Tag Archive for rail feasibility

Reports shows just how poor Brazil’s transport infrastructure is. // Two decades of progress hope — wasted on things like global soccer get them this

Something to reflect upon from a Bloomberg global news story on Oct 7, 2015

Two decades of promised growth and investment. Much of it wasted.

Now Brazil is forced to compete against nations like Mexico who have far superior road and highway infrastructure that move their supply chains. What a shame. What a mistake. Where was the oversight due diligence during all of those years?

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Gerald Lee, a former airline executive, thinks he can help ease one of Brazil’s most-absurd problems: “How do you ship large quantities of goods fast from the nation’s manufacturing hub when there’s not a single usable highway in or out of town?” Barge it down the Amazon River for a ten day transload supply chain. That is the best he can make out of a bad situation.

What happens is that products like TVs made in deep-in-the-jungle Manaus float down the Amazon River by barge to the Atlantic Ocean port town of Belem. From Belem, the goods go on trucks for pothole-filled delivery runs, many of them to distribution centers in Sao Paulo, about 1,600 miles away — and 10 days later.

MEXICO WINS

That can be more than twice as long in time as an 18-wheeler traveling a similar distance from Mexico City to the U.S. road-and-rail hub of Kansas City, Missouri. Or to even closer Houston.

When people criticize Brazil’s transportation infrastructure for being among the worst in the world, behind even Ethiopia’s, this is what they’re talking about.

Manaus, the nation’s only tax-free zone and home to 40 percent of its computer and electronics manufacturing, is just one of many reasons the World Bank says companies in Brazil spend more on logistics than in the U.S.  Moving many of Brazil’s exports can take twice as long as out of Mexico.

This was going to be fixed. But it never was.

How long will the needed investments take? No one is saying. I professionally would expect about 15 to 20 years.

The funding for long promised roads and railways is uncertain.

Heck, one point two years ago Brazil was promising foreign aid to help build Ethiopia railways. Unbelievable? Fact is often stranger than fiction.

To read the entire article, go to bloom.bg/1hrwCiI

Stunning graphs on resource capital project spending is a “wake up call” for planners

From mines around the world to the dependent rail and port projects, the changing global economics commodity cycle suggests a downer “Bear” market for projects that add to global capacity and output.

This down cycle could last from a short 2 to 3 years OR AS LONG AS 7 or more years. Strategic Planners to to rethink their now outdated assumptions from supporting logistics projects in diverse places like Mozambique, Botswana, Mongolia, Brazil, and even in the Canadian/Alaska Yukon region.

What ever capital plans for building the supporting ports and railways they had developed by big engineering companies — the underlying due diligence economic assumptions are now likely “under water” so to speak.

Billions and billions of proposed dollars in drawing board completed project engineering can no longer pass an economic feasibility test for recovery of he rail project capital P&I.

Instead these industry planners should brace themselves for at least another two years of shrinking budgets and outlays. The earliest signs of a “subdued” resource recovery might not be until early in 2018 say some experts.

But even this prediction might be too bullish. Why? Because metal prices have already fallen 12% further than they did during the bear market in the 1990s. In that bear market, capex only recovered to its pre-crash (1997) level after seven years (2004),” according to Mark Fellows.

Mark Fellows, director of consulting for a mining research firm reports that “while sustaining capital expenditure is down 13% since the peak in 2012, capital expenditure on new developments has been even harder hit.” “Spending on brownfield expansions is down 25% while greenfield project expenditure has plummeted by nearly one third” on a global basis.

Mr Fellows concludes this by comparing the current 2013-2015 downturn to the previous bear market in mining which ran from 1997 to 2002. He therefore argues that the current witnesses global capex cutbacks are far from over.

