Economic fallout from war in Ukraine could bring business to US railroads: analysis

A BNSF Railway export grain train travels through the Mojave Desert east of Barstow, California in June 2014. (Chase Gunnoe)

CHARLESTON, West Virginia — Russia’s self-inflicted economic recession following the war in Ukraine will likely undo more than a decade of economic progress as other countries end ties with Russians. For the United States, this is an opportunity to increase exports, thereby enhancing its relevance as a swing supplier. Coal and grain in particular are commodities that drive the economies of Russia and Ukraine, and in the United States have close ties to railroads.

Sanctions on Russia have tactically omitted fossil fuels due to Europe’s reliance on Russian energy, but Europe is considering how it can wean itself off Russian suppliers. The European Union is proposing a ban on coal imports from Russia that could come into force in August. CNBC Reports EU member Germany bought more than 20% of its coal from Russia in 2020 and has expressed concern about the economic impact of an accelerated phase-out of Russian coal.

The United States could be an alternative source of coal

These vulnerabilities could encourage European buyers to turn to American suppliers, taking advantage of relationships already established with American coal companies. The United States exported more than 22 million tons to Europe in 2021. The Netherlands was a major recipient, receiving 7.1 million tons, with Germany, Austria and Italy receiving more one million tons. As U.S. coal supplies remain tight due to strong global demand, this could create spot market opportunities for miners with the capacity to ramp up production. At least the tonnage of coal destined for Europe could compensate for the drop in US coal exports to Ukraine following the conflict.

For example, Metinvest, a Ukrainian steelmaker, uses Appalachian metallurgical coal to produce steel. CSX Transportation and Norfolk Southern transport coal from the steelmaker’s US subsidiaries to marine terminals for export. Mariupol Ironworks became a focal point of Ukrainian resistance in the coastal city, with Russia stepping up its attacks in an attempt to capture troops and civilians barricaded in the facility. A factory in Avdiivka was also reportedly damaged. According to Metinvest, until the end of the Russian military aggression and the restoration of communication with its factories, it is not possible to assess the impacts, but the production of steel – and therefore the demand for coal – is likely to be disrupted for some time.

The greatest opportunity: America’s most economical coal comes from the Powder River Basin, but the ability to supply unaccounted tons would depend on a mine’s ability to increase production and the ability of the line railroad to make additional business. Both industries are struggling to meet labor demands in a post-pandemic economy. The ability to produce more, at competitive prices and to manage complex logistics with finesse will determine the ability to meet new demand.

World wheat supply also at risk

Ukraine’s ability to export grain, particularly wheat and rye, is also under threat. A recent Forbes article, citing Uranian agriculture officials, notes that Ukrainian grain shipments have fallen from 4-5 million tons per month to just a few hundred thousand. According to United Nations data, Ukraine is the world’s sixth largest wheat exporter, accounting for 10% of the market and transporting 20 million tonnes in 2021. The country also exports rye, barley and sunflower seeds.

United Nations officials warn that farmers are unable to tend to their fields and harvest their crops. The latest indicators suggest that 20 to 30% of the sown areas will remain unharvested during the 2022-2023 season. Damage to transport infrastructure such as railways and ports will further affect farmers’ ability to market their crops, while insurance costs for ships destined to dock in the Black Sea region will drive up prices.

Egypt, Ethiopia, Yemen, Lebanon and Palestine are the major wheat importers from Ukraine and Russia. A disruption in supply can create food shortages, prompting these countries and other buyers to seek alternative sources, such as the United States.

The United States sends the majority of its wheat to Mexico, China and the Philippines, according to US government data. Farmers can consider increasing supply to other markets if food shortages require it. Globally, the United States is the world’s fourth largest producer of wheat, harvesting just under 50 million tonnes in 2020, followed by Canada with 35 million tonnes.

If the conflict continues and the United States has a favorable harvest, the railroads could seize spot market opportunities to move grain for export from terminals in the Gulf and elsewhere.

Biggest Opportunity: Wheat and other grains are exported across the country, but those with the greatest potential to accommodate additional capacity include New Orleans, which accounts for 37% of total agricultural trade, and the Port of New York and New Jersey. The remaining five major centers of agricultural trade are on the Pacific coast, located primarily for Asian markets. Spot market opportunities would require coordination between farmers and railways to get grain to market.

Even if Russia and Ukraine negotiate a peace agreement, a lifting of sanctions is unlikely to immediately revive relations with Russia. The Institute of International Finance says the current crisis has wiped out more than 15 years of economic development, suggesting that Russia’s gross domestic product will shrink by 15% this year and another 3% in 2023. Goldman Sachs projects a contraction of 10% of GDP in 2022. . The World Bank estimates Ukraine’s economy will contract by 45% in 2022, the full extent depending on the duration and intensity of the war.

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