Canadian ports feel impact of disrupted rail service, says Fitch Ratings

Rail disruptions related to ongoing protests in Canada will have a negative, albeit temporary, effect on port operations, says Fitch Ratings. 

Ports located further from destination markets and with greater reliance on rail will be more affected, including Halifax, Prince Rupert and Vancouver. Slowing port traffic has led to reduced or no storage capacity at several key ports.

The Canadian National Railway Co. (CN) had stopped traffic on its network east of Toronto on Feb. 13 due to rail blockades near Belleville, Ontario in support of opposition to the Coastal GasLink natural gas pipeline in British Columbia. The inability to transport goods on the CN main line between Montreal and Toronto caused slowdowns at the Port of Montreal and the Port of Halifax. New blockades in Quebec, Ontario and Vancouver following the dismantling of the Belleville blockage affected both major Canadian rail lines.

The effect of the blockades on Canadian port volumes has been varied. The Montreal Gateway Terminals (MGT) (BBB/Stable), which operates two of the main container terminals at the Port of Montreal, has seen limited volume declines. The Port of Montreal is served by both CN and Canadian Pacific Railway (CP), and volume effects have been moderated by the ability of CP to continue servicing more than half of MGT's rail cargo. Some shipping lines that normally use CN rail service were able to make temporary arrangements to transport their cargo using CP rail.

MGT has also used truck transport as a substitute for rail for cargo destined for its major markets in Quebec and Ontario. As these cities are located within the 500 mile radius of the Port of Montreal, truck cargo transport can be a cost-effective alternative to rail, although this substitution, combined with volume challenges from the blockade, has led to higher labor costs and compressed EBITDA margins due to increased handling of cargo. Although sizable, these effects are temporary and Fitch expects costs and margins to recover quickly.

Halifax and Prince Rupert will be more vulnerable relative to other ports that have more rail or other transportation options should there be continued disruptions. Volumes at the Port of Halifax were more significantly affected due to their sole reliance on CN for rail service. 

Some shipping lines have diverted from Halifax to U.S. ports to avoid cargo delays. The longer distance to Ontario markets makes the use of trucks less cost-effective for Halifax. Similarly, truck delivery is not a feasible alternative for Prince Rupert, which is located in rural British Columbia and is 2,500 miles away from its primary market in the US Midwest.

CN and CP both serve Vancouver, and given the scale of Vancouver's operations, dwell times have greatly increased. Like Prince Rupert, Vancouver also serves Midwest markets which are located further inland and are primarily serviced by rail. Operations are ramping back up following protests that halted rail service into these ports, and it will take a few days to clear the backlog, assuming there are no additional blockades.

Beyond the direct result on slowing port traffic, blockades could have wider economic effects on the trade of goods and agricultural products and manufacturing activity in Canada, which ultimately will affect Canadian ports, depending on their scale and duration. Furthermore, the Coastal Gas Link protests could presage a longer period of intermittent blockade risk as other pipeline projects get underway, notably the Trans Mountain Expansion Project, which also goes through British Columbia.

“Should there be ongoing rail obstructions, port congestion will take longer to clear. Shippers may seek alternate routes through U.S. ports to avoid ongoing risk of disruption to supply chains, causing volume declines at Canadian ports,” says Emma Griffith, Senior Director, Global Infrastructure and Project Finance.

In an interview with LM, she added that cargo diversions may be made to U.S. West Coast ports as well if the crisis goes on.

“It’s too early to tell if this will be a long-term concern for shippers on the Pacific Rim” she said. “But U.S. east coast ports are seeing more traffic as a consequence of the Canadian rail disruptions.”