The report is published by SNL Metals and Mining. DOLLARS OF PROJECT EXPANSION PLANS AT RISK

The report finds that total capital spending across all mining companies has declined by around $70 billion since the 2012 peak to just over $150 billion forecast for this year. As one business case example, the project investment at BHP Billiton this year will be $10 billion below its 2013 peak. The world’s number one miner only has four projects in the works, two of which are almost complete, compared to 18 mine and infrastructure developments just two years ago.

In a Mining.com press story by Frik Els on 21 September 2015 titled: “This is the scariest mining chart you’ll see today”, the investor alert numbers are brought out visually.

This is another piece of economic trend evidence in my blog’s strategic theme of changing times for traffic that feeds the dreams of massive new rail freight projects.

“a Bridge Too Far” analysis?

Only the strongest as low cost per ton-kilometer cost new rail projects might be competitive.

Too many rail projects on the drawing boards are simply under designed as to the necessary competitive productivity to prosper as investment grade scenarios. Trains would be too small because they often lack big train technology design features of the most successful resource rail carriers. Axle loads too small. Train lengths too short. Clearances too shallow. Net to tare wagon rates are too low

Too many are now ill advised rail schemes. “Schemes” in North American business language generally means a buyer beware concept plan”.

In Africa alone, I estimate that as many as two thirds of “announced” rail line freight projects may be too risky to build as currently designed around old market demand and old post World War-2 rail engineering standards. That could mean as much as $25 to $34 billion of “schemes” seriously require a second due diligence look just in Africa.

Africa is not alone. The billions in proposed rail engineering in the Canadian Yukon/Alaska region also need serious market demand re-examination. If not by the project sponsors, then certainly by the investors they will approach. Brazil, Mongolia, Swaziland, Senegal — all of their rail design and expected market traffic assumptions need serious review for their current planning.

For more, log onto Mining.com

Chart Sources: SNL Metals & Mining

Greenfield cap ex spending chart

Bear market recovery projection for commodities chart

Update on Ethiopia’s Light Rail System as it starts operating // Sept 2015

Multiple reports confirm the start of light rail service in the capital of Ethiopia on 20 September 2015.  The start of service on Line #1 is actually relatively close to the promised service date.  Funding approved in 2011 assumed a two year construction timeline.

The 16.9 km north-south Line 1 line links Minelik Square with Kality and has 23 stations. A 17.4 km east-west line from Ayat to Tor Hailoch is also due to open soon. The two routes share a 2.7 km section between Lideta and Stadium.

This light rail service which includes elevated sections and tunnels, runs from Addis Ababa’s main industrial area on its southern fringe, through the trading district of Merkato to the historic center of Piazza.

I had a chance to review the affidavit Addis Ababa light rail construction process in the capital back in the summer of 2013.  Project construction and the logistics handling of imported rail materials was well organized by the Chinese company.  The track ballast section and some early rail laying were substantial as to the engineering design and initial construction delivery of product in the field.

One of the tunnel projects was a huge physical undertaking.  Well done when I inspected it.  No question that the Chinese companies can build rail projects very well according to plans.

PLANTING THE C”AN DO” FLAG IN FRONT OF AFRICAN RAIL PLANNERS

The east-west light rail line skirts the African Union’s headquarters.  This location marks a great advertising opportunity of the Chinese capabilities with this line placement in front of the African wide headquarters.

Both light rail lines are built by China Railway Engineering Corporation (CREC).

CNR Changchun (now part of CRRC Corporation) has supplied a fleet of 41 low-floor vehicles, which have a maximum speed of 70km/h.

DEAL FINANCING TERMS

China is financing 85% of the $US 475 million project. It is a loan. Not a grant.

The government agreed to borrow the funds in June 2011 from the Export-Import Bank of China.  The to be paid back rate was at the 6-month Libor interest rate plus 2.6 percent and a grace period of three years.  This from Ethiopian Finance Ministry data.

State-owned contractor China Railway Engineering Corp. was the recipient of the export financing.

The financing of the remaining 15% is arranged from other sources by the Ethiopian government.

