By Peter G. Hall, Vice-President and Chief Economist, EDC
Railroads and modern Canadian history are inextricably linked. They were an essential economic development tool, getting people in and products out. We are still highly dependent on these same rail networks to get Canadian products to international destinations. Global hunger for Canadian resources has increased the demands on our infrastructure, and in recent years, its limits have been tested. If the world is on the verge of a U.S.-led recovery, can our rail systems handle the growth?
It sounds like a good problem to have, but it wasn’t back in 2004. At that time, North American demand was picking up, and West Coast ports couldn’t handle the inbound traffic. Although port space was constrained, there was also a real problem moving goods inland by truck and train. The logjam created panic up and down the coast, and every port was involved. The problem was resolved, but constraints again appeared in 2008. The global financial and economic crisis fixed that, but only temporarily – if we are getting back to growth, our rail systems may again be put to the test.
Anecdotal evidence suggests that rail capacity is already getting tight. Certain industries are worried that they may lose orders, as they are not able to guarantee anything close to just-in-time delivery. At first blush the data don’t seem to agree. Headline data on railway carloadings look benign; growth has flatlined over the past two years, giving little hint of difficulties. Are the anecdotes mere local concerns, or are the data masking a bigger underlying problem?
Additional data suggest the latter may be closer to current reality. Compare the rail traffic data to current manufacturing shipments, and it’s quickly apparent that growth of rail traffic has been falling behind since mid-2011. True, it’s possible that manufacturers are looking at other modes of transport. But it’s also true that rail transportation covers a vast array of primary goods not captured in the manufacturing data. Here’s where the facts are more disturbing. Growth in monthly GDP – driven lately by primary products – is also well ahead of growth in rail traffic. Given that there are fewer modal substitutes for raw goods, there seems to be a problem.
It gets worse. Although railway carloadings are relatively flat, certain key sectors are grabbing a lot more share of total space. Since early 2011, rail shipments of petroleum products have surged at a 21 per cent annualized pace. Vigorous production growth and constrained pipeline capacity have increased the oil industry’s dependence on rail shipments, and without growth in overall rail traffic, other industries are feeling the pinch. Wood products – in hot demand thanks to the US housing market’s recovery – are barely showing any rail shipment growth. The agriculture industry is worried that there will not be enough space to fill orders for raw product currently in storage.
If constraints are really there, then prices should be reacting. This is clear in recent U.S. price movements. Rail costs soared by double digits, hitting 10 per cent year-over-year in mid-2011, and although price increases have since moderated, they are considerably ahead of inflation. If this is true now, and resurgent global growth adds to demand pressures, more price hikes could be in store.
The bottom line? With our domestic economy slowing, Canada is increasingly looking to international trade as a key source of growth. Transportation infrastructure is key to facilitating this growth, but insufficient rail track capacity is a key limiter. At present, the evidence is not complete, but it suggests that we may be running short of the means to realizing the growth that is already coming our way. Best to keep an eye on this and other looming constraints.
This commentary is reprinted with permission from EDC. It is presented for informational purposes only. It is not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. Neither EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.