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Another Wrench in the Works of the Lubricant Supply Chain

Reductions in rail service threatens supply of finished lubricants, DEF and other chemicals and products sold by lubricant marketers.

Some of the leading manufacturers of lubricants and their suppliers say they got word this week that Union Pacific Railroad (UP) is reducing the number of active railcars in its systems in an effort to address mounting congestion and service-related issues in the rail networks. Shippers were asked to voluntarily reduce the number of railcars they ship and that reductions will be mandated if necessary. BNSF Railway is said to be taking similar action.

CF Industries (CF), a leading global manufacturer of hydrogen and nitrogen products, has been one of the more vocal companies publicly expressing concern about UP’s action. In a recent CF press release, the company said “On Friday, April 8, 2022, Union Pacific informed CF Industries without advance notice that it was mandating certain shippers to reduce the volume of private cars on its railroad effective immediately. The Company was told to reduce its shipments by nearly 20%.” CF Industries also notes that “The Company understands that it is one of only 30 companies to face these restrictions.” A big concern here is that the reduction in railcars will cause significant delays in supplying the farming industry with fertilizer in time for spring applications. Important for lubricant marketers to consider is that CF Industries is the largest producer of urea, UAN and diesel exhaust fluid (DEF) in North America.

In addition to disrupting supply of DEF, the reductions in rail service are also expected to impact the supply of other materials (e.g., base oil, additives) needed to blend lubricants, and cascade into delays for lubricant manufacturers to ship their products.

This is particularly concerning news for the US lubricants industry since it has already been struggling with product allocations, force majeures, shortage of truck drivers, weather events, and other significant lubricant supply line interruptions since the start of the pandemic. Further, the industry has been dealing with these challenges at a time when lubricant demand has been rebounding from the economic downturn caused by the pandemic.

The new wrench in the works is expected to make a challenging situation even worse.

While it’s too early to tell just how much the rail reductions will disrupt the lubricant supply chain and which suppliers will feel the brunt of the pain, chances are that supply will take another punch in the gut. With that, delays in shipments could get longer, allocations may run deeper, and costs could increase as suppliers turn to more expensive modes of transportation to assure customers get the products they need. 

While fingers are being pointed in many directions as to why the freight rail network is so congested, and Federal regulators are holding hearings later this month to look into the causes and possible remedies, most lay blame on labor constraints and rising inventory levels.

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