The potential shutdown, which could come as early as Friday, could freeze almost 30 per cent of U.S. cargo shipments, stoke inflation, impede supplies of food and fuel, cost the U.S. economy about US$2 billion per day and cause transportation woes.

Railroads including Union Pacific, Berkshire Hathaway’s BNSF, CSX and Norfolk Southern have until a minute after midnight on Friday to reach tentative deals with three hold-out unions representing about 60,000 workers.

If agreements are not reached, there could be union strikes or employer lockouts. But the railroads and unions also could agree to stay at the bargaining table or the Democratic-led U.S. Congress could intervene by extending talks or establishing settlement terms.

The Biden administration’s push comes as food, energy, automotive and retail groups implore Congress to intervene, saying a rail shutdown could threaten everything from global grain supplies to shipments of goods related to Christmas holiday shopping.

White House press secretary Karine Jean-Pierre said the administration is asking truckers and air shippers to assist should rail service cease and also is considering invoking emergency authorities. Jean-Pierre added that the administration is hosting daily interagency meetings to assess which supply chains and commodities are at highest risk.

The White House has told railroads and unions that “a shutdown is unacceptable and will hurt American workers, families and businesses, and they must take action to avert it,” a White House official told Reuters, speaking on condition of anonymity.

One key issue is ensuring “continued distribution of vital hazardous materials that depend on rail transport, such as chlorine for water treatment plants,” this official added. Railroads on Monday stopped accepting shipments for hazardous materials such as chlorine and chemicals used in fertilizer so they are not stranded in unsafe locations if rail traffic stops.

The U.S. energy sector relies on railroads to move coal, crude oil, ethanol and other products.

Some railroads plan to impose additional restrictions that could impact food suppliers and online retailers that use intermodal services that connect ships, trains and trucks. BNSF, which serves the western U.S., said it will stop accepting refrigerated intermodal cargo. Norfolk Southern, which serves the eastern U.S., said it will stop accepting all intermodal shipments.

U.S. passenger railroad Amtrak, which uses tracks maintained by freight railways, is facing growing disruptions. Amtrak said it will cancel trains on seven more long-distance routes on Wednesday after it began canceling trains on four long-distance routes on Tuesday.

High stakes

The stakes are high for Biden, who has vowed to rein in soaring consumer costs ahead of November elections that will determine whether his fellow Democrats maintain control of Congress.

Biden appointed an emergency board in July to create a framework for settlement terms.

That has not happened since the early 1990s, when Congress sent the parties into final and binding arbitration.

Unions in the current talks have been offered significant pay increases. Three of 12 unions, representing about half of the 115,000 workers affected by the negotiations, have yet to sign deals. They are grappling with railroads over working conditions that they have said worsened after the industry slashed its workforce by almost 30% during the past six years.

Rail customers have said a shutdown will send them scrambling for alternative transportation and storage for everything from ammonia and fuel to cars and chicken feed.

It takes about four trucks to handle cargo in a single rail car. The United States does not have the estimated 467,000 trucks or the necessary labour to support such a shift. Beyond that, some cargo is too heavy or large to travel over the road.

A rail work stoppage could strike as U.S. farmers harvest corn, wheat and soybeans for export around the world, according to the National Grain and Feed Association.

“The economic damages across the food and agricultural supply chain would be swift and severe,” the group said.

Justin Louchheim, senior director of government affairs at the Fertilizer Institute, which represents companies that rely on ammonia supplies, added: “When you contemplate global food security, I’d say it’s a crisis right now.”

Automakers worry that a disruption could empty dealer showrooms by stranding cars in the wrong places. Toyota said it would have to store vehicles and “many locations would run out of storage within two to four days of production.”

— Reporting for Reuters by David Shepardson and Lisa Baertlein; additional reporting by Ben Klayman, Joe White, Laura Sanicola, Stephanie Kelly, Arathy Somasekhar and Tom Polansek.

