10:00 25.11.2021

Author YURIY SHCHUKLIN

Why Ukrainian grain producers must pay through the nose for railway shipments and what “Ukrzaliznytsia” has to do now?

6 min read
Why Ukrainian grain producers must pay through the nose for railway shipments and what “Ukrzaliznytsia” has to do now?

Yuriy Shchuklin, logistics market expert, advisor to the “Ukrzaliznytsia” Head of Board  

 

Railway is the main and irreplaceable shipping means for the Ukrainian grain on the way to Ukraine’s sea ports. The country’s grain export, its repute as a reliable player at the world market depend on the proper economic situation of the two parties to the logistics process: grain producers and grain shippers.  

Since the last millennium, I have been engaged in shipping grain by railway, and I know everything about it (maybe, even some stuff that I should not know). Regrettably, this market has not seen, even until now, normal and mutually beneficial relations between shippers and cargo owners, and there are crises recurring every year. Every autumn, there are not enough railway cars for grain producers, and they are not sure if they can move the cargo. Every spring, the shippers do not have enough cargo, and they are not sure if they have enough work to do.  The correct and logical step to help avoid crises and evenly spread shipments throughout a year could be the early planning of shipments.  I, and the like-minded people, have more than once raised this issue at different levels. However, it has not been the arguments of real business owners that have been winning in this discussion but the interests of numerous intermediaries and functionaries who get their chances to profit as a result of annual crises in shipments.  

Still, there is hope that the new crisis which has begun in the recent days will become the decisive argument to show that it cannot go like this any longer.  

I will share the analysis of the key market trends. With the beginning of massive gathering of maize, the hyped demand for renting railway cars of “Ukrzaliznytsia” has formed. As a result, the cost of renting these cars has grown twofold or threefold, compared to early October. This growth will inevitably influence the pricing policy of the remaining 75 percent of the market because other shippers are already beginning to revise their prices in the wake of these events.

This price corridor is lowering the margin of the production of grain in Ukraine. Grain producers have already been shocked by these prices and are facing the choice: either pay UAH 200-300 more for shipping a ton of grain or change the terms of fulfilling their contracts.   

This is why this has happened: “Ukrzaliznytsia” has 7,000 railway cars for carrying grain, this representing almost 25 percent of the market.  However, if privately owned railway cars stock (19,000) has been already hired by cargo owners and shipments with them have already been planned, “Ukrzaliznytsya” does not have contracted shipments and enters the spot market at the peak of the season offering its railway cars to all who want them, through auctions. When the agricultural producers who want these cars were joined by the army of intermediary forwarders, the price of using these railway cars has immediately risen twofold or threefold, on October 21-22.  A chain of decisions has led to the peak rise in prices while every party at the logistics market (producers, infrastructure operators, traders) wanted to realize their interests within short terms without having adequate information on actions of other parties and on possible results.  The interest of shippers of agricultural produce and of traders, to realize all their deliveries within one calendar month, led to the hyped demand which, in its turn, has provoked the formation of the price bubble. This is why the main cause of this crisis may be considered the lack of long-term contacts between grain producers and shippers, whereby one party would guarantee the availability of cargo and work to the other, while the other party would guarantee shipping at a certain price.  

The current crisis, caused by intermediary forwarders (who will profit from the next price turn) will be a blow at agricultural producers and will inflict damage at the state-owned shipper, “Ukrzaliznytsya”. Knowing how this market functions, I can responsibly forecast the way in which privately-owned railway-car stock will use this new price turn. They will see the trend that will benefit them: to lure the bigger part of agricultural shipments away from customers, and will do everything possible to push “Ukrzaliznytsya” out to solely the spot market, lasting for only 2-3 moths every year.   

Being a businessman in essence, I do not share the opinion of a number of my fellow business people that the state-owned railway shipper must abandon the grain shipment market. However, the current targets and benchmarks set for the “Ukrzaliznytsia” managers are leading to this very result. Against the background of the peak rise in prices, the grain shipment segment of “Ukrzaliznytsia” will demonstrate a rise in revenue, and this will provide the cause for praise. However, from the viewpoint of chances of gaining profit in the long term, “Ukrzaliznytsia” will suffer as a result of this price change because its agrarian customers will switch to private shippers. The latter are interested in luring the cargo base to their side, and for this sake they will be doing everything that “Ukrzaliznytsia” has not done until now: they will guarantee the stability of prices and will implement early planning of shipping in order not to create hype and queues during the peak season.  The issue remains open as to what private shippers will do and what terms they will offer when “Ukrzaliznytsia” leaves the market…   

The state, as the shareholder of “Ukrzaliznytsia”, and the executive power need to understand with all seriousness: it is now that the risks of losing the market for shipping grain are high as never before, and owners of agrarian businesses and grain producers will be the first to suffer from this. It is my great hope that the state-owned shipper, “Ukrzaliznytsia”, with its new top management, demonstrates self-reliant mode of actions and begins developing what the market needs most of all at the moment: long-term contracts between shippers and cargo owners. It is this course that will allow to lead the market of the export logistics of grain to the civilized format of relations. Then, grain producers will not face the choice of deciding what to lose, as this is happening now.   

 

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