ON-GOING MAINTENANCE

The 39-station network will be maintained by CREC and Shenzhen Metro Group under a $US 116m five-year contract.

The Ethiopian client for the continuing rail service is the Ethiopian Railway Corporation (ERC).  The ERC rail company is a government corporation with a very small staff.

TRAIN OPERATIONS

The first three to five years of light rail train operation will also be by the Chinese and not the ERC.

At one point back in 2013 the Ethiopians sent out a global request for a  consultant team to build up the Ethiopian internal organization into becoming a world class operating management team.  Then they could take on train operations management themselves.  But that internal skill building process so far appears to not have happened.

Instead of internal managers inside the  Ethiopian Railways Corp, the light rail service will be run day to day by Shenzhen Metro Group.  For at least five years.

LIGHT RAIL TRAFFIC FORECAST

The light rail total system may eventually carry 60,000 passengers an hour, according to project manager Behailu Sintayehu.

Passenger FARES will be subsidized

The maximum one-way fare on the network is about $US 0.29 to $0.30 (cents).

The light rail line operating costs is projected to be about 1.5 billion birr a year to run. Fare box revenues will not cover all of that annual operating cost.

“The government is subsidizing this transportation system. This is not for commercial purpose, it’s for the public” said a local official source to reporters.

Sources also reported that the subsidy to allow such low passenger fares will in the long term have to come out of “expected” freight operating profits from the not yet completed new standard gauge international railroad line.

This cross subsidy practice might be a logical strategy if trucking companies subsidized the passenger buses on highways But they do not.  In the long term of daily rail to truck competition, this creates an advantage for truckers.  It is incredible how state planners historically are blind to this integrated transportation fact of competition economics.  The Ethiopians are no exception to such economic flaws in policy thinking. As the become better trained in economics, this may change their thinking.

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MORE INTEL about this light rail system

THE LONG DISTANCE LINE

The freight and intercity passenger train new railway construction underway will connect the Ethiopia capital city with the port of neighboring Djibouti.

Service there may begin sometime in 2016 say current reports from Bloomberg.

Trains on this inter-nation line might also be operated by a Chinese contractor instead of by the local Ethiopia rail organization.  Too early to tell yet. There is no published report on the success or timeline of building such skills inside the Ethiopian Rail Corp organization.

The long distance line will be standard gauge (1435mm) track.  But not 33 metric ton or doublestack container train capable.

The Ethiopians have settled for a lesser freight train capacity that they received from the Chinese builders rather than adopting the North American commercial and engineering big train technology standards — and having the Chinese contract companies modify their engineering build to standards. The result will give the Ethiopian rail company a rail freight haulage capability equivalent to a 40 to 50 year old post WW-2 North American operating performance. This means missing their chance to become the best of class within the African world of freight railroads.

POWER SUPPLY

Electric power to supply these light rail and intercity train sets in a more dependable manner is to come from the Chinese financed Gibe III hydropower dam’s reservoir set for operation in 2016.  The reservoir has started filling, with its 1,870 megawatts capable of almost doubling Ethiopia’s generating capacity. This will presumably allow for a dependable service day to day performance using straight electric locomotives rather then modern diesel-electric locomotives.

MISSED DOUBLESTACK CONTAINER OPPORTUNITY

With electric power from overhead wires catenary systems, the overhead clearance for doublestack container trains could be restricted.  This overhead wire electric system as currently designed as to height above the top of the rails is another rail marketing (commercial business competition) flaw that could have improved.  How? By increasing the wire height to more than 6.7 meters above the top of the rail.  That would allow doublestacking container trains to have a far superior cost per container advantage in direct competition with highway trucking.  In the US that rail rate advantage can be as large as 50 cents to $1.40 per container moved kilometer.

These simple manmade engineering design changes would have given the resulting rail line a superior economic advantage against long haul trucking.

