Tag Archive for railway competition

Russian Hopper wagon contract reflects post World War-2 engineering design. –

RUSSIA: United Wagon Co has signed an agreement with fertilizer producer Uralkali to supply 400 hopper wagons from its Tikhvin factory.

The Type 19-9870 cars will have an axle-load of 25 tonnes and can carry up to 76·5 tonnes.

That design reflects engineering standards found in North America in the 1950’s

Modern North American rail freight wagons have typically been built and operated across the USA, Canada and Mexican rail tracks with 30 to as high as 3 metric tonne axle loading.

As a global benchmark, this is not good news for Russian shippers.

www.railwaygazette.com/newsfreight/single-view/view/hopper-wagon-contract-signed.html Sent from my iPad

Back to the Future for the UK rail structure? // 2015 review

Was the British Rail privatization effort ever successfully completed. Or just a juggling of the accounting books?

What do you think? Here is an interesting review in part from Zthe Economist in early October 2015 //

The original Railtrack company actually according to many economists was partially re-nationalized when financial oversight shifted to the replacement Network Rail company within about a decade of the initial change.

More passenger riders? Yes. At more public subsidy? Yes.

Is that success?

Quite a few in the UK don’t think it was successful. Note this from The Economist on 3 October 2015 Railways “Gravy trains” Why Labour’s plans to renationalise the railways are so popular

FEW topics get Britons as hot under the collar as the state of the country’s railways. When trains are delayed—at the slightest hint of snow, or when leaves fall on the track—passengers fire off furious letters and tweets. According to polls by YouGov, more than half of Britons would like the government to take the railways back under state control.

This makes Labour’s plan for a publicly run “People’s Railway”, affirmed at its conference this week, a popular policy as well as a radical one.

By some measures Britain’s railways are booming. Since the network was privatised in 1994, the number of train journeys taken each year has doubled. The growth in passenger-kilometres travelled has been among the fastest in the European Union.

BUT… …the service has become far more expensive, with rail fares now 24% higher in real terms than in 1995.

And as well as being pricey, the service is often uncomfortable: 22% of passengers commuting into London and 16% of those travelling into Manchester have to stand.

// The Economist writes that …”passenger frustration also reflects the fact that privatisation was rushed through and in many ways flawed.” When British Rail, the monolithic state operator, was broken up in the 1990s the government stringently followed a European directive to separate the tracks from the trains.

The idea was to boost competition by ensuring that different train operators could whizz up and down the same stretches of track.

But in some circumstances this led to inefficiencies, with employees of privately run train companies doubling up against those from Network Rail, the state-owned company which controls all 20,000 miles (32,000km) of track. Investment has risen since privatisation, but so has government subsidy…

The subsidies adds up to around £4 billion ($6 billion) a year.

According to a report published in 2011, costs per passenger-kilometre have hardly improved since 1996.

And Network Rail is in disarray. The company, which was brought on to the government balance-sheet in 2014 with £34 billion of debt, is due to publish three reports over the next six months looking at how it can be restructured.

Read the column in full at: www.economist.com/news/britain/21669057-why-labours-plans-renationalise-railways-are-so-popular-gravy-trains

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

Are high speed rail projects a good or bad deal? // Or mainly poorly researched investments?

Here is a short excerpt about rail project due diligence from the files of The Economist. They published this investor alert back in 2012. I am recirculating it in case you missed it.

The theory is that …”new-build rail projects are horribly likely to come in way over budget and to be used much less than expected.”

Their researchers discovered a 2009 paper by Bent Flyvbjerg of Oxford’s Saïd Business School entitled “Survival of the Unfittest: Why the worst infrastructure gets built—and what we can do about it”. That paper presents data on predicted and actual costs and ridership for 58 rail projects around the world.

On average, these rail project costs ended up 50% above predictions, and the ridership usage was 50% under.

Due diligence!

What due diligence?

For many of these complex rail projects—for example the much delayed Brazil bullet train — require precision engineering. The Channel Tunnel linking Britain and the European mainland, and the Great Belt Rail Tunnel linking two Danish islands were this type of complex project. Both of these ended up costing around double the initial budget.

AND… initial revenues did not hit the promised targets suggests the research.

In the case of the Channel Tunnel, the due diligence overlooked the competitive response. The English Channel ferry operators reduced their unit costs by modernizing their boat fleets and won the initial price wars.

