Andrey Moroz, Head of External Logistics of PJSC ArcelorMittal Kriviy Rih, spoke about forced increase of own wagon fleet; about the tariff policy of Ukrzaliznytsia and how it impacted transportation and infrastructure of the railways of Ukraine.
– All Ukrainian carriers suffer from lack of wagons. How does PJSC ArcelorMittal Kriviy Rih manage?
– This year we have purchased 500 open wagons. We have received a part of them, and, in autumn, we are to complete the deal. The own fleet will increase 2-fold, enabling 10-15% transportation with own resources. The objective is to have up to 1500 own wagons, which makes one third of our total demand (4500 wagons). For now, that is good enough, as we need to operate own wagons with maximum efficiency, and ensure their maximum turnover. Operators are the ones who can arrange the flows taking into account contracts with other shippers – thus ensuring minimum run of empty wagons. And for us, there is no need to transport our cargo ourselves to make it efficient – as it is not feasible anyway.
– Increase of own fleet does cost the company…
– Definitely. Although, considering deficit of wagons in our country, this is the only chance to ensure stable deliveries of raw materials and shipment of metal products. Plus – in this case we are less dependent on market behavior, and more flexible when arranging our transportation flows. And what is more – reduce inbound and outbound costs, as well as consider new directions for shipment of metal products and iron ore concentrate for export. Increase of own rolling stock has already paid off. We felt a big relief in both deliveries of metal products to the ports and transportation of limestone in these tough times of this material deficiency. In other words, we have to enlarge our fleet. They estimate wagon deficiency in Ukraine at 10 thousand, and in the upcoming years the situation will be even more complicated. By 2021 the deficit may be up to 18 thousand wagons countrywide.
– Why has the wagon deficit become so severe in the country?
– There is a complex of factors here. The primary and the main reason of deficit is suspension of production of new wagons for Ukraine’s market due to crisis developments starting from 2013. Seven years ago there was quite an active production of rolling stock, although new wagons were mostly designated to former CIS countries. That resulted in deficiency of new wagon fleet. Now old wagons are gradually failing, and new ones join insufficiently.
– Weren’t there any orders for new wagons in Ukraine?
– In recent years wagon building was extremely poor, it simply had no sense. Starting from 2013 transportation cost was restraining companies from buying wagons with good payback period, as it would significantly affect their profitability. Ukrzaliznytsya (UZ) was trying if not to cover the gap, but at least to stop the negative trend of recent years. It did not succeed that much. In 2016 only 300–400 wagons were built. In 2017 there were ambitious plans to buy 9 thousand wagons, but UZ managed to build around 2.6 thousand within own capacities. Having 9 thousand wagons is the minimum, which will prevent the situation from being even worse, and maintain the same deficit level. Now there is no wagon production in such volumes, therefore, the negative trend is still there.
– Is it possible to order wagons from other countries?
– Hopefully, we won’t have to go for that. Ukraine has got three major wagon-building manufacturers and several smaller ones. Total demand of Ukrainian companies is from 80 to 120 thousand. At that, in 2011, they produced 52 thousand wagons in Ukrainian plants. We see that our wagon-building capacities can cover the demand in the country. The thing is building new wagons is a long-term investment with quite a long payback period. After 2014 many Ukrainian plants had to optimize their headcount and even to stop some production facilities just to survive the crisis. That is why they are simply not able to maintain the same output volumes. Though one can consider the level closer to 10 thousand wagons, which is possible for Ukraine with its capacities available.
– What else contributed to such a big wagon deficit in Ukraine during the recent years?
– In 2011-2012 top sales of new Ukrainian wagons went to Russia. Then Russian Federation started to apply duties, block Ukrainian shipments, and actively develop own wagon building. Moreover, in 2014 military operation started in eastern Ukraine. The military conflict and blockade of some areas in Donetsk and Luhansk regions significantly affected the situation with rolling stock in the country. Thousands of wagons were blocked in the East, and right now it is impossible to bring them back. Therefore, it is a complex of reasons, including actions by RF, conflict in Donbass, low carrier rates, which hindered building of own wagons.
– What is the payback period now given the raise of wagon operation rates?
– I think it is five years approximately. Now the rates rose, which was good for carrier, and at the same time wagon price rose. On the one hand, it is caused by increase of metal price, on the other hand – the demand developed, and manufacturers went for other pricing policies, to make it more profitable.
– How much did the wagon price rise?
– Approximately 2-fold against July 2016. During this period, the wagon price was the lowest, it was just because nobody was buying. Wagon-building plants were idle, eager to restart production process even at a loss. All of us were waiting for better times.
– What are the loads of Ukrainian wagon-building plants?
– I think, major plants operate in half capacity, which is already not so bad, and gives a signal of restoration. The key wagon-building manufacturers in Ukraine are Dneprovagonmash, Popasnyanskiy wagon-repair plant, Kryukovskiy wagon-building plant and Azovmash. Most Ukrainian companies are willing to cooperate with these plants, and purchase new wagons in 2018.
– How would you comment on the problem of running (speed) on Ukrainian railroads?