S. Africa Rail Gauge Conversion Policy Change Announced by Government

Sep 22, 2015 report…

South Africa now has a government transport policy to plan out a widening of the country’s existing railway tracks to international standard gauge. The geographic scope covers as much as 20,000 kilometers (12,427 miles) of track just in South Africa.

This scope would take decades to physically complete. It might cost as much as 1.5 trillion rand ($110 billion),

Cape Gauge existing track width between the inner sides of two rails is 1067mm as a design. Standard gauge design width is 1435mm.

South Africa Transport Minister Dipuo Peters announced the policy to reporters on Tuesday. The gauge conversion would bring the network in line with about 60 percent of other countries, boost capacity and reduce transportation costs, she said.

In response, Transnet Acting Chief Executive Officer Siyabonga Gama said that while the company supports a move to standard gauge, the policy “needs further investigation” to determine its viability. “We did an assessment and we found out that if we had to create 15,000 kilometers of track, we would need up to 1.5 trillion rand,” he said in an interview after the announcement. “It would be a very expensive exercise.”

STRATEGIC FLAW

The assumption is so far that almost all tracks would be converted to 1435mm. Economically, it is more likely that only the strategic high traffic volume density routes and some feeder lines would financially justify the expense of conversion. .

The economic benefits come from more stable train operating wagon movements and possible high clearance doublestack container train economics. Containers stack two high on rail cars cut the expense by as much as 35% to 45%. Stack container trains have been operating successfully in the United States for 30 years. Two decades!

Stack trains cannot physically be operated on Cape Gauge or Meter gauge tracks.

Regardless of the eventual network size, the project could take decades to fully complete. A place to start might logically be between one of South Africa’s premier container sea ports and the Johannesburg regional market.

Meanwhile, much of Africa’s rail planning is already focused on standard gauge 1435mm track for all new railway projects. Ethiopia and Kenya just as two eastern African examples.

Minister Dipuo Peters strategic announcement is simply acknowledging a prudent rail modernization approach for South Africa.

Bravo!

To read the entire article, go to http://bloom.bg/1KxjCiS Sent from the Bloomberg iPad application.

Should Transnet wander off on global and African project consulting? Or first fix the domestic needs?

Transnet’s Africa announced it management plan to offer consulting service outside of its domestic market.  This may be a flawed corporate strategy.  Lets discuss.

21 September 2015

TRANSNET’s announced plan to increase its international revenue by consulting in other countries.  Good or Bad Idea?

Some say that the diversion of skilled managers could increase or mask its domestic  weaknesses.  It is not yet world class at its domestic markets.  Good?  Yes.  But probably not world class.

Transnet acting CEO said last week that the state-owned freight and logistics company intended to increase its revenue from international business to 25% by 2025 from 4.2% currently. Most of this would be from business on the continent and opportunities in the Middle East he suggests.

A local transport economist Andrew Marsay retorts that Transnet is not yet “intrinsically viable” at performing in its critical home market.  The company should focus on restructuring itself to become more viable in SA, rather than looking abroad for solutions, he asserts.

Transnet’s general freight business today does not yet fully cover BOTH its rail operating and capital costs.

There are some who believe that much rail business is subsidised by other Transnet  business units such as the ports or the pipeline sectors.

Transnet instead need to focus on examining how to fully implement its 7 year plan to obtain a lion’s share of the general cargo business against trucks.  The planning period to obtain a stated objective of as much as 80% general cargo share is about half over and the truck share is from most independent reports actually at  better than an 80% share.

BENCHMARK

We as Conrail managers  faced this dilemma in its corporate history. We elected to avoid what some saw as potential consulting and rail operations markets in 1994 European markets with their so called open access — in favor of executing domestic at home projects with far less risk and higher potential operating income growth.  Looking back, it was a good choice. By working at home we managed to improve our company rail operating ratio from 84% to 79.9%.

At the same time, we rolled out a very strong truck competitive doublestack market share. In some long distance lanes, we managed to earn a 40% or better share with bog train technology.  With interline container train service between the West and East Coast, we managed to get a 75% estimated market share against long haul trucking.

