Cement makers signing long term freight contracts with railways
Cement markers are signing long-term freight contracts with Indian Railways in droves, a development that would help the transporter reverse the recent trend of a decline in cement loading and allow manufacturers of the binder to cut operating costs significantly. Following India Cement and UltraTech Cement which have signed loading contracts with the railways recently, at least three more large cement makers —ACC, Ambuja Cement and Birla Shakti (Vasavadatta Cement plant in Karnataka) — have inked long-term freight agreements with the transporter. Though the exact quantum of business these contracts will bring to IR is not immediately known, it is certain to benefit from the guaranteed revenue flows.
Apart from cement firms, steel makers are also showing interest in IR’s long-term contract scheme. In July, when the scheme was launched, Tata Steel had inked a contract with the South Eastern Railway. SAIL and JSW Steel are also getting into such contracts. At least 10 more long-term freight contracts are expected to inked by the end of this month, said a Railway Board member. “Vedanta has also shown interest but they are insisting on coking coal which is not included under the scheme as of now,” added the official.
The railways had witnessed a 4.9% annual fall in loading of cement, excluding clinker, on an originating basis in 2015-16 and a 3.2% decline in 2016-17. Its cement loading in 2016-17 was 71 million tonnes, just over 6% of total freight carried in the year.
According to a report by agency India Ratings, 21-25% of total operating costs for cement makers is on account of freight and forwarding costs. Another report by the rating agency expects the cement industry to grow 4-5% in 2017-18, “driven largely by the demand stemming from infrastructure activities and a revival in housing demand in rural areas, both led by government spending”. Other reasons for the growth estimate include funds allocated towards Pradhan Mantri Awas Yojana and spending of the ministry of road transport and highways.
Long-term contracts, which are signed with the railways zones, is an arrangement wherein the railways will benefit from long-term commitment from manufacturers and customers will benefit from freight rebates and assurance of tariffs.
Under the scheme, the railways is assured of revenue commitment from customers at predetermined price escalation principle as customers commit a minimum guaranteed gross freight revenue for each year of the contract period at a minimum of 5% increase over previous year.
For customers, freight rebate is linked to incremental growth in gross freight revenue and absolute volume of traffic. Rebate ranges from 1.5% to 35% based on incremental growth in revenue and 0.5% to 5% on the total volume of traffic. The contract period is for minimum three years and maximum five years.
Existing customers who offered a minimum 1 million tonnes of traffic for the previous 12 months are eligible for these contracts and new customers have to make commitment to offer at least 3 million tonnes of traffic during the agreement period and at least 1 million tonnes in first year.