Financial Daily from THE HINDU group of publications
Monday, Dec 05, 2005
Industry & Economy - Steel
Columns - On the move
For Railways, steel may indeed be worth its weight
Thus, Tata Steel has plans for an additional capacity of 29 mt, both by expanding the existing unit and launching new ones in Chattisgarh, Orissa and Jharkhand; Mittal and POSCO (new units) of 12 mt each in Jharkhand and Orissa respectively; and SAIL and RINL plan to add six mt each at their existing units. With Jindals, Essar, Ispat Group, Bhusan, VISA, Adhunik and several others planning more modest additions, even a conservative estimate would be of not less than 75 mt of extra production in the next 15 years or so.
Assuming an average raw material requirement of 3.5 tonnes for producing one tonne of steel, the production of an additional 75 mt of finished products will require movement of 260 mt of raw materials.
In other words, together with finished products, an additional 335 mt would have to be moved, the bulk of it by rail and that too mainly within the three railway divisions Chakradharpur under South Eastern Railway, Bilaspur (South East Central Railway) and Khurda Road (East Coast Railway).
Notwithstanding the upgradation of existing handling facilities and the creation of new terminal facilities, the Railways will continue to face capacity bottlenecks.
The steel giants planning massive investments need to take note of it, especially because in today's highly competitive environment, the reduction of transportation cost holds the key to maintaining the competitive edge at home and foreign markets.
On the basis of the current shares of the Railways and the road sector in the movement of raw materials and finished/saleable steel, the scenario for 2019-20, constructed by the NSP, will be as follows:
The transportation of raw materials by the Railways will rise from the present 80 mt to 230 mt and of finished products from 11 mt to 33 mt by 2019-20.
During the same period the road transportation of raw materials will rise from 34 mt to 100 mt and of finished products from 27 mt to 77 mt. Based on the average lead distance over which freight needs to be computed for raw materials for steel making and finished products, the total traffic to be generated for the railways by the steel sector will be around 120 billion tonne kilometre by 2020.
If the exports of iron ore by the steel plants are taken into account, the figure will rise to 150 billion tonne km.
Even if we assume that these estimates will change to some extent depending on the exact location of the greenfield projects and the new mines proposed to be developed in the next decade and a half, the need for massive capacity expansion in the Railways remains a critical factor.
How is the Railways planning to fund such as expansion? This is important because the outlay for the Railways as a percentage to the total Plan outlay has dropped from 10.3 per cent in the Fourth Plan to 6.8 per cent in the Tenth.
The resources crunch therefore could lead a major user like the steel industry to participate in the creation of infrastructure by the Railways.
A beginning has already been made with Tata Steel, SAIL and RINL investing in partnerships with the Railways for the development of private sidings. But much wider participation will be needed, particularly in such capital-intensive areas as laying of tracks and procurement of wagons.
Some initiatives are being taken in this regard. For example, a move is afoot to introduce dedicated freight trains by the private sector.
Rationalisation of freight structure deserves serious attention. This is because of the huge cross-subsidisation that now happens.
The passenger services, contributing a mere 30 per cent of the total railway revenue, get all the attention with the result the average freight tariff in our country is much higher than that in many other countries. For example, the railway freight for transporting finished steel from Surat to Delhi is higher than the road transportation cost.
There are other challenges also. Since the volume of coking coal imports, mainly through the east coast ports, will rise to meet the requirement of these steel plants, these ports too need not only to expand their own capacities but also integrate their expansion schemes with those of the Railways.
The proximity of the iron ore producing areas might force the authorities of many of these new steel plants to rely less on rail transportation and more on more efficient conveyor system or captive merry-go-round system for transporting ore from the mines to the plants.
In fact, the challenges before the Railways are many and these include lack of operational flexibility, inadequate infrastructure, lack of upgradation of service levels, ad hocism as reflected in arbitrary changes in rules, non-availability of suitable wagons, frequent congestion of siding, inter-zonal conflict and high overall cost due to other costs over and above the basic freight. It will be wrong to presume that the road sector that poses the maximum competition to the Railways is without problems.
The road sector is heavily congested and not even two per cent of the total National Highways are four-laned. The good vehicles can cover 250-300 km a day against double the distance in developed countries, and capping it all, road transport is energy guzzler and environment unfriendly. Yet, when it comes to transporting steel products, the road sector is often preferred mode.
No wonder, this sector, already accounting for more than 70 per cent of the dispatches of finished products, is set to have even a larger share as it will emerge the preferred mode to contain the inventory cost and spread the retail business. After all, the road transport is a customised service, offers specialised vehicles, can track consignment, guarantees transit time and lifting and ensures safety of the consignments. Today, the customers of finished products are fragmented but discerning: they are sensitive to costs even as they insist on high level of services.
Logistics service provider
What must the Railways do to meet the challenges thrown up the changing scenario of the economy? Several things. The most important thing that the Railways needs to do is to shed its image of a transporter of goods between two railway stations; instead, it must emerge as the provider of integrated logistics solutions and to do this, it must explore the scope of tie-ups with other logistics service providers. The concept of customer care must form the core of the service. Unfortunately, this is not so at the moment.
With the implementation of VAT, the optimum way of distribution would be direct dispatch from the producing units to the customer as State boundaries lose relevance, the stockyards will be required only for JIT (just-in-time) deliveries and there will be huge cost benefits in direct deliveries. In such a situation, the best option for the Railways will be to provide 3PL services wherein steel plant hands over materials at the factory gate and the Railways deliver it to customers and to do that the Railways has to have state-of-the art siding facilities and good covered sheds, sophisticated handling equipment and reliable second leg transportation.
In fact, there are huge business opportunities for the Railways because of the economies of scale through consolidation across industry requirements, long-term contracts to become competitive to road. After all, the Railways has some inherent strengths it is ideal for bulk movement, offers lower transit time, is environment friendly and energy efficient.
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