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In letters to the CEOs of the railroads, dated Friday and posted Monday on the U.S. Surface Transportation Board’s (STB) website, the regulator requested locomotive and employee numbers, and asked whether the railroads have sufficient numbers of each to meet demand.

The STB said last week it would start meeting with customers next month, signaling the agency could be open to new paths to relieve shipper pain.

The letter signed by STB acting chairman Ann Begeman and vice-chairman Deb Miller cites the regulator’s “increasing concerns regarding service across the rail network,” and asks for a service outlook for the near term and for 2018.

“Please discuss your expectations for service demand in 2018, ability to serve this demand, and whether internal projections for demand in 2018 have been accurate based on actual volumes year-to-date,” the letters said, among other requests.

The letters were sent to the CEOs of Union Pacific, BNSF Railway, CSX, Norfolk Southern and Kansas City Southern. They were also sent to the CEOs of Canada’s two major railroads, Canadian National Railway and Canadian Pacific Railway, which have significant U.S. operations.

A spokesman for CN said the railroad has “acted aggressively to address service issues… that have developed in the face of significant volume increases across our business.” It said those included leasing locomotives and raising planned 2018 capital expenditures by $500 million, to $3.2 billion.

A Norfolk Southern spokeswoman said the railroad would “respond directly to the STB.”

CSX has been reporting weekly service data to the STB since August following disruptions last summer and a spokesman said the railroad has consistently shown “significant improvements across all key metrics.”

The other railroads did not immediately respond to requests for comment.

As U.S. economic growth has revved up, railroads and truck fleets have not expanded capacity to keep pace — a decision applauded by Wall Street.

The drive for cost cuts and higher margins at U.S. trucking and railroad operators is pinching their biggest customers, forcing the likes of General Mills and Hormel Foods to spend more on deliveries and consider raising their own prices as a way to pass along the costs.

— Nick Carey is a Reuters correspondent based in Detroit.

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Investors rushed to bid up shares of CSX after news reports that former Pershing Square partner Paul Hilal was teaming up with Canadian Pacific Railway’s outgoing CEO Hunter Harrison to shake up the Jacksonville, Fla.-based firm.

The stock’s jump added more than US$6 billion to CSX Corp’s market value. Harrison, a well-known turnaround expert, has overseen a three-fold increase in CP’s stock price in five years at the helm. He has also tried to engineer consolidation in the North American rail industry in the past.

A person familiar with the matter said Hilal is aiming for a turnaround of the company rather than its sale. Hilal declined to comment.

While Harrison’s pursuit of a deal could now get another chance, regulatory and political obstacles remain.

Many large rail customers spoke out against CP’s bid last year for No. 4 U.S. railroad Norfolk Southern. The bid failed last spring in the face of criticism from lawmakers and customers, including package delivery giants FedEx and UPS.

“Still, we know Harrison wants to see that sort of deal. And we know CP wanted it as well. Perhaps what we are now seeing is a backdoor way for that deal to happen,” Gordon Haskett head of research Don Bilson, said in Thursday’s note.

Harrison has previously said that CSX has several strengths as a merger target, but stressed that he never made a formal offer for the U.S. railroad.

Keith Creel, who takes over as chief executive of CP on Jan. 31, told analysts on Wednesday that he expects future industry consolidation.

“I don’t know if it’s going to be two years, three years, five years,” he said. “But it’s inevitable. Volume growth is going to come. Railways are not going to be built (so) consolidation will occur. And I can certainly see that happening within my career.”

Hilal’s fund, Mantle Ridge LP, has raised more than US$1 billion and is in the final stages of working out an agreement with Harrison on their partnership.

CSX spokesman Gary Sease said the company and the board will evaluate Mantle Ridge’s views and looks forward “to discussing our core strategy.” The deadline for CSX shareholders to nominate directors is Feb 10.

Opposition to a CSX merger is already reemerging.