THAT is a WOW impact for a freight railroad.

Wandering off to Europe would have been nice.  But no where near as profitable.

What do you think Transnet?  Where is you WOW impact gong to come from?

Can you accomplish such WOW market truck to rail general cargo share shifts with fewer skilled people because of some wandering off to other overseas ventures?

http://www.bdlive.co.za/business/transport/2015/09/21/transnets-africa-plan-masks-local-failings

Honolulu rail transit capital budget at about a 19% higher cost

Once budgeted at a capital cost of $5.26 billion, the project engineers now estimate a 19% over run. That is above and beyond whatever contingency percentage they had built into the project bid. Contingencies typically range from 5% to 12% at the final engineering bid stage. The total cost overrun is cumulatively close to a one-third range.

Would the project had been approved by the legislators and government administrations if they foresaw tis kind of project cost change?  Maybe not.

The project construction problems have added another year of delay.   2020 will now be the earliest completion date for the entire system.

At over $6 billion, the Honolulu system is about the same capital cost of the upgraded Panama Canal project due to open sometime in 2016.

http://www.staradvertiser.com/news/breaking/20150915_Honolulu_rail_shortfall_now_projected_at_over_1_billion.html?id=327783761 Sent from my iPad

Maybe as many as 15 Years of Weak Crude and other energy prices

“WHAT IF:

What if the world is shifting from an “investment phase” of a 30-year commodity cycle to an “exploitation phase?” 

How does this professional assessment of future markets cause you as a railroad or freight carrier to change from Plan A to maybe Plan B or even Plan D?

 

From Bloomberg, Sep 17, 2015

A glut of crude may keep oil prices low for the next 15 years, according to Goldman Sachs Group Inc. That is a very long period.

This strategic commodities report cites in part Jeffrey Currie in an interview at Lake Louise, Alberta.

Goldman’s long-term forecast for crude is at $50 a barrel, he said. He also observed that “the risks are to the downside given what’s happening in the other commodity markets and the macro markets more broadly.”

Lower iron ore, copper and steel prices as well oil and natural gas –PLUS weaker currencies in commodity-producing countries — have reduced costs for oil companies, according to Currie.

The world is shifting from an “investment phase” of a 30-year commodity cycle to an “exploitation phase,” with shale fields as an important source of output, he said.

To read the entire article, go to http://bloom.bg/1JcGYJu

A proposed inland Australian rail freight line MIGHT NOT make economic sense –

The proposed 1,700 Kim’s of new freight railway has a capital cost estimate to build it.

IF BUILT, then it has all kinds of job creation and “soft” society economic benefits that surround the project scope like an angel’s halo.

However, there is no published traffic mix forecast. There is no train operations projected income statement for the generalized scope of possible future rail business.

There is instead a “build it, and they we come” conceptual expectation. The “they” being shippers.

There is no information about commercial rates and the shippers ability or willingness to pay those rail rates.

But there is an acknowledgement that the government will have to write the checks to pay for the capital cost.

In summary, there is very little due diligence as to the economic feasibility of this inland route as an investment. This is the kind of planning that made the recently built north-south Australian rail building project a financial disaster.

I suspect that none of these Australian inland rail proponents could ever hold a job working as rail planners for the big profitable North American rail companies like Canadian Pacific or Union Pacific.

What do you think of the projects financial feasibility prospects?

http://www.macrobusiness.com.au/2015/09/an-inland-rail-freight-line-makes-economic-sense/ Sent from my iPad

Mongolia Ovoot mine – A long Shot? Or Now Better Odds? //The Australian

“We were out there with a stranded asset and now we’re the centrepiece of an international rail corridor — it couldn’t have gone any better,” Mr McSweeney told The Australian. He is the Aspire executive chairman. He voices a strong positive outlook that with recent ministerial agreements that there is now a stronger guarantee of rail financing to service the otherwise isolated northern mine.

as of early September, what do you think as a possible investor?

