However, their need for long-term contracts and the pressure to move a surplus of grains in the country is making it hard to cash in on the prospect.

Canada moves about 95 per cent of its oil by pipelines, which are currently full. A 20 per cent rise in crude production in the past five years has increased pressure to find new ways to haul the commodity, with rail being the second cheapest alternative.

Analysts expect railway operator Canadian Pacific Railway (CP) to see a more than 60 per cent rise in the volumes of crude it ships this year, but the company and its rival Canadian National Railway (CN) are being cautious about going all-in.

With oil prices volatile and three pipeline expansions due to come on line at the end of decade, railways worry that any investment will be at risk in two or three years and could undercut their money-making base: moving grains.

“Rails don’t view crude by rail as a sustainable business, but rather, one that is driven by short-term dislocations in crude prices,” said Stifel analyst Michael Baudendistel.

In 2017, 23 per cent of CP’s revenue came from grains and only three per cent from crude, according to data by Desjardins analyst Benoit Poirier. CN saw 13 per cent of its revenue from grains and two per cent from crude, in the same period.

“We understand crude is only going to be here for a certain period of time,” CP CEO Keith Creel said in a fourth-quarter results call with analysts.

“We’re looking for strategic partners with long-term objectives that align with ours. We’re not going to allow ourselves to be commoditized.”

Still, RBC analyst Walter Spracklin says CN and CP could see, respectively, five and 11 per cent upside in earnings this year helped by crude shipments, if oil sands production increases by 315,000 barrels per day. Other analysts expect even more of an impact to their bottom lines.

Long-term pacts needed

Rail companies are reluctant when it comes to monthly, spot deliveries and the inherent volatility of the oil markets make it hard for them to get long-term commitments from vendors.

Cenovus Energy, which expects to double its daily output to 350,000 barrels during the first quarter over last year, recently complained that transport bottlenecks had made it impossible to haul oil. The company said it was having “ongoing discussions” with rail operators to resolve the shortage of rail hauling capacity.

Railway operators cannot think of one- to three-year investments when they invest in tank cars that are intended for a more than 30-year life span, said Genscape analyst Mike Walls.

Producers on the other hand are wary of the long-term commitments railways are asking for, which is costlier than pipelines.

To make a rough estimate, pipelines cost about $6-$12 per barrel to move crude from Hardisty, Alta. to the Gulf Coast, while it costs about $16-$18 per barrel when using rail.

Major pipelines are expected to complete capacity expansions by 2020. Enbridge is expected to double the capacity of an existing line to 760,000 barrels per day, while Kinder Morgan Canada plans to triple its capacity with the expansion of its Trans Mountain pipeline beginning 2020.

TransCanada Corp. said last month it expects to start construction on its $8 billion Keystone XL expansion in 2019 and it will take about two years to complete.

The International Energy Agency says crude shipments by rail will ease to 170,000 barrels per day in 2020 from about 250,000 in 2018, when Enbridge’s Mainline pipeline is expected to complete a capacity expansion.

But until that happens, railways could move more than 400,000 barrels of oil per day and movements could even be higher if pipelines face further delays, said IHS Markit analyst Kevin Birn.

“They want longer term commitments from oil producers and we think those commitments will be made… (but) the long-term role depends on pipes,” he said.

— Reporting for Reuters by Anirban Paul and Ahmed Farhatha.

CORRECTION from Reuters, March 28: A paragraph has been removed from this article that incorrectly described Canadian railways’ grain handle as subject to government subsidies.

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The Minnesota-based company predicted third-quarter phosphate sales of 2.2 million to 2.5 million tonnes, down from 2.6 million in the second quarter.

Mosaic forecast third-quarter diammonium phosphate prices lower than in the second quarter, but investors may be missing that raw material prices are also declining, preserving margins, said Chief Executive Joc O’Rourke in an interview.

“Somebody’s obviously selling on the future,” he said.

Mosaic shares pared losses to trade down 7.5 percent at $22.34 in New York around midday. The selloff seemed like an over-reaction, said Bernstein analyst Jonas Oxgaard.

Fertilizer prices remain low amid pressure from bloated global capacity and soft crop prices, but O’Rourke said both phosphate and potash prices have stabilized since last year.

Asked if he would consider selling the potash business, O’Rourke said Mosaic’s stock price does not reflect that business’s value, especially compared to BHP Billiton PLC’s planned Saskatchewan potash mine.

“If you consider BHP is talking about $16 billion to build an eight million tonne per annum (mine), we have a 10-12 million tonne potash business. That would value our potash business at least in that $16 to $20 billion range. We’re not in a position to want to sell for what amounts to lower than book or replacement cost.

“If someone wanted to offer us the right price, of course.”

O’Rourke added that potash remains a core business to Mosaic and he is not saying it is for sale.

He declined to comment on whether BHP had shown interest in buying Mosaic, but said it makes more sense to buy existing potash capacity than to build new capacity.

A BHP spokeswoman could not be immediately reached for comment.

The potash industry is under pressure as price weakness is compounded by new mines coming online by miners including K+S AG and EuroChem. Beyond that, there is no need for additional mines in the next five to 10 years, O’Rourke said.

Mosaic, the world’s largest producer of finished phosphate products, reported second-quarter profit that topped analysts’ expectations.

Excluding one-time items, Mosaic earned 29 cents per share, beating analysts’ average expectation of 23 cents, according to Thomson Reuters I/B/E/S.

Reporting by Ahmed Farhatha in Bengaluru and Rod Nickel in Winnipeg, Man.

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