The CEO at Union Pacific said the No. 1 U.S. railroad remains opposed to mergers between major railroads in the U.S.; Lance Fritz told Reuters “we still think Class 1 mergers in the United States are not a good idea.”

Union Pacific had publicly opposed CP’s bid for Norfolk Southern.

Harrison has repeatedly touted U.S. rail industry consolidation as a way to improve efficiency and profitability. That view may find stronger support in the administration of U.S. President Donald Trump.

But there are also red flags for companies like Union Pacific. Trump has criticized the auto industry for building cars in Mexico for import into the U.S. and has threatened to impose a “border tax” or roll back the North American Free Trade Agreement (NAFTA).

Fritz said about 12 per cent of Union Pacific’s business is linked to Mexico, but added he is an “optimist” about the prospects for NAFTA even though Trump campaigned as a fierce critic of the North American Free Trade Agreement.

“While I think NAFTA is ripe for modernization in labor practice, environmental practice and e-commerce, it also represents a boon to the U.S. economy,” he said. “It benefits the U.S. consumer and creates U.S. jobs.”

— Michael Flaherty reports on corporate governance and activist shareholders for Reuters from New York. Additional reporting for Reuters by Nick Carey in Detroit and Allison Lampert in Montreal.

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The announcement comes days after the U.S. Justice Department urged the Surface Transportation Board to reject a voting trust arrangement CP had proposed as part of its bid.

Calgary-based CP, Canada’s second-largest railroad operator, launched its takeover bid for Norfolk Southern in mid-November, touting potential savings of more than $1.8 billion annually (all figures US$).

But Virginia-based Norfolk Southern had continually rebuffed its advances, rejecting CP’s offer three times including its latest offer in December.

In that offer, CP had proposed a contingent value right in a new holding company for CP and Norfolk that could have increased the value of the deal by up to $3.4 billion.

CP said Monday it has also withdrawn its resolution calling on Norfolk shareholders to vote in favour of good-faith negotiations between the two companies, and plans “no further financial offers or overtures to meet” with Norfolk’s board.

Norfolk’s shares were down about 0.8 per cent at $80.82 in premarket trading. CP’s U.S.-listed shares were untraded before the opening bell.

“We have long recognized that consolidation is necessary for the North American rail industry to meet the demands of a growing economy, but with no clear path to a friendly merger at this time, we will turn all of our focus and energy to serving our customers and creating long-term value for CP shareholders,” CP CEO Hunter Harrison said in a statement.

A number of Democratic lawmakers in Congress, including all the party’s representatives from Illinois and Pennsylvania, have spoken out against a merger.

The U.S. military also raised concerns last week, saying a merger could adversely affect the country’s national defense. The military relies on rail networks to move defense-related cargo across the country, both during peace and times of war.

Some customers including package delivery companies FedEx and UPS had also opposed CP’s plans out of fears that cost cutting would hurt rail services. UPS is the largest customer of the major U.S. railroads.

Billionaire investor William Ackman had played an outsized role in CP’s plan to buy rival Norfolk, but later acknowledged that his firm, Pershing Square Capital Management, should have cut its stake in CP.

CP had also discussed a deal with railway CSX Corp. last year but could not reach an agreement.

Norfolk’s shares have fallen more than six per cent since CP’s first offer in November.

— Reporting for Reuters by Arathy S. Nair in Bangalore. Includes files from AGCanada.com Network staff.

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In mid-November, CP disclosed a $28 billion offer for the Virginia-based company, which has rebuffed all advances from the railroad (all figures US$).

CP proposes sending its CEO, Hunter Harrison, to run Norfolk Southern as part of that trust. But the rules of the U.S. Surface Transportation Board require the companies to run independently of each other while it reviews any deal.

The Justice Department said in a statement that it had told the STB that the voting trust would also fail to preserve the companies’ independence during the review.