There are plenty of long-term rail corridor high level ministerial agreement rail corridors around the globe… … most of which lack commercially attractive financing. They are often described as a “wish list” of new projects.

A broad gauge line between Russia and Vienna is one of many such grand designs that are unfunded. Adding capacity to the existing single track un-signaled Russia-China 1,100 km long UBTZ rail line is another now more than a half decade long delayed “wish lists” of freight projects. These and other examples refortify the economic logic that “Political support is not the same as monetary investment”.

At capital costs of $2.5 million to $4 million a kilometer (over relatively flat rural terrain), these proposed rail projects generally require as much as 20 to 30 million net tons of bulk cargo annual movement in order to earn sufficient operating profit to pay off the railroad construction debt and interest capital costs.

Passenger trains? They generally around the world don’t cover their annual operating costs from passenger revenues and almost never cover their share of allocated capital debt and interest payments. Talking about adding passenger capability is only adding costs — not profits.

When finally available for this suggested Mongolian – Russian project, a detailed independent operational and market feasibility report should provide clearer due diligence evidence of these rail corridor prospects. Without that independent assessment, it is prudent for investors to beware.

The current mine projections may be either true or false. I suggest that investors consider the entire opportunity and risk profile.

As one example, Russia RZD has very high capital rail rehabilitation and domestic rail requirements previously announced as strategic initiatives. Where in priority of RZD rail company cash flow do these Mongolian corridor capital needs fall compared to competing RZD domestic Russian rail corridors?

For added background, see: http://m.theaustralian.com.au/business/mining-energy/aspires-ovoot-mine-to-benefit-from-china-russia-trade-corridor/story-e6frg9df-1227516860479

Investors take up hedge risk in high speed Spain-France project. // What could go wrong?

To the chagrin of a creditor group that includes Avenue Capital Group, BlueMountain Capital Management and Neuberger Berman, the rescue of a troubled very high speed passenger railroad whose loans they bet on has failed to materialize.

The group bet on a funding to save a premier advertised Spain to France high speed rail line. TP Ferro was a 2003 joint venture between Spain’s Actividades de Construccion & Servicios SA and Eiffage SA of France. They won a prestige 50-year concession for a 44-kilometer rail line to link Figueres, in Spain, and Perpignan, on the French Mediterranean coast. The goal was to fund that small link to connect Barcelona and Madrid to the rest of Europe’s high-speed train network. What could go wrong?

Quite a bit actually.

Delays and geo-polotical issues with the rail project has left them holding losses in TP Ferro Concesionaria SA. And according to Bloomberg reporters the investors have little recourse promise from the the Governments in Spain and France. Neither government wants to lend a hand to international investors, banks and construction companies.

Avenue, BlueMountain and Neuberger Berman bought some of TP Ferro’s 445 million euros ($492 million) of loans at about 70 cents on the euro last year. Now that is valued at about 50 cents, according to two people familiar with the matter. The rail company filed for insolvency proceedings on July 17 after the governments turned down its bailout requests and an international tribunal rejected its bid for compensation.

WHAT NOW?

If TP Ferro’s debtholders, which also include lenders Banco Bilbao Vizcaya Argentaria SA, ING Groep NV and Bankia SA, fail to reach an agreement with the owners and governments to restructure the debt in court, the working theory is that the company will be liquidated and its concession to operate the railway will end. That would leave TP Ferro with no assets.
Bloomberg notes that about 92 percent of companies that enter insolvency proceedings in Spain are liquidated, according to rating company Axesor’s most recent data.

For a more detailed report log onto Bloomberg and read the entire report “Hedge Funds Near End of the Line for Bailouts on Railway Bet”, by Luca Casiraghi and Katie Linsell.

http://www.bloomberg.com/news/articles/2015-07-28/hedge-funds-near-end-of-the-line-for-bailouts-with-railroad-bet