Unmarketable railcar from the Urals

24.01.2011 — Analysis

The Uralvagonzavod Corporation has announced that it starts its own freight company, UVZ-Logistic. Experts say that through this company the corporation is trying to improve its rolling-stock sales. However, as the "RusBusinessNews" columnist has found it out, the captive freight company will not be able to influence sales due to lack of demand for railcars. On the other hand, it will do its bit by adding to railway chaos. Over the last seven years, the Russian railcar fleet has increased by one third, while shipments and the speed of cargo delivery have decreased, evidencing atrocious management of the railway industry.

The Uralvagonzavod Research and Production Corporation, OJSC, specializing in manufacturing of armored vehicles and railcars has decided to go into logistics. The corporation intends to spend 40 billion rubles on purchasing of 12 thousand tank-cars and 8 thousand gondola cars for its new transportation company. The experts expect that its share of the transport market will not be large: with such unimpressive railcar fleet the corporation can only hang around the First and the Second Freight Companies.

Vladimir Chernykh, Deputy Director of the Ekaterinburg Branch of the First Freight Company, OJSC, thinks that the UVZ-Logistic is likely to focus on local transport operations that are not serviced by major companies. These may be domestic routes or certain destinations that are in little demand from the existing market participants. Therefore, the new freight company will not be able to have a profound effect on the freight transportation market.

In the meantime, UVZ-Logistic has no intention to play first violin. By assumption, Uralvagonzavod is trying to take advantage of the market situation to boost rolling stock sales. According to V. Chernykh, today's petroleum product market features stability and upward trend, thus, promising steady demand for tank-cars in the near future. However, he thinks that UVZ-Logistic is unlikely to have any impact on railcar sales. The roost here is ruled by large players: for example, sales increased considerably when the First Freight Company came into the market. The same company influences pricing for rolling stock.

By today, the First and the Second Freight Companies have developed investment programs involving sizeable purchases of railcars, which manufacturers will have to cope with. The experts are confident that Uralvagonzavod has no capability to manufacture additional quantities of rolling stock. Previously it was reported that in 2011 Uralvagonzavod (UVZ) will manufacture about 20 thousand railcars - the quantity required for UVZ-Logistic.

In the meantime, some experts believe that the demand for railcars is inflated artificially. Moreover, in the next few years the requirement in tank-cars is likely to decline. At night on January 1st, 2011, Transneft started deliveries through the Skovorodino-Datsin pipeline. The pipe branch that was built last year from the Eastern Siberia-Pacific Ocean (ESPO) pipeline will supply 15 million tons of oil to China annually. Previously, oil was delivered to Celestial China by rail. Oil is still being delivered in tank-cars from Skovorodino to the Kozmino Port, but it will not last long. The second ESPO phase includes construction of a pipeline in the Skovorodino-Pacific Coast section and increased capacity of the Kozmino sea terminal. Logistics specialists assert that it will result in declined demand for tank-cars for heavy petroleum products.

Alexei Bezborodov, General Director of the InfraNews Agency, expects that the decline will not be considerable - about 1.5%; however, the market participants will be affected by it. Light petroleum products will not be able to fill the gap, because in 2011 they will still be subject to high export duties. Therefore, as the expert anticipates, the current excessive supply will keep surging up with the increased output of tank-cars.

A. Bezborodov also thinks that the demand for gondola cars is inflated. In 2010, the amount of shipments failed to reach the level of 2004 (let alone 2008), and the railcar fleet has increased by 30% by the present time. Nevertheless, entrepreneurs complain about shortage of gondola cars. V. Chernykh thinks that the true reason should be looked for in inefficient exploitation of rolling stock: railcars stay idle during handling operations, and then travel empty, occupying railroad tracks. "Instead of shifting all the blame for delays in unloading to consignors and consignees, - the executive manger emphasizes, - a number of measure should be taken to improve operating efficiency of such rolling stock".

The executives of the Russian Railways OJSC suggested that the largest owners of the railcar fleet should transfer operating functions to the Authorized Service Center as well as impose penalties for running of empty railcars. Vladimir Yakunin, President of Russian Railway, thinks that such measures will make private companies accept cargoes, which they neglect today seeing them as poor yielders.

Alexei Bezborodov agrees that the idea makes sense, but its implementation will require flat rates for all types of empty railcars and all companies as well as solution of the problem relate to compensation of railcar owners who face payment defaults from lessees. However, the main issue concerns the speed of shipments rather than unwillingness of the private business to make their fleet readily available at short notice. This problem cannot be solved through purchases of new railcars: in 2004, though railway companies had by 30% fewer railcars, they were able to cope with shipments. Today, the situation when empty railcars stay idle while they are needed in some other place has become commonplace. The larger number of railcars seems to result in inefficient dispatching services. The situation has repeatedly been discussed by specialists, but managers of Russian Railways keep pretending that they do not understand the underlying reasons.

No solution has been found for another problem: railcar damage during unloading operations. The managers of the First Freight Company state that in 2010 about 15 thousand gondola cars were damaged, which can be compared with the number of newly purchased railcars. Sea ports account for the lion's share of damages due to application of claw-type vehicles for unloading. After its iron jaws, railcars cannot be restored to their initial serviceable condition. Vladimir Chernykh says that many gondola cars stand idle in car-repair sheds due to lack of spare parts or skilled personnel required for their rehabilitation.

The situation looks absurd: dozens of thousands of cars break down, and maintenance and repair shops are idle. Car-making companies complain about tough competition, but turn their blind eye to shortage of spare parts. In the meantime, foreign manufacturers use their best efforts to fill the vacant niche. The situation suggests that market participants are not interested in cars being repaired. The government pursues the policy of connivance, encouraging the established practice. For example, The First Freight Company suggested changing the regulations that permit unloading of railcars with clamshells, but the initiative was buried in the interiors of the Transport Ministry. The freight company has nothing else to do but factor losses from damage of rolling stock in transportation rates.

Then, the price impulse triggers the chain reaction: prices for coal, gasoline and metal start going up. At the end of 2010, Vladimir Yakunin announced at the Russian Railways board meeting that some entities of the Federation had increased traction power supply rates by 80%. He pointed out that inflation undermined the investment potential of the railway monopoly; therefore, the government should increase freight rates by 23% in 2012 or compensate Russian Railways for shortfall in income in the amount of 147 billion rubles.

Being interested in keeping railcar-making factories afloat, the government is likely to fulfill the requirements of the railway companies. Through subsidiary entities, part of the funds received by them will be allotted to Uralvagonzavod, which will make new tank-cars and gondola cars. Though, according to A. Bezborodov, there is no need in them: shortage of gondola cars does not necessarily mean that demand exceeds. Today's transactions deal primarily with redistribution of the existing rolling stock and do not require the new one.

The manufacturers are well aware of the situation: therefore, they are concerned about ways to increase sales. Uralvagonzavod has decided to set up a logistics company, though, in the experts' opinion, it will do more harm than good. The factory will have to pretend that there is demand for railcars. By reporting publicly about 20 thousand units of rolling stock supplied to its own freight company, Uralvagonzavod admits that the company has no other way of selling these railcars. A. Bezborodov thinks that it casts doubt on competence of the Uralvagonzavod management.

Marina Sirina, Vladimir Terletsky