A trainload of economic chaos

15.11.2010 — Analysis

There are not enough railroad cars in the Sverdlovsk region to transport freight. The government has suggested that the business community create a regional transportation company, take out loans, and buy some rolling stock. Experts think that officials are pressuring entrepreneurs into a risky venture. The transportation problems aren't limited to just the lack of railroad cars - a weak dispatch system and outdated rail infrastructure are also major issues. As this columnist for "RusBusinessNews" explains, the slowdown in the average speed of rail cargo transportation is already affecting Russia's economic growth.

Aleksandr Petrov, the minister of industry and science for the Sverdlovsk region, proposed that the Sverdlovsk regional Union of Industrialists and Entrepreneurs organize a regional rail freight company. He believes this step could go a long way toward alleviating the shortage of rolling stock on the regional freight transportation market. The regional government has indicated its willingness to provide a new system of tax incentives and banks have offered to provide loans for the purchase of railroad cars.

Experts were surprised by this government initiative, since the Second freight company only recently registered in the Sverdlovsk region. This new company was designed by the ideologists behind the reform of Russian Railways as a way to fully meet the rail transportation needs of business. The government of the Sverdlovsk region offered the carrier unprecedented tax incentives to help the company be as successful as possible. But experts are even more interested in the infamous shortage of rolling stock.

Aleksei Bezborodov, the general director of the news analysis center InfraNews, claims that the alleged scarcity of railroad cars does not exist. Research has shown that the number of open railroad cars, platform cars, and tank cars currently being proposed for construction are more than the market requires. This means that railroad-car manufacturers might run out of production orders by mid 2011, or by early 2012 at the latest. Some of these manufacturers might even go bankrupt.

Market players reacted skeptically to the predictions announced by InfraNews. According to information from the press office of the public research and manufacturing corporation "Uralvagonzavod", the company intends to produce more than 20,000 units of rolling stock in 2011, including no fewer than 3,000 of a new type of open car, designed to meet improved technical and operational standards. The company, based in Nizhny Tagil, will manufacture about 19,000 open and tank cars this year. As before, they will be purchased by "the First freight company", "Vostokneftetrans" (a joint venture between "Uralvagonzavod" and "Transneft"), and leading private shipping companies.

Albert Kostromin, the director of the division of railroad foundry and railroad-car manufacturing at the mechanical-engineering holding company "Traktornye Zavody", told "RusBusinessNews" that about 80,000 railroad cars would be produced in the country in 2010. A number of operators have already announced their plans for 2011. "First freight company", for example, intends to buy 40,000 open cars in the first six months. If the freight market continues to develop at this rate, everyone will be vying for access to those production facilities. According to Albert Kostromin, the railroad-car manufacturers don't care whether the carriers expand their fleets or just replace outdated rolling stock. He emphasized that not only will the currently operating factories (including those in CIS countries) be unable to satisfy a rapidly increasing demand for railway cars, but even the new facilities scheduled to open in 2011 to manufacture railroad cars and castings will be insufficient.

Gleb Kinder, the general director of the transportation company "Konteinerny Servis, LLC", suggests that the demand for tanker cars will be tied to increases in the production of Russian petroleum products. That situation could change once new oil pipelines are built, but those are still far from completion. "In my opinion, there will be a continued increase in the demand for tanker cars for the next two to three years," Gleb Kinder sums up. Nor does he rule out a revival of the market for container shipping services, especially if rail shipping rates go down. This manager claims that this scenario is, in fact, quite likely.

In the meantime, Aleksei Bezborodov, tells "RusBusinessNews" that his calculations are based in fact. According to him, a reduced demand for railway cars is not connected to decreasing volumes of cargo shipments, which have actually increased by 6-7% in some areas. The issue is how to use the railcar fleet in an effective way. When one examines the relationship between the amount of rolling stock and the logistics of how they are used, one sees that as the number of railroad cars increases, the dispatch system deteriorates. Thus, freight takes longer to ship and, naturally, even more cars are needed. This is a profitable scenario for the shipping companies and railroad-car manufacturers, but isn't so great for the Russian economy.

Aleksandr Striga, the PR director for the Institute for the Study of Natural Monopolies, would not comment on InfraNews' statement, but he did not deny that the average speed of Russian rail freight transportation is declining. This means that infrastructure constraints are beginning to stifle economic growth.

Railway officials claim they cannot modernize their rolling stock as quickly as they need to. One problem is the continuing increase in the price of freight cars, which resumed as soon as the economic crisis of 2008-2009 began to abate. The metallurgical industry is behind this rise in costs - they are guided by global market prices, although they have their own raw materials and even their own transportation networks. The railroad-car manufacturers are also a factor. Judging from "Uralvagonzavod's" economic indicators as published on their website, each of the corporation's railroad cars sells for $80,000-$90,000.

In Ukraine, where up to 80% of the rolling stock that is produced is headed for Russia, a railroad car currently costs $67,000. It's already been announced that this price will rise to $90,000 in 2011, although Dmitry Podturkin, the director of the analytical unit of the consulting consortium Management Consulting Group, claims that the production costs for a railroad car manufactured in Ukraine are no more than $33,000.

The result of this bidding up of prices is that the railroads are ruinously unable to modernize their rolling stock and infrastructure. Mikhail Burmistrov predicted the imminent collapse of the railroad system at the Infotrans-2010 conference, claiming it could be avoided only by improving the operational efficiency of the transportation system using new information and analytical resources. In turn, Vladimir Yakunin, the president of Russian Railways, noted that the most important task today is to create a planning and forecasting system.

Vladimir Terletsky