Aug 18

Suez Blockage Makes Rail Merger Look Smarter

Dimitri Frolowsckii
Mar 30, 2021
railroad tracks in canada actively used amid Suez blockage

The economic impact from a cargo ship that got stuck in the Suez Canal has brought attention to the value of transport alternatives.

Last Friday, oil prices jumped amid speculation that dislodging the ship could take weeks (the ship has since been dislodged). West Texas Intermediate crude futures and Brent crude each advanced more than 4 percent.

Of the 39.2 million barrels per day of crude imported by seaborne methods in 2020, 1.74 million barrels per day – or 5 percent of total flows – passed through the Suez Canal, according to data from Kpler.

Overall, the Suez Canal handles around 12 percent of global trade. Each day of blockage disrupts more than $9 billion worth of goods, according to Lloyd’s List.

The dependence of global trade on the Suez Canal has raised concerns about the need to explore alternative and less vulnerable transportation routes.

Even before this crisis, freight costs were soaring as a robust economic recovery and growing demand disrupted the normal flow of ships between the U.S. and China and created a shortage in available container space.

Expanded railways could provide some alternatives. Last week, Canadian Pacific Railway agreed to acquire Kansas City Southern for $25 billion, seeking to create a 20,000-mile rail network linking the U.S., Mexico and Canada.

The agreement is set to create the only network that cuts through all three North American countries, stretching from Kansas City Southern’s legacy routes deep into Mexico across the Midwest and up along the Canadian border.

Once completed, the project will facilitate further economic integration among the recently signed U.S.-Mexico-Canada trade agreement — a revamped version of the North American Free Trade Agreement championed by former U.S. President Donald Trump.

The merger also has to acquire approval from the Committee on Foreign Investment in the United States, an intra-agency panel, and competition authorities in Mexico and the U.S.

The combined company, which is projected to be called Canadian Pacific Kansas City, would increase annual revenue by $800 million — about 9 percent more than the companies’ combined revenues last year.

The deal is also set to create a “single line” service for commodities such as grain from the UMidwest and petroleum products from Canada that could reach the Gulf Coast and Mexico without interruption and faster than before. The project could change the freight calculus for companies contemplating moving parts of their supply chains into North America.

The merger comes as rail traffic rebounds from the Covid-19 pandemic, with North American carloads up 2.8 percent year on year in the first ten weeks of 2021.

Some observers believe that a merger of this kind could increase the combined carrier’s commercial breadth and broaden the services it could offer.

Currently, no single U.S. or Canadian-based railroad reaches every important producing and consuming area in the region, which puts the industry at a competitive disadvantage to truckers.

As a result, the merger could indicate the importance of diversifying trade routes and challenge skepticism surrounding big rail mergers that has prevailed across North America in the past.

Dimitri Frolowsckii

Dimitri Frolowsckii is a political and energy analyst with over 15 years of experience in journalism.

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