Calgary-based CP, Canada’s second-largest railroad, has said a merger would result in savings of more than $1.8 billion annually. It did not immediately respond to a request for comment on Friday.

If Norfolk Southern accepts CP’s bid, this would be the first such review by the STB since the regulator’s merger rules were rewritten in 2001. The new rules are tougher and include additional regulatory hurdles.

The letter comes in response to a March 2 petition from CP to the STB seeking a “declaratory order” on its voting trust proposal.

In its statement, the Justice Department said that by effecting a management change in Norfolk Southern, CP’s proposal “is even more pernicious in its failure to preserve competition than a typical voting trust.

“The STB should find that the proposal fails under each prong of the revised regulatory requirement — it creates unlawful control violations and is against the public interest,” the statement said.

Experts had said the voting trust structure CP proposed would face tough scrutiny from the STB.

On Thursday, the U.S. Department of Defense also raised concerns with the STB over CP’s proposed voting trust.

Last Tuesday, Rep. Bill Shuster, chairman of the U.S. House of Representatives’ transportation and infrastructure committee, also stated his opposition to CP’s proposal.

“I do not believe it is in the best interests of the U.S. freight transportation system, railroad employees, rail shippers and the short line railroads,” he said in a statement. “I believe it is time for all parties to move on from hypothetical merger proposals.”

— Reporting for Reuters by Nick Carey in Chicago and Timothy Ahmann in Washington, D.C.

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Chicago-based ADM, one of the world’s largest grain traders and processors, filed suit against CP in the U.S. District Court for the Central District of Illinois last Friday, seeking damages “resulting from one of the worst and most persistent railroad service failures experienced by ADM in many years.”

But that same day, Calgary-based CP filed a claim against ADM in the U.S. District Court for the District of Minnesota seeking payment of overdue charges.

Railroads have long served as the lone, dependable way to move grain across the northern U.S. Plains, where there are no commercially-navigable rivers.

In early 2014, after months of worsening delays crippled the U.S. farm transportation system, farmers in the Upper Midwest held the largest grain stocks in years.

A CP spokesman said ADM’s claim stems from that harsh winter, adding it would “defend itself vigorously against ADM’s frivolous allegations.”

ADM refers in its lawsuit to damages of “several million dollars,” but it is potentially embarrassing as it highlights key benefits CP has touted in its bid for Norfolk Southern.

CP in mid-November disclosed its US$28 billion offer for Norfolk Southern.

The Norfolk, Virginia-based railroad has rebuffed CP’s advances. CP claims a deal would result in cost savings of more than US$1.8 billion annually.

While some rail customers back the bid, many, such as package delivery companies UPS and FedEx, oppose it. Opponents say cost-cutting initiatives would cause service disruptions.

Since septuagenarian railroad legend Hunter Harrison became CP CEO in 2012, Wall Street has cheered its efforts to trim costs.

But ADM’s lawsuit claims service disruptions at its facilities in Enderlin and Velva, N.D. and Red Wing, Minn. stem partly from CP “engaging in imprudent cost-cutting initiatives.”

ADM blamed the problems on “diversionary management activities” at CP “pertaining to potential rail merger/acquisition partners.”

In late 2014, CP also offered to buy No. 3 U.S. railroad CSX Corp., but was rebuffed.

The lawsuit also alleges CP did not allow ADM to use alternative rail providers “to mitigate its service deficiencies.”

CP has promoted the idea of “open access,” allowing rail customers to use alternatives in similar situations.

— Nick Carey and Tom Polansek report for Reuters from Chicago.

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“It is unfortunate that CP must consider the use of litigation to ensure a level playing field and protect its rights,” CP, Canada’s second largest railroad, said in a statement.

CP’s US$28 billion plan to buy Norfolk Southern has garnered support from more than 80 shippers, but is being opposed by Norfolk Southern and a number of industry groups and other rail customers.

Some U.S. railroads said on Wednesday they were not participating in any anti-competitive activities.

