionate dent in container demand globally.

In its latest canceled sailings analysis, Drewry said between late November and early December, 14% of sailings have been canceled across major container shipping routes.  Last week, major shipping group Maersk warned in its third-quarter results that freight rates have peaked amid easing supply chain congestion and falling demand. The company told investors to expect lower ocean shipping profits.

Nearly 60% of the 200 freight forwarders, traders and shippers that Container xChange spoke to in a survey last month said they were grappling with geopolitical, economic and political risks which have imposed downward pressures on consumption and therefore demand for containers.  

“We know already that the market is bearish on consumer demand because of multiple factors like recessionary fears and inflationary risks,” a Container xChange spokeswoman told CNBC. 

“So of course, there is a significant dent in consumer demand which then leads to less demand for freight and cargo, and therefore, a proportionate dent in container demand globally.”

Shipping liners are giving containers away to reduce crowding at depots while many have resorted to blank sailings, Container xChange added.