By R. Bruce Striegler

“Canada’s trading patterns are shifting and putting additional pressure on Canada’s railways and ports to meet the growing demand for Canadian commodities,” says Len Coad, Research Director, Public Policy, Conference Board of Canada. The information comes in a new study published by the Board: Building for Growth: Trade, Rail and Related Infrastructure, which estimates commodities shipped by rail will increase to 260 million tonnes annually by 2025, up from the 200 million tonnes shipped in 2011. Railcar loadings are also forecast to rise from 2.4 million tonnes in 2011 to 3.2 million tonnes by 2025.

The report says the majority of these increases will be felt in Western Canadian ports and the rail corridors between the Prairies and the U.S. as well as from the Prairies to B.C. According to the Conference Board, Great Lakes ports, St. Lawrence and Atlantic ports appear capable of handling the increased rail volumes, however, facilities in British Columbia will require expansion to accommodate the projected increases. As rail volumes increase, B.C.’s ports will need to contend with an additional seven million tonnes of agricultural products by 2025.

In dollar terms, Canada’s international trade in goods and services grew steadily from the early 1980s to the early 2000s, when it reached $500 billion calculated on 2007 constant dollars. (The adjusted value of currency, used to compare dollar values from one period to another.) Since then, the value of exports has stagnated while the value of imports from other countries has grown. Total goods exported to the U.S. has declined, largely due to fewer exports of automobiles and auto parts. Other categories in decline include electronic and electrical products, manufactured goods including textiles, clothing and footwear. Energy products and, to a lesser extent, primary metals have been the lone areas of growth. In contrast, exports to China have been increasing almost across the board (albeit from a much smaller base). Energy product exports have grown, but manufactured products have driven a larger share of the growth, including forest products, which have also seen a substantial decline to the U.S. market.

The Board’s report identifies that the majority of this growth is forecast to occur within Western Canada. The largest increases in rail volumes, in absolute terms, originate in Saskatchewan and Alberta for transport into the United States. Growth in shipments from Saskatchewan and Alberta to British Columbia are also forecast. Collectively, the increased shipments between these four origin-destination pairs are predicted to account for over 50 per cent of the total growth in rail carloadings between 2011 and 2025. Across all origins, rail volumes destined for B.C. are anticipated to increase by 17 per cent between 2011 and 2025. Propelling this grow is wheat, forestry and energy products; the majority of wheat and energy from the Prairies, the majority of forestry products from B.C.

Can the ports and rail lines handle an additional 7.1 million tonnes of agriculture?

As a result of increased rail volumes, British Columbia’s ports will need to contend with an additional 7.1 million tonnes of agricultural throughput by 2025. After increasing existing port utilization levels, this growth would require the construction of an additional five million tonnes of capacity. Vancouver Fraser Port Authority’s Land Use Plan anticipates an additional 26 million tonnes of capacity by 2018, which could accommodate this growth. However, the existing and currently planned port capacity may not be sufficient to handle future potash volumes in B.C., depending on future expansions and the development of a new terminal.

When contacted for this story, the Port Authority’s President and CEO, Robin Silvester, provided a statement, saying, “Last year was another year of strong cargo volumes through the port of Vancouver, with new records set in the container, potash, and grain and agri-product sectors” In 2015, the port’s bulk and container division’s handled 140 million tonnes of cargo, with import cargo up 4.1 per cent and export cargo increasing 3.3 per cent. Silvester continued, “We anticipate long-term growth, both for goods shipped in containers and core export commodities like grain and potash.” He added that the Port Authority concurs with the Conference Board’s perspective. “We see an ongoing need for investment in corridor infrastructure in the Lower Mainland, and we are very much aligned with their views on the critical shortage of trade-enabling industrial land in this region. We expect the supply of such land to be depleted roughly within the next ten years, and are advocating for its protection to ensure Canada’s trade interests are similarly protected.”