“CSX has not been part of, nor is it aware of, any anti-competitive activities related to mergers, or otherwise, in the railroad industry,” spokeswoman Melanie Cost said by email.

A spokesman for BNSF Railway declined to comment on Wednesday.

CP has previously raised concerns that U.S. railroads were working collectively to oppose its proposed merger with Norfolk Southern. In January, CP said in a statement that it asked the U.S. Department of Justice to “review” the actions of certain railroads “who have stated publicly that they are organizing a collective campaign” to block industry mergers.

The proposed merger, announced in November, would come under regulatory scrutiny from the Surface Transportation Board over its impact on the U.S. rail market, in particular the possibility it could spark competition-crushing rival deals, according to former regulators and analysts.

It would be the first deal reviewed by the STB since the U.S. rail regulator rewrote merger rules in 2001.

CP said in February it would seek an order from the STB confirming the viability of the complex deal structure it intends to use in its proposed takeover of Norfolk Southern.

The Wall Street Journal reported Tuesday that CP had approached CSX in January about a takeover, but the railroad rebuffed CP’s advances.

— Reporting for Reuters by Allison Lampert in Montreal and Nick Carey in Chicago.

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Norm Hall, president of Agricultural Producers Association of Saskatchewan, worries the move is short-sighted and may catch up with the railway in months and years to come, when commodity prices catch fire again.

“You dump those employees now but when things heat up in 12, 18 months, either in the oilpatch or potash, it’s going to take another 18 to 24 months to find enough employees to replace these guys,” he said.

His concerns are echoed by Saskatchewan’s Kevin Hursh, who sits on the board of the Inland Terminal Association of Canada. CP’s cuts came up at a meeting Jan. 25, he said.

“There is a worry that when times are slow it’s pretty easy to cut capacity and cut jobs. It’s much more difficult to gear them up when demand returns,” he said.

The current winter has been a relatively easy one for the railways, but that could always change, he added.

“A whole lot of factors can come to play and the railways have not shown much eagerness to have surge capacity at their disposal.”

Both Hall and Hursh said the railways are doing a good job presently and they hope that continues.

However, Hall said, grain still tends to be a low priority when it comes time to actually move the product.

Another aspect worth considering is CP’s recent pursuit of rival company Norfolk Southern, the No. 2 railway in the eastern U.S.

“Those arrangements usually work a lot better if you can stay on the same railway and not have to pass things off from one railway company to another railway company,” said Hursh.

For its part CP said in an email that it adjusts staffing levels to the demands of the ever-changing market.

Furthermore, the company said, it would look to bring back employees to meet any future demand.

— Dave Sims writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting. Follow CNS at @CNSCanada on Twitter.

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Calgary-based CP on Tuesday asked the U.S. Justice Department to look into statements by U.S. railroads, in the wake of the meeting, about “working closely with each other to block” its bid for U.S. railway Norfolk Southern.

The U.S. railroads met late last year in the presence of lawyers, saying they merely discussed a merger’s impact on the industry. Interviews with U.S. railroad executives show some oppose mergers; others tout possible benefits.

Tuesday’s flap, where CP accused U.S. railroads of adopting an “anticompetitive” strategy, shed light on chances for further consolidation, with eyes on No. 3 U.S. railroad CSX Corp. as a future target.

“If Canadian Pacific’s bid for Norfolk Southern goes ahead, then CSX will be the next domino to fall,” said Scott Rostan, who worked on the Merrill Lynch team advising Norfolk Southern during its battle with CSX in the 1990s for control of Conrail, which was ultimately carved up between them.

CP in mid-November disclosed its US$28 billion offer to buy Norfolk Southern.

The bid coincides with a “freight recession” as falling commodity prices hurt North America’s railroads. On Tuesday Moody’s Investors Service warned of “increasing risks of an industrial recession” for North American manufacturers. CP, like the broader Canadian economy, is fairly reliant on commodity exports.

