70% of US ethanol shipped by rail
Strike would interrupt coal deliveries
Coal shortage could boost gas demand
Commodity markets were closely watching negotiations between US railroads and unions Sept. 13, as a deadline nears for a strike that would curtail shipments of agricultural and energy products, leading to price spikes.
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Ten of the 12 major unions have reached agreements, leaving just the Brotherhood of Locomotive Engineers and Trainmen and SMART Transportation Division.
President Joe Biden and members of his Cabinet have joined the talks in hopes of helping to broker an agreement between the freight rail companies and union workers.
A rail strike “would have a tremendous impact on our supply chain,” White House Press Secretary Karine Jean-Pierre said Sept. 13. “It is not acceptable.”
Freight railroads have already stopped accepting shipments of hazardous and security-sensitive materials in preparation of the possible work stoppage to ensure that sensitive cargo is not left unattended or unsecured, as well as warned of freight delays and suspensions in the days leading up to the Sept. 16 bargaining deadline.
“Almost all ethanol is moved via rail and it is produced in the Midwest. There is no easy substitute for rail and the US government will have to make decisions around blend targets if ethanol movement to demand centers are constrained due to a strike,” said Debnil Chowdhury, vice president of refining and marketing at S&P Global Commodity Insights.
- Roughly 70% of ethanol produced in the US is shipped by rail, primarily from the Midwest to coastal markets, according to the Renewable Fuels Association.
- The US also imports small volumes of ethanol from Brazil, primarily into the US West Coast, US Energy Information Administration data shows.
- Ethanol can also be transported by truck or barge. According to the US Department of Energy, roughly 10% is transported by barge.
- However, the number of available barges has fallen. Barges require roughly 25,000 barrels to make the fixture economical, surpassing the typical 5,000-10,000 barrel lot sizes typically traded.
- “Given where the US is in its crop cycle, a rail strike would pose a large impediment to the movement of both grain and required fertilizers for fall applications, after harvest. The ramifications would be far ranging as global supplies of grains remain constricted due to the continuing conflict in Ukraine and UIS farmers need to prepare their acres for 2023 soon,” said Pete Meyer, head of grains and oilseeds analytics, S&P Global Commodity Insights.
- With ethanol accounting for about 10%-11% of US gasoline volume, any disruption to getting that fuel to terminals for blending could impact gasoline prices.
- “Pipelines between the Gulf Coast and Northeast are well utilized so there is no additional capacity to use pipelines in place as a substitute,” said Chowdhury. “There is some space on line between the Gulf Coast and Midwest.”
- The White House in a statement touted the average $1.30/gal decline at the pump since the beginning of the summer, and has repeatedly committed to taking action to keep prices on that downward trajectory.
- A rail strike could also disrupt deliveries of crude in the US, primarily North Dakota Bakken crude from the Midwest to refiners on the USAC and USWC.
- The most recent monthly EIA data shows the Midwest shipping 4.619 million barrels of crude to the USWC in June, and 930,000 barrels to the USAC.
- If railroads and labor unions can’t agree on a new contract by the Sept. 16 deadline, utility coal deliveries would be interrupted ahead of key pre-winter restocking.
- Demand for US coal has increased amid the war in Ukraine and subsequent EU sanctions against Russian coal. A US rail strike could have rippling geopolitical effects as US major export terminals like Lamberts Point and Dominion Terminal Associates also depend on rail service to bring seaborne coal to market.
- The impact of the rail negotiations “has already been felt slowing and/or delaying deliveries of coal through Q2 and into Q3 of this year and driving down stockpiles. Nearly 75% of the coal that moved to electric utilities in the first half of 2022, 150 million st of the 202 million st, was moved by rail” according to the EIA, said Wendy Schallom, senior analyst, coal and power analytics, S&P Global Commodity Insights.
— Natural gas
- Lower coal supplies due to a rail strike would increase gas demand for power generators at a time when gas storage levels are already about 11% below the 5-year average and with only about six weeks to go in injection season.
- The Midcontinent Independent System Operator is closely monitoring fall fuel supplies because 79% of the coal shipments for MISO coal-fired plants is delivered by rail and the threat of rail strike looms, MISO staff said Sept. 13.
- MISO generators burn Powder River Basin coal, which is mined in Wyoming and Montana and relies heavily on rails for transport.
- Dwindling coal stockpiles could have a bullish impact on power pricing given the recent rally in natural gas.
- A potential rail strike would negatively impact the shipment of finished and semi-finished steel as well as steelmaking raw materials.
- Philip Bell, president of the Steel Manufacturers Association, said Sept. 13: “Our supply chains are stressed, and any disruption in freight rail service will hurt our economy by adding costs and delays to a rail service system that is already suffering from poor service.”
- If the parties do not resolve their differences through voluntary agreement, US steelmaker Nucor’s tubular division said it expects Congress to intervene as it has in the past to prevent or stop any service rail disruptions, according to a letter sent to customers Sept. 13 and seen by S&P Global Commodity Insights.
- “The timing couldn’t be worse for the petrochemicals industry as it finally began to eliminate all of the logistic constraints and manage inventories,” said Robert Stier, senior analyst, petrochemicals analytics, S&P Global Commodity Insights.
- The biggest impact would be on polymers including polyethylene, polypropylene and polyvinylchloride which are shipped by railcar.
- US producers also use railcars as mobile storage for polymers. Railcars are extremely important for US Gulf Coast polymer producers and a strike would significantly disrupt their operations as well as their customers who convert polymers to consumer goods.
- US spot ethanol prices rallied Sept. 13 on the looming strike, with Chicago Pipeline ethanol assessed by Platts at $2.659/gal, up 15.5 cents, while New York Harbor ethanol was assessed at $2.76/gal, up 16 cents.
- NYH prices have risen 30 cents since Sept. 8, and Chicago prices 25 cents, following a rise in prices for corn feedstocks.
- Corn futures have rallied as the US Department of Agriculture slashed its September estimated yield for US corn by 2.9 bushels/acre from its August projection.
- OTC coal prices already are at record highs. Prompt-month CSX 12,500 Btu/lb rail coal finished at a record-high $205/st for the sixth straight session.
- Both Illinois Basin 11,500 Btu/lb fuels maintained their record highs, with the prompt-month coal finishing at $202.65/st and the prompt-quarter coal at $199.30/st.
— Natural gas
- “A rail strike would affect LNG through secondary impacts, primarily around the cost and availability of coal,” said Ross Wyeno, lead analyst, Americas LNG, S&P Global Commodity Insights. “If coal fired generation were to be restricted, there would be a stronger call on natural gas by power generators, thereby raising the price of feedgas for LNG export facilities. However, given the exceptionally robust global pricing environment, Henry Hub natural gas prices would need to rise by another $30-$35/MMBtu to incentivize LNG shut-ins, which remains a highly unlikely scenario.
- According to the RFA CEO Geoff Cooper, once storage tanks fill up at ethanol facilities, if it cannot be transported, the “only option is to throttle down or shut the plant down.”
- The EIA expects ethanol production this year to average 1.01 million b/d, to meet projected demand of 910,000 b/d.
- US ethanol inventories were at 23.138 million barrels the week ended Sept. 2, 8% above the five-year average, EIA data showed.