India Inc. welcomes Railways’ proposal for Long Term Tariff Contracts with discount scheme

NEW DELHI: India Inc is upbeat about the Indian Railways’ plan to have long-term tariff contracts with consumers in cement, steel and fertiliser sectors, with many companies now willing to bring in more freight traffic to the national transporter.

Companies such as UltraTech Cement and ACC and industry body Cement Manufacturers’ Association (CMA) are already in talks with the railways to enter into long-term contracts. The new plan is likely to bring back the traffic the railways lost in the recent years. It is expecting an increase of six per cent in its freight traffic to 1,165 million tonne (mt) in 2017-18, compared with 1,093.5 mt in FY17. Over a period of 60 years, the share of railways on total freight traffic has declined from 89 per cent to 30 per cent, with the majority of the traffic moving towards the road sector.

Pushed by long-term contracts, the segments in which the railways is expecting a major rise in traffic in FY18 include container services (9.9 per cent), pig iron and finished steel (7.52 per cent), coal (6.7 per cent) and iron ore (6.7 per cent). “This (the discount scheme) is a clear effort from the railways to bring back its lost traffic. As of now, about 65 per cent of cement sector traffic is through road and 30 per cent is through rail route, while the remaining five per cent is by water. The new incentives offered may help the cement sector and will bring in additional traffic to railways,” said a CMA official who did not want to be named.

The railways is targeting 113 mt traffic from the cement sector following the new scheme. The national carrier had set a target of 110 mt for FY17, but due to decline in infrastructure activities because of demonetisation, it is expected to be in the range of only 90-100 mt. While coal constitutes 45 per cent of the railways’ freight traffic share, cement makes up eight per cent, while foodgrain and steel constitute seven per cent each. According to the Revised Estimates for 2016-17, revenue from freight traffic will be Rs 1,08,900 crore. The railways expects it to rise by 8.5 per cent to Rs 1,18,157 crore in FY18, primarily through an increase in cargo volumes. Freight loading is expected to fall marginally to 1,093.5 mt in FY17 from 1,095 mt in FY16.

However, consumers are concerned if the scheme would affect the availability of rakes.

While welcoming the move, Rakesh Kapur, IFFCO joint managing director and Fertiliser Association of India chairman, said: “Any such new commitments for cargo movement should not be at the cost of the availability of covered rakes for evacuation of fertiliser from fertiliser plants, which operate round the clock. Of late, fertiliser plants have been facing constraints in timely availability of rakes.”  About 80 per cent of fertiliser movement take place through the railways, which rakes in revenue of about Rs 7,000 crore annually.

For FY18, total coal traffic is expected to be 555 mt, compared to a revised target of 520 mt in FY17. The target from raw materials for steel, pig iron and finished steel for the next financial year comes to around 72 mt, iron ore at 142.75 mt, fertilisers at 54 mt and petroleum products at 45 mt.

The railways transports nearly 75-80 per cent of the steel produced in the country. Since the movement of iron ore and steel depend on the quantity of the commodity and the distance covered, it varies from company to company, an expert said.  “SAIL has had a long-lasting relationship with the Indian Railways, being both a freight customer and supplier for them.

We expect to benefit as and when the guidelines are implemented. SAIL is currently moving 50-60 mt of steel, iron ore and coal through the railways. As we ramp up our production from the current level of 15 mt to 20 mt in the coming years, we expect to add more traffic to the rail network of the country,” a SAIL spokesperson said.

Transporters feel the railways’ bouquet is very small and, thus, not a threat. The major reason for a shift in rail traffic towards road was due to declining rates and flexibility of movement. “Globally, rail traffic rates are 25-50 per cent less than road. The industry is yet to get the details of the scheme. But it appears as if the move may bring in price advantage for customers,” said Ratika Jain, executive director, manufacturing, at the Confederation of Indian Industry.

Due to a fall in demand, even coal traffic reduced during the first nine months of the financial year but sources at the Kolkata-based Coal India (CIL) said coal traffic had improved in the past two months. “Average rake loading per day increased by 20.4 rakes during February 2017 registering a growth of nine per cent as CIL stepped up the loading to 246.8 rakes per day compared to 226.4 rakes per day during the same month last year,” said a senior CIL executive. This was in the range of 205 rakes per day in December.

Under the long-term contract policy, customers may get discounts in the range of 1.5-35 per cent based on the incremental growth in volume of cargo. Customers are required to offer at least 1 mt of traffic per annum. The discounts will be based on the gross freight revenue in return for commitment to provide guaranteed traffic by a customer.

The minimum period of long-term contract agreement shall not be less than three years, which will also give these players insulation from sudden price increases for one year. “Our main focus is on sectors like cement, steel, fertilisers, grains, iron ore, scrap and pig iron. We are already in talks with a few companies. Initially our focus will be on cement and steel sectors. We have lost at least Rs 7,000 crore this financial year due to drop in coal traffic only,” said Mohammed Jamshed, member (traffic), Railway Board. The railways has already crossed 1,000 mt of freight traffic in FY17 and expects to achieve its revised estimate of 1,094 mt by the end of March.