Crude focus of deadly railway crash, but far more chemicals transported by rail

MONTREAL - The explosive railway crash in Lac Megantic, Que., has put the focus on the growing transportation of crude oil, but far more hazardous materials, including dangerous chemical compounds, are regularly transported near Canadian communities.

Canadian railway companies shipped 86,000 carloads of petroleum products in the second quarter, up 18 per cent from last year and 62 per cent from 2011.

But, at the same time, railways transported 154,000 carloads of chemicals during the most recent period, 79 per cent more than the material that forever changed a small Quebec town.

Fifteen people have been confirmed dead and about 60 are missing following Saturday's early morning derailment, explosions and fire that devastated parts of the town.

Cameron Doerksen of National Bank Financial said some of the chemicals transported are even more dangerous than crude, which has come under increased scrutiny over the safety of hauling such material by rail.

Any movement to limit the shipments of crude by rail would also hit the transportation of chemicals.

"We cannot see this being an improvement in safety given that the alternative is to move some of these hazardous materials by truck," he wrote in a report.

Doerksen said transporting hazardous materials by rail is not perfect, but it is generally safe.

The cause of the derailment disaster is under investigation. Initial reports have pointed to a possible braking system failure, which suggests a general rail safety issue, not with transporting crude per se.

"Indeed, the train could just have easily been carrying other hazardous materials or a benign cargo," Doerksen said.

The American Association of Railroads says 99.9977 per cent of all rail shipments of hazardous materials reach their destinations without incident.

Accident rates have dropped 91 per cent since 1980 and the estimated spill rate of crude by rail was 0.38 compared with 0.88 for pipelines. The rate measures gallows spilled per million barrel miles moved.

The Lac Megantic disaster could prompt additional safety measures, including regulations to upgrade tank cars to more modern standards. Tank cars used in hauling crude are generally owned by oil producers and refiners, not the railways.

However, Doerksen said he doesn't expect new safety regulations will be overly burdensome to the country's two largest railways — Canadian National (TSX:CNR) and Canadian Pacific (TSX:CP). Incremental costs could be recovered by higher pricing.

While transportation of crude by rail is the fastest growing segment for both railways, he said it will represent only three to five per cent of CN's revenues by year end and seven to 10 per cent of CP revenues.

Canadian railways continued to outperform their American rivals in the second quarter, despite a slowdown in June.

Total carloads by CN and CP rose in the quarter by 2.8 per cent, including a 4.3 per cent increase of intermodal volumes. U.S. carloads were up 1.7 per cent, including intermodal volumes, which grew 1.7 per cent.

In June, Canadian rail carloads decreased 1.3 per cent, the first year-over-year decline in eight months. Bulk grain carloads were down seven per cent and coal was down 14 per cent, while intermodal volumes, although decreasing 0.4 per cent, were still the third highest in a year.

Doerksen lowered his earnings forecasts for CN and CP for the quarter, based on the lower than expected volumes.

He expects CN will earn $1.57 per share in adjusted profits, down from $1.61 per share previously, but maintained his target price for shares at $101. CP's EPS estimate was lowered to $1.48 per share from $1.56. But he increased the target price to $120, up $2.

CN's carloads rose 2.3 per cent in the quarter, while revenue ton miles increased five per cent, according to the American Association of Railroads. Consequently, revenues are expected to up by less than five per cent, two percentage points lower than previous forecasts.

Calgary-based CP was negatively impacted last year by a strike and costs associated with its proxy battle.

Volumes were up 3.9 per cent in the quarter, led by grain (up 15.1 per cent), industrial products including crude (15.1 per cent) and forest products (8.8 per cent). Coals was down 8.9 per cent and automotive off 9.2 per cent.

On the Toronto Stock Exchange, CN's shares were down 85 cents at $103.09 in Wednesday afternoon trading. CP's shares were off 21 cents at $128.27.