On the face of it a weak week for commodities, but investors, producers and others should be watching events in the US railroad industry this week because there’s a growing chance of the first strike in decades which could send oil, grains, coal, steel and other prices surging in surprise.
A strike would worry sharemarkets as well, but the initial impact would hit oil, grains, coal, cars, consumer goods, electricity utilities and a host of other industries and companies, large and small.
The strike threat comes as major railroad companies, including Union Pacific, Norfolk Southern and Warren Buffett’s Berkshire Hathaway’s Burlington Northern Santa Fe have reported record earnings.
Talks so far have settled a new contract with five of the dozen unions and around 27,000 members. A further seven unions and 88,000 employees have no agreement in place.
The poor working conditions (being on call every day), age and no pay rises have seen 30,000 people leave the industry in the last five years.
Rail is vital to the US economy.
Between 7 to 8 million barrels a day of oil and products (petrol, jet fuel) are carried on railroads within the US, or imported from Canada. 13.6 million barrels of oil a day are consumed within the US and current production is around 12 million barrels a day.
Around 3.6 million barrels a day of oil and products are imported from Canada of a total of 8.7 million barrels a day of total imports of oil and various products. The US exports several million barrels of oil and products a day as well.
Coal – especially thermal coal – is the major cargo for railroads in the US (the so-called class one lines like Union Pacific), accounting for 27% of all freight carried by rail. Rail accounts for around 40% of the daily movement of export wheat, corn, soybeans and other grains, as well as millions of tonnes of steel, aluminium and millions of cars a year.
A railroad work stoppage would cost the US economy $US2 billion a day in output and require 467,000 long-haul trucks daily to handle shipments diverted from rail – exceeding supply of available vehicles, the US railroad association said in a statement last Thursday.
Many of those trucks would be diverted from existing tasks, although the increased demand for vehicles would make that tough.
A strike – it would be the first in 30 years – has been looming now for two years and President Biden halted the process two months ago by imposing a cooling-off period during which a panel he appointed, known as a Presidential Emergency Board (PEB), looked at the disputed issues in the negotiations and issued a recommended settlement.
That 60-day grace period is due to expire at 12:01 am US Eastern Time on September 16. The President does not have the power to prevent a strike at that time. Only Congress can act to prevent a work stoppage, either by imposing a deal on the two sides or to extending the current cooling off period.
And US railway companies said over the weekend that they had started preparing for a possible strike.
That’s perhaps why oil and wheat prices in the US perked up on Friday.
The impact of a strike would take a week or so to develop – the US electricity industry would be the first to feel any pain and the US car industry would be hit as well and could very well start closing capacity and laying off staff if the strike looks like going on for some time.
Some analysts claimed that the rise was due to new threats from Russia’s Vladimir Putin that supply would be cut which could happen this week if Russia continues to lose ground in Ukraine, but the threat from the strike seems more a logical reason at the moment.
West Texas Intermediate crude rose 3.57% to $US86.53 a barrel and Brent crude gained 3.59% to $US92.37 a barrel. Chicago wheat futures rose more than 4.5% on Friday as well while corn futures were up 2.5%.
The OPEC+ production cut of 100,000 barrels a day had no lasting impact on prices which eased over the week. Brent and WTI both ended the week down less than 1% in the strongest weekly performance for several weeks.
An emerging concern for US output is the slow fall in the number of rigs being used, especially for oil exploration and production. They have now fallen for the past month or so and last week saw the loss of five oil rigs according to the Baker Hughes weekly compilation.
The count slipped to 591 in the week to last Friday Baker Hughes said. A year earlier, the US had 401 oil rigs in operation.
Gas rigs though rose by four to 166 while miscellaneous rigs remained at two.
In the same period of 2021, there were 101 gas rigs and one miscellaneous rig in operation. Overall, there were 503 rigs operating a year ago.
…………
Iron ore prices edged up by around 8% to 9% over the last couple of days of last week with the SGX futures price ending at $US102.85 a tonne for 62% Fe fines delivered to northern China, up from $US94.52 a tonne the previous Friday.
The price of coking coal on the SGX eased to $US260 a tonne from $US273.67 while the price of Australian thermal coal ex Newcastle remained over $US400 a tonne on the ICE thermal market at $US430.60 a tonne, down 2.3%.
The northern Asian LNG price (on the JKM market) fell to $US42.29 from $US48.43 a million British thermal units the Friday before.
…………
Comex gold futures settled at $US1,728.60 an ounce on Friday, up $US8.40 on the day and up 1.11% for the week.
Comex copper fell 0.4% on Friday to end at $US3.55 a pound, but managed a solid 4.3% gain for the week.
London Metal Exchange copper rose for four sessions to $US7,810 a tonne.
There’s talk that workers at the world’s largest mine, Escondida in Chile (operated by BHP), are set to go on strike to demand better safety measures.
Comex silver added 0.105 to $18.78 for a gain of more than 6% for the week.
