Aug 26, 2016

Stung by negative growth, IR does U-turn, hikes Freight Rates

The tariff hike will increase the fuel costs of power stations and cement units closer to pitheads, while units far away from coal mines could see their fuel/input costs decline

New Delhi: Indian Railways announcing freight changes for a lead of 497 km with a new tariff structure would be Rs.712/tonne as against Rs.702/tonne earlier; for a longer lead of 1,800 km, the new freight would be Rs.2,138/tonne compared with Rs.2,343 earlier stating that the tariff revisions would aid capacity utilisation when more than 300 rakes are now lying idle!
Stung by negative growth in freight revenue in the June quarter, Indian Railwayson Tuesday hiked the cost of freight for several consumers of coal, the commodity that accounts for 45% of its receipts from transportation of goods. It raised the freight rates by 7-14% for distances between 200 km and 700 km and imposed a R55/tonne extra charge on both loading and unloading. At the same time, it reduced the freight for long-lead traffic by 4-13%.

The tariff hike will increase the fuel costs of power stations and cement units closer to pitheads, while units far away from coal mines could see their fuel/input costs decline. A power company official said electricity from plants less than 700 km from pitheads could become costlier by 8-10 paise/unit. With Tuesday’s freight changes, for a lead of 497 km, the new tariff would be Rs.712/tonne as against R702/tonne earlier; for a longer lead of 1,800 km, the new freight would be Rs.2,138/tonne compared with Rs.2,343 earlier. Railway officials said the tariff revisions would aid capacity utilisation. “More than 300 rakes are now lying idle,” a source said.

Most likely, the extra fuel/input costs will be passed on to the end-consumers by power and cement firms while those who see their freight costs coming down as a result of the railways’ latest decision might improve their margins. Given the tepid demand scenario, steelmakers have subdued pricing power and may not immediately transfer the extra cost to the consumers. Though the railways claims the move is “cost-neutral”, analysts said the move would still have a significant inflationary impact. For thermal power plants, coal transportation accounts for up to 25% of power tariffs.

India’s consumer price index (CPI) scaled a 23-month peak of 6.07% in July as retail food inflation rose to its highest since August 2014 due to an intense and prolonged summer. While analysts expect it to moderate in the coming months to remain below the RBI’s target of 5% for March 2017, due to normal monsoon and favourable base effect, D&B recently said that headline CPI number in August could be in the range of 6.1-6.3%.

The national transporter’s latest move is at divergence with its strategy outlined in the last budget to offer freight rebates to boost volumes and broaden the basket of commodities transported via its network by giving strong competition to the road sector.

A steel sector analyst said: “India’s steel consumption grew just 0.5% during the April-July period of the current fiscal. Since demand remains subdued, steelmakers will find it difficult to pass the increased rail freight to customers. They will have to absorb the cost.”

Freight rate will go up by up to Rs.100/tonne (HR coil is priced at around Rs.33,00/tonne) for steel firms which use coking coal for steel production and non-coking coal for captive power generation. “We are yet to work out the impact (of freight changes) on coal cost, but now there is likely to be parity between coal-based power plants irrespective of their distance from the coal fields. It will benefit plants located beyond 700 km from the coal source as their transportation cost would now be similar as the pithead plants,” an official from NTPC said.

According to Lalit Jain, chief commercial officer, Hindustan Power Projects, the tariff change, inclusive of coal terminal charge of Rs.55, would be 25-25% for shorter leads. “With this increase in the railway freight, energy tariff from coal-based power plants shall increase by 8-10 paise/kWh. This is yet another burden on coal-based power plants after recent increase in clean energy cess and coal price which shall further increase end-user power cost. Inability to pass such tariff shall further deteriorate the financial condition of distribution companies and power generators,” Jain said.

Indian Railways’ freight revenue in Q1FY17 declined 10.3% to Rs.25,503 crore compared to the year-ago period on a flat growth in freight loading. This showed that freight concessions being offered by it as part of a strategy to boost volumes and increase market share have had an adverse impact on its revenue in the short term.

Rail freight growth stayed negative in June, though better than the record lows in April, coming at -5% year-on-year. Tonnage, however, grew an annual 3% after seven months of declines, giving some credence to the railways’ claim that a turnaround is round the corner.

Freight declined in June for all categories except iron ore and fertilisers. Containers, grains and oil saw tonnage fall, but all categories saw a decline in distance travelled, coal the most, analysts at Credit Suisse said.

 

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