– UZ definitely has several major problems, which disturb both their business and ours. The first one is lack of locomotives and locomotive teams. It is linked with the conflict in the East of the country, and blockade of not only wagons, but also locomotives. All the locomotive-building facilities are located in Lugansk region, and are not controlled by Ukraine. Moreover, there is a lack of spare parts for repair of main-line locos of Soviet times. These items are under the sanctions, and we cannot bring them. Hence, it is important to consider new types of locomotives or heat engines as soon as possible. Thirty locomotives, which UZ bought from General Electric, are a good help, but they do not drastically solve the case. Main-line locos need modernization as well, big money for new ones. Our company together with major shippers of Ukraine regularly suggests on introduction of private locomotive resources in order to operate on UZ networks, but for now, it did not give any results.
– And what about the second problem?
– Deterioration of track and poor quality of network repair. For instance, it used to be two days to transport products from Kriviy Rih to Kamenskoye, now it takes 4-5 days. The speed of wagon passing decreased dramatically. Wagon turnovers rose at least by 70% against 2011-2012. It also worsens the problem of wagon deficiency, as the higher the turnover is, the bigger demand in wagons is. Nowadays there are many areas on railroads, where locomotives cannot move with normal speed. Instead of 90 km an hour, they move with the speed of 20 km an hour. It is necessary to invest in Ukrainian railway and use the means efficiently. We know that these plans exist, but the important thing is to aspire to their fulfillment. For instance, we are looking forward to electrification of the area to Nikolayev and to the railway station Izov, as the result of which we will be able to improve shipment turnover significantly. These are important projects, which are implemented by UZ today, and their completion is expected in 2018-2019.
– How does the company in its turn deal with the problem of excessive downtimes?
– There were wagon downtimes within the plant premises. We have significantly improved the situation now – the downtime peak of 128 hours decreased to 94.
– Is it the premium indicator?
– I consider that 85 hours is the indicator of efficient work. To tell the truth, UZ is more likely to have another opinion on that. They calculated somehow, that the wagons turnover inside our plant should make 68 hours in summer, and 72 hours in winter period. It is difficult to prove that the company never reached such indicators before. It depends on how cargo arrives to us, in which wagons, how they are processed. We shall keep in mind that PJSC ArcelorMittal Kriviy Rih has over 600 km of its own tracks. And it is necessary to promptly distribute, process, clean out, form the incoming cargo, and fulfill all requirements. We regularly apply to UZ for them to reconsider the wagon turnover indicator inside the plant, but without results for now. UZ has a very tough approach to wagon downtime rates. We are obliged to pay maximum rate for any downtime above 48 hours – higher than the market one. They have such a rule, which motivates us to operate faster and more efficiently.
– How do you evaluate operation of UZ in whole? How serious is increase of tariffs for cargo transportations, are there any improvements?
– I would like to remind you, that when UZ increased tariffs for transportations in November last year, we did not argue on that. We treated the necessity to increase its profitability with understanding, taking into account problems, which accumulated. Moreover, we do not have any objections against another increase (from July 27) of the rate for UZ wagons use – from 546 to 600 UAH a day (without Value Added Tax). We are for it to approach the market level, but to be lower than the commercial one, because UZ takes pre-payment for using their wagons, and operators provide payment delays – there is money value against time. This approach contributes to more reasonable allocation of UZ wagons and growth of their quantity in our transportations. In its turn, it enables the government company to get away from cross-subsidization, to receive money for building of new wagons. Therefore, we do not have any claims concerning growth of wagon part in a tariff. Considering the infrastructure part of a tariff, we see that since the moment of tariff increase in November last year a little has changed for the better. For example, the quantity of operated locomotives has decreased by 75 units since September last year. It seems that it is not so much versus the total UZ locomotive fleet (2500). But now each locomotive counts, and even such a small decrease as it may seem causes particular difficulties. I understand that there are objective reasons – tender failures, requirements from the anti-monopoly committee, etc. But in fact, what we see is the tariffs have risen, and locomotives are fewer, which is negatively reflected in transportation. Therefore, our position comes to the following. Money, which was received by UZ as a result of tariff increase in November 2017, was not properly used, there is no progress. And for the moment, we do not see any grounds for further growth of infrastructure part in a tariff.
– What else causes objections from PJSC ArcelorMittal Kriviy Rih?
– First and foremost – hidden tariff increase. To give you a recent example, UZ increased the standard time for cargo delivery by 2 days from July 27. And in fact, we will have to pay not by 54 UAH more due to increase of tariff from 546 to 600 UAH, but 1200 UAH additionally for each transportation within Ukraine. One more thing. Leveling of cargo class is discussed now. Actually, the point is not that much in leveling, but more in payment for empty wagon run after transportation of the third class cargo (in our case – concentrate). This payment will rise by 90%. Some major companies consider that such “leveling” of classes will cost all shippers 5.5 billion UAH per annum. UZ estimated over 800 million by the end of the year, if they introduce this indicator. It will make approximately 3.9 billion UAH a year. It is another tough topic. We are not ready to agree with another hidden increase, which is quite significant. UZ shall consider the market opinion, which is totally opposed to such decisions. As the biggest foreign investor in Ukraine, ArcelorMittal company hopes that the government bodies take reasonable approach to the case, taking into account position of the companies of one of the major industries of Ukraine’s economy. (AMKR/Ukrainian metal)