Similarly, in a statement from Port of Prince Rupert, spokesperson Michael Gurney says that the Port Authority continues to anticipate and prepare for cargo growth. “It was the motivator behind the creation of the port’s Gateway 2020 Vision five years ago, which has guided increases in infrastructure and capacity at the gateway. Specifically at the Ridley Island Industrial Site, the construction of the $90 million Road, Rail and Utility Corridor opens the port to additional terminal development as well as providing new rail infrastructure for use by existing grain, coal and project cargo terminals. Gurney also notes that the Fairview Container Terminal is undergoing a two-year expansion which will augment its annual capacity by 500,000 TEUs. “In short, findings in the recent report by the Conference Board of Canada with respect to cargo increases are validation of the Port’s strategy for ongoing growth and diversification.” The Port awaits a decision from Canpotex Terminals Limited (Canpotex) which has proposed to construct and operate a new potash export terminal on Ridley Island. The project has received all required government environmental permits and a lease agreement with Prince Rupert Port Authority has been signed.

The critical role of transportation in the export chain

According to the Conference Board, in the last decade, incremental growth in Canada’s exports has been driven by energy, primary and other minerals and metals, chemicals and plastics, as well as agriculture products. In other words, Canada’s merchandise exports have become more oriented toward bulk commodities. Furthermore, the geographic distribution of exports has shifted away from NAFTA’s continental markets, toward intercontinental markets, particularly those emerging markets like China.

These two trends have important implications for the relationship between transportation by rail and export competitiveness. Canada’s export supply chains have become elongated, involving multiple transportation modes, warehousing, stuffing and de-stuffing, and goods transformation while in transit. Our trade supply chains involve a combination of rail, truck, and ocean transportation. This makes rail an especially critical component of the supply chain since most of Canada’s commodities producers are inland, not near the country’s deepwater ports. For example, the port of Vancouver handles more than half of Saskatchewan grain exports despite being located roughly 2,000 kilometres from the Saskatchewan elevators. Equally important to consider is that commodities are largely undifferentiated products— B.C.’s wood products are much the same as Russia’s. This means that commodities are easily substituted between competing sources.

Commodities can be extremely sensitive to transportation disruptions, making transportation costs and service levels key points of differentiation between Canada and its international competitors. The location of production sites relative to ports means Canadian producers are often more reliant on rail services to export goods than our competitors. This makes the efficiency of the supply chain in terms of cost and service levels, one of the most important differentiators for many export commodities.

Jeremy Berry, media relations for CP Rail tells us in a statement that CP has stressed and will continue to stress that the complex Canadian supply chain must operate on a 24/7 basis to fully utilize capacity and move more products.” He also says that Canada has the most efficient freight rail system in the world and, “CP looks forward to meeting current and future needs of its customers.” CP Rail made capital investments of more than $1.5 billion in each of 2014 and 2015, the vast majority of which went into the renewal of depleted assets, the lengthening of sidings, installation of Centralized Traffic Control, and other projects that improve the productivity, fluidity and safety of the railroad. In 2015, CP Rail extended its customizable Dedicated Train Program to Canadian grain customers.

The Conference Board report notes that rail carriers have made significant investments to ensure that their operations can accommodate the expected surge in demand. Between 2005 and 2014, CN and CP, Canada’s Class I freight railways, averaged a combined annual investment of more than $1.25 billion to improve and expand their respective networks. During the past two years, CN has invested an average of $2.5 billion annually in property and equipment. Mark Hallman, CN’s Director, Communications and Public Affairs, told us that, “CN stresses that long-term growth forecasts are always challenging, as the world and markets evolve. At CN, we’ve always been there with the appropriate rail infrastructure to accommodate growth as it firms up and it makes economic sense to invest in it. CN will apply the same approach in the future.” According to CN’s own published information, the company has invested $500 million in infrastructure improvements to their Western Canada feeder rail lines in Alberta, Manitoba and Saskatchewan. The company has also invested significantly in the Edmonton–Winnipeg and Winnipeg–Chicago main line corridors. In 2014, CN committed more than $100 million to improve yards and install sections of double track, crossovers and high-speed switches on main lines in the two corridors. That followed a $100-million program in 2013 to increase capacity on CN’s main line between Edmonton and Winnipeg and the parallel secondary Prairie North Line.

Given that commodities are generally similar no matter their country of origin, competition between producers is based on price and product availability. Canada’s commodity exports typically have low value density, meaning they are large in volume relative to their value and transportation costs account for a significant portion of the overall price. “Continued investment and performance improvements in Canada’s transportation supply chain will be essential to ensure that Canadian exports remain competitive in the global market place,” says the Conference Board’s Research Director of Public policy, Len Coad.