OREANDA-NEWS. September 23, 2011. Russia's railcar market is experiencing changes that have led to higher transportation costs for coal exporters. Railcar operator Freight One (PGK), a subsidiary of state-controlled railway monopoly RZD, manages to keep rates stable despite the rising shortage opentop railcars. Transport costs influence the margins of Russian coat exporters as most export-oriented mines are located far away from ports and places of coal consumption. Andrey Isaev, head of Freight One's department that works with coal and steelmaking businesses, in an interview with Argus describes the operation principles of the company — one of the largest operators of opentop railcars in Russia.

The seasonal surge in demand for coal transportation is evident in Russia* Does it impact Freight One's railcar rates?

Coal is not a seasonal cargo, and its transportation is called for throughout the year But the demand for coal rail shipments increases during September-October as a result of the start of the heating season. Coal deliveries to utilities and power plants increase from September.

We have never linked the growth in railcar rates with the demand for railcars. The rates for Freight One railcars are set every quarter If we linked the rates with demand, we would have to increase them every day. Freight One does not do this. We have amended the rates since July because the shortage of opentop railcars is sharper in the second half, but it concerned only deliveries to export destinations. The growth in railcar rates for export shipping was possible without any damage to coal production.

Our rates for transporting coal for domestic customers remain virtually unchanged from the start of the year We do not plan to raise rates for domestic shipments until the end of the year despite the fact that demand for our railcars is booming.

How can you afford this given that a railcar turnaround is decreasing because of congestion, and profitability is falling?

We certainly suffer some losses, caused by the decline in railcar turnarounds. But customers cannot be blamed for the infrastructure constraints and mismanagement of railcars in the railway system.

A serious problem is that a lot of private railcar owners and operators appeared on the railway network. Their railcars are managed ineffectively, and as each railcar has to be sent to a particular customer, it embarrasses the management of all railcars on the railway system.

What export routes has the rise in railcar rates concerned?

It concerned rail shipments to all export destinations — shipments to ports, border crossings, and CIS countries. The growth was not radical, it was planned and negotiated with our clients. That is why it was conceived adequately by the market.

Will you increase railcar rates from 1 October?

Freight One does not plan to raise rates from 1 October. For the majority of clients, including coal companies, we will maintain cur­rent rates until the end of the year.

What is the current range of railcar rates for Freight One's railcars for export shipments?

We stick to Rbs1,150-1.200/d for a railcar, excluding value added tax. Market rates are well above this level, at around Rbs1,500/d for a railcar. But this is a spot price, and the market accepts it now, but it is not a long-term price. The market is unlikely to be ready to pay this price for a long time.

When railcars are in short supply cargo holders are forced to pay higher rates. They would sacrifice a portion of their margin for stability of supply. This is possible because export prices allow it, otherwise it is at the cost of company reserves.

What factors impact railcar rates the most?

The price of an opentop railcar has risen sharply by 78pc in the third quarter this year to Rbs2.3mn per unit. All imaginable and unimaginable thresholds for a railcar price have been broken.

Companies that buy new rolling stock incorporate the price of a new railcar into their rates.

And the cost of railcar maintenance is growing. Expenditure on maintenance has increased by 30-40pc over the past year and a half. The agiotage on the market caused by the shortage of rolling stock adds to the price growth.

Market participants say Freight One does not include payment for the empty return of railcars in their rates, that is why they are low compared with the market Is this true?

This is a delusion. Freight One acts on the market as any other railcar operator. The empty return fee is included in our rates. We calculate our rate within the general logistics of shipment. If this is a circular route, we enclose 100pc empty return into railcar rates, because, in this case, railcars travel along the circled route — it leaves freighted to a customer and returns empty for the next load­ing. If the shipment is carried out under the general logistics, we enclose a certain percentage of the empty return fee into the daily rate, depending on where a railcar moves further Our rates are below the market as we have a ramified cargo base, which enables us to reduce the clients' costs and our costs.
Freight One has recently declared that there could be some restrictions to railcar supplies for export shipments to satisfy domestic demand for the coal transportation. What was the reason for this measure?

There is no direct guidance to restrict coal freight in the railcars of Freight One for exports. The domestic market is a priority for Freight One because our company is owned by state-controlled railway monopoly RZD. Tasks presented to RZD concern Freight One similarly. Nobody cancelled the task to provide railcars for domestic shipments ahead of the winter season.

