Transgarant`s Alexey Grom:"We expect the market stable in 2011"
Transgarant is one of the largest private-sector rail operators in Russia. It operates 15,687 railcars, including 7,238 opentop railcars used for coal transport. The rail firm is part of Fesco group. The group owns two container terminals in the port of Vostochny and in Vladivostok and has its own shipping fleet, including dry bulk carriers (see table). Fesco has diverse assets including containers, locomotives and icebreakers.
The group specialises in container transport but coal is becoming an increasingly important cargo, at least for the rail subsidiary. The share of coal transport increased to nearly 50pc of the total amount of cargoes transported by Transgarant this year (see table).
Transgarant managing director Alexey Grom described the specifics of coal transport in Russia, the company’s experience in this business and its outlook for the future in an interview with Argus in October. Edited highlights follow:
How much coal does Transgarant transport?
Coal accounts for about 47pc of all cargoes loaded that we transport. Normally, we transport about 1mn t/month of coal. Transgarant began dealing with coal even when other companies gave more attention to other, more profitable cargoes. Nowadays, transporting coal is considered to be an attractive business and rail operators are competing for this cargo.
RZD has been complaining for years that coal is a loss-making cargo. How did this cargo become attractive?
The clients are different now. Some of them are only interested in lower fees, the lower the better, and they do not care about anything else. But times change. Now more and more cargo holders want their coal to be transported on time, especially during the railcar shortage. Some clients are prepared to pay a premium for guaranteed delivery.
We have good experience of transporting containers based on a fixed schedule, almost like passenger trains, and we are trying to employ the same technology for transporting coal. Coal companies are interested in our technologies developed for the transport of containers. The market is on an upward trend now. The price of our services has started to grow, after the fall in 2008-09, and has almost reached the 2007 level.
Do shipments to export or domestic destinations provide better returns for rail operators?
Revenues from transporting coal to the ports for export or inside the country are very much the same. It is important for rail operators that the railcars spend as short a time on the route as possible. The less time, the higher the margin. On any route the main time losses are associated with coal loading and unloading. So what is important is not where the railcar is moving but how quickly it can be loaded and unloaded. When 1,000 railcars were standing idle near the far east ports [earlier this year] this route was not attractive at all.
Does Transgarant transport a lot of coal to the Far East?
A total of 95pc of all the coal we transport is on Siberian and far east routes. This includes coal shipments to power stations in east Siberia, and to the ports for export. The destinations are determined by cargo holders. Our margin does not differ much on export and domestic routes.
The export routes involve big distances and the client pays us a high fee. On domestic routes the fees are lower but the routes are much shorter — as a result the railcar on a domestic route can bring as much revenue as on an export route in the same period of time. On a domestic, shorter, route a railcar makes several trips during the same period of time, and we are paid a lower fee but several times.
Russian domestic consumers such as utilities say they cannot pay the fees private-sector rail operators are asking for. What do you say to them?
It is normal when the buyer of a service wants to pay less than the seller wants to get. But each service has its market price. As for power stations, transporting coal to them means stable long-term business and private-sector rail operators want to work with them. The operators are interested in a term agreement and are ready to give a discount in exchange for stable term relations.
How often do rail operators change their fees?
When the market is stable the fees do not change often. We had a stable market in 2007. But then the market collapsed. At the end of 2008 the railcar rent was Rbs1,200-1,300/d, and when the economic recession began the rates fell to Rbs400/d. Now the rates are going up. Everyone needs opentops railcars, they are in short supply and the rates are going up very quickly.
Do you fix your rates in the contracts with your clients?
Yes, we do. It is normal to revise the rate twice a year, or possibly once every three months. But the market is very unstable at present — the rates are returning to the normal level from a deep fall. And we have seen rates change every month lately. In the last three months our company raised its rates twice. We expect some stabilisation now and the next increase should happen in January as a result of the rise in the regulated infrastructure component of the rate.
Is it possible to determine the rate through some formula included in the contract? What can it be linked to? In the past linking the rail tariff to the market price of coal was discussed. Is this viable?
