UPDATE 3-Ottawa cites progress in talks to end Canada railway strike

(Updates with comments from transport minister)

MONTREAL/WINNIPEG, Nov 20 (Reuters) - Talks were making progress toward ending a strike by thousands of workers at Canada’s biggest railroad, Canadian National Railway Co , Canada’s transport minister said on Wednesday.

About 3,000 unionized workers, including conductors and yard workers, hit picket lines on Tuesday after talks with management failed to resolve contract issues amid softening demand for freight service. The two-day-old strike had already slowed output at industrial plants making products such as chemicals and canola oil that were cut off from their markets.

“We believe that there is a light at the end of the tunnel and we’re going to push them as hard as we can because this is very important from the economy perspective. We also believe in the collective bargaining process,” Transport Minister Marc Garneau told reporters in Ottawa, adding that a solution is “within their grasp.”

“They have a number of issues, some of which have been resolved but some are still sticking points.”

Business groups have urged Prime Minister Justin Trudeau’s Liberal government to intervene in the dispute.

The union’s concerns center on fatigue, safety and ensuring that workers’ breaks are not reduced. Negotiations in Montreal were ongoing, Teamsters union spokesman Christopher Monette said.

Canada, one of the world’s biggest exporters of farm products, relies on CN and Canadian Pacific Railway to move crops, potash, coal and manufactured goods to ports and the United States.

In a letter to employees on Wednesday that was seen by Reuters, CN denied union arguments that the “strike was about safety.”

“We offered the union a solution to address its concerns,” said the letter dated Wednesday from CN Chief Operating Officer Rob Reilly.

A CN spokesman said the railway was committed to negotiations.

The Teamsters said it had pushed back against CN’s efforts to limit the time off that members get in a current contract.

The union is also asking to limit the use of so-called belt packs, a type of remote control that allow workers to control and move trains.

CN reiterated its desire for an arbitrator to settle the dispute, a step that the union has rejected.

“Arbitration would get you back to work in time for the holidays and we could all continue to serve our customers and the economy,” Reilly said.

But many said the economy was already feeling the strike’s impact.

Plants that produce hazardous chemicals such as chlorine and sulphuric acid suspended production starting last weekend because those goods cannot be stored in cars on rail sidings, said Bob Masterson, chief executive of the Chemistry Industry Association of Canada.

“That’s lost business,” he said. “The economy is a little soft right now. (The strike) comes at a very unfortunate time.”

Chemtrade Logistics Income Fund, a major North American supplier of sulphuric acid and sodium chlorate, warned on Wednesday that a prolonged CN strike could materially damage its operating results. The stock dropped 3.4% in Toronto trading.

The strike has also reduced oil transportation options, as CN is the largest Canadian crude-by-rail mover.

The discount on Canadian heavy oil compared to the North American benchmark grew to $21.25 per barrel for December delivery on Tuesday from $16.95 the previous day, according to Net Energy Exchange. Trading was thin however, as it usually is during the second half of each month.

Some plants that crush canola into vegetable oil and animal meal have slowed production and reduced purchases of the crop from farmers, said Chris Vervaet, executive director of the Canadian Oilseed Processors Association.

He declined to identify the plants, but Canadian canola processors include Bunge Ltd, Cargill Ltd and Richardson International.

“We haven’t really had a lot of history with long strikes, and there’s a reason for that. They are so potentially damaging to the economy that usually there’s the threat of back-to-work legislation,” said Doug Porter, chief economist at BMO Capital Markets.

CN shares dipped 1.8% in Toronto and have fallen 2.8% this week. (Reporting by Allison Lampert in Montreal and Rod Nickel in Winnipeg, Manitoba; additional reporting by Kelsey Johnson and Steve Scherer in Ottawa; Editing by Bernadette Baum and Lisa Shumaker)