Some analysts see its Norfolk offer as an opportunistic bid for a growth story while rail stocks are down.

The No. 4 U.S. railroad has rejected CP’s advances, setting the stage for a potential proxy battle.

Union Pacific CEO Lance Fritz told Reuters last week consolidation would harm the industry and the No. 1 U.S. railroad has been lobbying lawmakers and regulators against mergers.

Asked whether Union Pacific would participate in consolidation of North America’s seven remaining major railroads, he said “we will act in the best interests of our shareholders.”

Matt Rose, chairman of No. 2 U.S. railroad BNSF, owned by Berkshire Hathaway, said now is not the time for mergers because “our customers do not want” them. But he added mergers would not necessarily be a bad thing.

“There’s nothing evil at all in having a transcontinental railroad,” Rose said on Thursday. “You’ve got lots of national networks in lots of industries.”

Rose said if a CP/Norfolk deal looks likely, BNSF will participate in further consolidation.

Rose stressed if Norfolk goes under the hammer CSX would be at a competitive disadvantage if the $1.8 billion in annual cost savings CP promises from a deal were borne out. This would lead to a “final redrawing” of the continent’s rail map.

“CSX would be at an enormous disadvantage and so there would be another step towards consolidation,” he said.

BNSF, Union Pacific and Canadian National Railway (CN) would be seen as potential suitors for CSX.

A question is how the U.S. rail regulator would approach any proposed merger, as it must take into account other potential deals.

Some analysts see CSX’s announcement Monday that it is consolidating some operating divisions and closing administrative offices as a proactive step toward remaining competitive. CSX did not respond to a request for comment.

Independent rail analyst Anthony Hatch said CSX faces a dilemma if CP gets its way. CSX might be able to stand alone, but would lose value if it struggled.

“I don’t think they could afford to take that bet-the-company risk,” Hatch said.

— Nick Carey is a senior Reuters correspondent based in Chicago.

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Norfolk Southern said Wednesday its board of directors has “unanimously” rejected CP’s revised Dec. 16 proposal, which offered US$32.86 per share in cash, a fixed exchange ratio of 0.451 shares in a new company that would own both CP and Norfolk, and 0.451 of a contingent value right (CVR) in the new company.

CP on Dec. 16 said its offer of a CVR — which could be converted to cash as a protection for shareholders against the company’s stock value dropping below a set point — boosted the value of CP’s deal by up to $3.4 billion.

Norfolk, in a letter to CP brass dated Wednesday, said its board “has unanimously determined (CP’s) latest revised proposal is grossly inadequate, creates substantial regulatory risks and uncertainties that are highly unlikely to be overcome, and is not in the best interest of the company and its shareholders.

“This would be the case even if the CVR had a value at the high end of the range suggested in your publicly filed presentation. In fact, our financial advisors believe that the CVR would trade at a significant discount.”

CP officials, in a statement later Wednesday, said it’s “apparent that neither the executive leadership at (Norfolk) nor its board of directors are willing to sit down in an open and constructive dialogue about this transformational opportunity.”

The interests of Norfolk’s board, CP said, “are not aligned with the best interests of (Norfolk) shareholders. Therefore CP will review its strategic alternatives.”

Merging CP and Norfolk would need the approval of the U.S. Surface Transportation Board, which since 2001 has had tighter criteria for rail mergers.

Norfolk, in its letter, said that while CP “continue(s) to publicly declare that we are not ‘engaging’ or ‘meeting’ with you… (t)here is no basis to meet until you both make a compelling offer and address the regulatory issues, which you have the ability to do by seeking a declaratory order.”

Norfolk said it had urged CP to seek a declaratory order regarding the legality of putting CP into a voting trust under the proposed merger structure. “Your decision not to seek an order shows a lack of confidence in your proposed structure,” Norfolk said. — AGCanada.com Network

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