As mentioned earlier this week, another inflation threat is in the works, with a Western-style showdown threatening the U.S. economy. A duel between 60,000 rail workers, their unions and some of the largest U.S. railroad operators is already having impacts, but the worst is yet to come. A 12:01 a.m. Friday deadline to agree to new work terms hangs in the balance, with the gunslinging likely to cost the nation $2B in economic output per day if things go off the rails.
What's at stake: There are already reports of railways stopping to take grain and animal-feed shipments, while most of them have already put a halt to ammonia fertilizer and hazardous items to ensure that sensitive cargo is not left unsecured. Other raw material deliveries are also facing uncertainty, like coal transports that could be interrupted ahead of pre-winter stocking, which could subsequently trigger an increase in gas power demand. By some estimates, the railroads in the U.S. impact about a third to about 45% of all freight in the U.S., meaning there can be knock-on effects for many industries.
"Almost all ethanol is moved via rail and it is produced in the Midwest," noted Debnil Chowdhury of S&P Global Commodity Insights. "There is no easy substitute for rail and the U.S. government will have to make decisions around blend targets if ethanol movement to demand centers are constrained due to a strike." Ethanol currently accounts for around 10% of U.S. gasoline volume, and prices for the commodity have already been raised at several marketplaces with sellers facing interruptions.
Supply chain threat: The current dispute goes back three years and mainly centers around pay hikes, sick leave and time-off policies. In July, the Biden administration intervened to avert a strike, naming a panel of arbitrators to mediate the contract dispute, but two remaining holdouts - the Brotherhood of Locomotive Engineers and Trainmen and the International Association of Sheet Metal, Air, Rail and Transportation Workers - account for over half of the rail labor force. The Biden administration is now speaking with truckers and air freight companies to assess alternative modes of transportation, but if things get real bad, Congress may be forced to impose contractual terms or send the dispute to forced arbitration. Emergency powers could also be used by the White House for the delivery of critical materials.
Related: BNSF Railway (BRK.A) (BRK.B), Brookfield Infrastructure Partners (BIP), Canadian National Railway (CNI), Canadian Pacific (CP), CSX Corporation (CSX), Union Pacific (UNP), Norfolk Southern (NSC) and the iShares Transportation Average ETF (IYT).