This does not mean that we are not transporting coal for exports. We deliver coal to Beregovaya rail station [Yuznhy port, Ukraine], to Slovakia, through land border-crossings through Belarus to Poland, to the ports of Riga and Ventspils. That means that priority is given to the domestic market now.

High railcar rates of private-sector operators are believed to be one of the reasons of railcar congestions in Kuzbass. Coal miners prefer to wait for cheaper Freight One railcars instead of loading coal into more expensive railcars.

The cargo holder waits for Freight One railcars because we charge transparent rates, and coal companies are able to forecast their costs based on our rates.

Private railcars are more expensive now, but coal companies have to understand that they will eventually have to pay for longer waiting. An operator is a participant of the coal freight process, like a coal producer, trader, RZD, and it carry its business. Every day of waiting is costly and any operator will include the time lost for waiting in its rates.

Coal companies have to compare their costs for expensive railcars with the standby in waiting for Freight One railcars. They cannot produce coal and stock it without restriction. On the other hand, an operator cannot wait for their cargoes for a long time. One has to develop understanding with the operators.

All Freight One railcars are managed through the centre for transport service (CFTO), an RZD structure, responsible for railcar traffic management. What is the mechanism?

All opentop rolling stock of Freight One and partly of VGK [the second RZD cargo freight subsidiary being formed] has been transferred to CFTO management. CFTO, as our agent, concludes agreements for transportation with clients. Client base and railcar management are centralised with CFTO. It knows where to send a railcar, how many railcars are needed for a specific transportation, on what schedule, and to which client.

Has the agent's scheme led to the increase in transport costs for coal producers and other clients?

Freight One defines the rates for its railcars. CFTO is just an agent, and it cannot influence our commercial policy. All conditions and rates are agreed in advance and translated to the clients without any amendments.

The agent's agreement stipulates the agent's reward. But a client has not paid a single ruble while transferring to the new scheme. Freight One pays the agents re-.vard to C^TO.

Rules of transportation of empty railcars are being developed. Do you see them as a method to solve the problem of manage­ment of private rolling stock?

They are required, because several serious challenges exist today, and they have to be sorted out immediately. There are stations, a railcar leaves empty and, at the same time, another empty railcar enters the station for loading. When empty railcars move in op­posite directions, it enhances the burden on infrastructure. And additional locomotives are required to move these empty railcars, which leads to the shortage of locomotives. New rules are needed to sort out this issue.

Freight One carries out rail shipments of Mongolian coal through Russian territory. Will you continue these shipments?

We transported 300 railcars, or around 20,000t of Mongolian coal in transit through Russian territory to Izov rail station in Ukraine in July. That was a test run. As far as we know, a coal seller has failed to receive a quality confirmation from a consumer in Poland so far, that is why such shipments are restrained. The distance to transport Mongolian coal through Russia to Europe is long, and Mongolian coal producers do not send further volumes until they receive confirmation, that the coal quality is satisfactory for its consumer. As soon as they receive confirmation, we will continue to co-operate with Mongolian partners.

Why are such shipments interesting for Freight One?

The fact is that we transport timber cargoes to Mongolia from the Irkutsk region and Krasnoyarsk krai. On the way back, railcars are

loaded with coal to improve the logistics of railcar operations. An operator benefits if it leaves Mongolia with loaded railcars. This

is logical from the point of view of tarification and the burden on infrastructure.

Have Mongolian exporters approached Freight One for coal rail shipments to Russia's far eastern port of Sovetskaya Gavan? Yes, we have received such requests. But we notified Mongolian coal exporters that such shipments would require circled operations, so that a railcar returns from Sovetskaya Gavan loaded.


But the Russian ports of Vanino and Sovetskaya Gavan lack such cargoes, which could be transported to Mongolia in opentop railcars, so we cannot guarantee the shipment of Mongolian coal to Sovetskaya Gavan with minimal costs. We calculated possible rates for such shipments for Mongolian exporters, but failed to receive an answer. If Mongolian coal exporters accept our offers, we will transport their coal.

What do you think the market will be like when all state-controlled opentop railcars are transferred to subsidiaries and VGK enters the market as an operator?

The purpose of a reform was to create a market of cargo freight. Upon the formation of VGK, a market will appear where operators will compete with each other.

The number of railcars on the railway network is enough, but the management of railcars is yet to be tuned. With the clear rules of empty railcar movement, the traffic will normalise and the shortage will eventually diminish.

I do not see any reasons for further growth in railcar rates. Summer maintenance at railways will cease, and in October-November the traffic will improve.