I think it would be fair to link the transport price to the cargo price, but it will not work in this country. There were attempts to link the tariffs on transportation of petroleum products and crude oil to their international prices. But these attempts have failed. I think the old regulated tariffs system will serve as a sort of benchmark for some time.
But mainly the rail operators look at the railcar profitability when determining their rates. The railcar itself already costs as much as it did in 2007. But the fees of private-sector rail operators are not as high as in 2007 because clients cannot pay that much at the moment.
With the disappearance of state-owned railcars regulated tariffs will become irrelevant — the infrastructure component will remain regulated but the railcar component will be determined by the market. Can regulated tariffs serve as a benchmark?
The market participants may take those tariffs into account. This may continue for about a year. And then the profit margin of the main market players — PGK and VGK — will serve as a benchmark. They are the leaders with the largest railcar fleets.
Some utilities are urging the government to introduce caps on rail rates. What do you think about this?
If the cargo holders want the transport market to develop they have to pay the market price for transport. If they want to receive better railcars, with new modifications, of higher capacity, they should pay the market price for transport services. Rail transport is a business, it needs to develop.
When do you think the railcar shortage will be overcome? And is it a shortage of railcars or a problem of managing them?
Many different factors have contributed to the problem. The railcars now stay on the route longer, and many older railcars need to be scrapped. And the railroads are in need of repair. For instance, this year RZD carried out large-scale repairs on the far east network — as a result there was congestion and the railcars spent too much time on the route, which undermined the profitability of transport.
The problem needs to be resolved in an integrated effort. The cargo holders should speed up loading, the ports should unload without delay, and the rail operators should improve their efficiency.
Any shortage is a bubble that will burst at some stage. And we are not interested in charging high fees today but having no work tomorrow. We are interested in long-term stability because the investment needed to buy a railcar is recouped in 10 years — at current railcar prices.
Besides, high rail rates prompt cargo holders to create their own transport companies and buy the railcars. And when a company buys its own railcars it will not sell them in two years, it will continue developing this business because the railcars are a serious investment. It means that they will transport more cargoes themselves. And this is certainly contrary to the interests of private-sector rail operators.
RZD has proposed taking private-sector railcars into operation based on agent agreements. Is Transgarant interested?
Yes, RZD is proposing to manage all the private-sector railcar fleet. We might accept this proposal. But so far we have failed to agree on the terms. If they want to take our clients and our railcars and manage them in the same way as we do and charge a commission for that — we are not interested in this.
We want to see how the largest coal producers and metals producers will co-operate with RZD. If this co-operation is efficient then we might also join the pool. Transgarant is one of the most efficient companies of Fesco group and our final goal is increasing the capitalisation of the company.
FESCO has its own dry bulk fleet. Have you thought about offering a package service that includes rail transport, port handling and sea freight?
Our dry bulk fleet transports coal for Suek and Evraz. We have offered “door-to-door” logistics but this service found no demand. The clients want to pay for rail freight in roubles, while sea freight rates are charged in dollars. But we continue to explore the opportunities in this sphere and when there is demand for this service I hope we will be the first to offer it because we have all that is necessary — the railcars, ports and dry bulk fleet.
What do you expect in 2011?
The market has changed a lot during the past two years. And next year we are facing another major change — a new big player will emerge, VGK. But I do not think the market would experience a shock. My forecast is that rail rates may grow by a maximum of 10pc from the current level — in line with the rate of inflation and the planned increase of the infrastructure component.
Are you concerned about competition from VGK?
VGK has a very experienced and professional leader. If he can manage to provide the ideal logistics and develop the key advantages of the company, clients may start choosing in favour of VGK. We understand this very well. But we exist in a competitive environment and will try to offer some new advantages ourselves. The market always develops through competition, and we understand this. Nobody has the target to squeeze each other from the market.
The government wants to sell stakes in PGK and VGK to private-sector companies. Would Transgarant participate?
I would be very interested to participate in the privatisation of PGK or VGK. But FESCO as a group has other strategic priorities.
The source: Argus Russian Coal