Canada's crude oil train transportation boom derailing forestry sector

Forest products companies facing 'acute' lack of rail service, says national forestry organization
Access to railcars is becoming increasingly difficult for B.C.'s lumber industry as Canadian railways allocate more rolling stock to shipping oil

BC forestry companies are losing out to the more lucrative oil and gas industry in the war over scarce space on Canada's rail network, say industry analysts and shipping advocates.

Faced with pipeline bottlenecks, Canadian oil producers have increasingly been using rail to ship their product to refineries in the southern United States. Around 5% of rail traffic in Canada is now taken up by shipments of crude oil – 10 times higher than it was three years ago, according to the Conference Board of Canada's Leading Indicators of Industry Profitability survey for May.

At the same time, forestry has faced delays in getting railcars and shipping their product to U.S. and overseas markets. The conference board noted that despite record lumber prices, the wood products industry's profitability index fell in April because of the railcar shortage.

The problem has become "acute" in recent months, said Catherine Cobden, executive vice-president of the Forest Products Association of Canada (FPAC).

"When we have a member company who's not getting all the cars they need, or we have a member company that has to go to its shareholders and say our economic performance … was depressed because we didn't get railcars, I start to really worry about capturing the Canadian economic opportunity."

Forestry faced the same problem the last time lumber demand was high, back in 2005 at the peak of the U.S. housing boom. But oil didn't present the same competition it does now, said Michael Vermette, a senior PwC vice-president.

"The [rail companies] are busy servicing that very wealthy customer and are not giving the forest companies not quite the same attention," said Vermette. "There may be lots of lumber cars you can load railcars onto, but there's only so much capacity."

The problem is symptomatic of an ongoing tussle between rail and shippers, said Ian May, chairman of the Delta-based Western Canadian Shippers' Coalition. He wants the rail companies to increase capacity to meet the market demand for their services.

While the rail companies are obliged by law to carry all shipping traffic requested of them, they decide what to charge, and are under no obligation to deliver the goods in what the shipper would deem to be good time, said May.

Late shipments mean lost business opportunities, said Cobden, especially when shipping overseas.

"When you've got the ships waiting, they won't wait," she said. "We're now Canada's largest supplier to Asia and keeping those customers into the future is critical."

Both Cobden and May say the solution is improved legislation to put more power in the hands of shippers. They hope draft legislation currently winding its way through Parliament will be passed, which would give shippers a statutory right to service-level agreements with rail companies (see "Railway monopoly legislation sparks debate," issue 1220, March 12-18).

Canadian National Rail Co. (CN) (TSX:CNR; NYSE:CNI) did not respond to Business in Vancouver's request for an interview.

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