The poor revenue oversight might reflect the use of too many engineers for the initial competition due diligence and too few economists.

http://www.economist.com/blogs/americasview/2012/08/high-speed-rail-brazil

Economic Assessment of a city with these great attributes. Is All Well?

Here is a US city with the following favorable economic attributes.

It has ample water access. It has an international airport. It is served by three competing railroads. It has direct local access to three of the highest traffic density US Interstate Highway routes. Sounds like the basis of a solid urban economic development, correct?

You would be wrong.

This is Gary Indiana. A sort of mini Detroit says The Economist.

Gary’s unemployment rate is unofficially close to 30%

28% of the population lives below the poverty line.

50 some years ago, this city was home to 180,000 people and most were employed and earning good wages. 30,000 were employed at the U.S. steel mega steel mill after WW-2. Today, only about 5,000 work there. And the population is down to < 79,000.

With about one quarter of its building boarded up.

In 1970, about 50% of the residence aged 16 and over worked in manufacturing jobs. Today, only about 14%.

As a Conrail strategic planner with Chicago roots, I watched the change of the southern Lake Michigan heavy industrial regional landscape between the South Chicago steel complex and the Gary Works.  The entire region was caught up in the global steel making changes with cheaper competition from abroad. Gary was not alone.

Investors were losing faith in the old steel business model.  Political elected leaders missed the economic signs.  After all, many like Gary’s past leaders could say they had all the infrastructure qualities — some even an international airport!!

RESURRECTION?

Gary is trying to reinvent itself. Maybe as a logistics semi processing and distribution center.

It is clear that despite its apparent advantageous characteristics in the introduction above, fancy economic indicators like “access” don’t by themselves make the future. Hard work and excellent choices are needed in order to reinvent a healthy city economy.

A manufacturing giant through and after WW-2, approximately 30% of the US workforce was in manufacturing. Today, maybe ten percent.

Lots of cities from Detroit to Gary failed to catch the changing economic trends after the late 1970’s an adapt. Some did, like South Bend and Galena.

The critical success factor is to know how to make change and execute.  To walk away from a historical core local employer like US Steel was in Gary is hard.  Too often the easy road of hanging on is the political choice.  City planning skills to make such strategic changes are often lacking.  It is a tough call,

Check The Economist 11 July issue for details of the stories as cities try to remake themselves rather than manage their decline.

Mongolia premier pledges to end Tavan Tolgoi coal mine & railroad delays

From the Financial Times news report comes this upbeat news from Mongolia.

The headline:

Is this just more public relations political hype? Another “junk” rated bond issue to please voters? Is this necessary? Probably a bad idea. Again.

More long delayed plans for the east-west low margin financial feasibility railroad towards Japan? These sound more like a belief in Santa Clause than a sound strategic recovery for the nation.

I would wish more then this for my many Mongolian friends I have worked with.

The good news is that there is a way to make Mongolians strategic winners” if they pull together on tactics and engineering that are sound best practices.

Cheers!

For the FT report, log onto: http://www.ft.com/intl/cms/s/6e7a241a-20c7-11e5-ab0f-6bb9974f25d0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F6e7a241a-20c7-11e5-ab0f-6bb9974f25d0.html%3Fsiteedition%3Dintl&siteedition=intl&_i_referer=#axzz3erCpC6bE

Here are a few of the reported public relations statements in the news report. ——- Saikhanbileg Chimed indicated that “Mongolia planned to launch another sovereign bond as the country seeks to get “back to business” following two years of slowing growth in gross domestic product, plummeting foreign direct investment and rating agency downgrades of its junk-rated “Chinggis” bonds.”

“Official approval for investors to start work on the Tavan Tolgoi (TT) coking coal mine in the Gobi desert should follow soon after a review of the investor agreement in parliament this month, Mr Saikhanbileg told the Financial Times in an interview.”

Investors in the project include China’s Shenhua Energy and Japan’s Sumitomo Corp. “TT will be unlocked in the very near future,” he said.

HOWEVER—

“Several members of Mongolia’s parliament have raised objections to financial and legal aspects of the TT investor agreement, raising the possibility that the mine… …could suffer a similar fate to that of Oyu Tolgoi, a $5bn copper mine, where an expansion project was unblocked in May only after two years of wrangling. This year, Mongolia resorted to a mobile phone referendum to shore up public support for the project…

The minister still believes in 220km rail line from the mine into China — delayed now for more than three years.

Mr Saikhanbileg also told the FT reporters that he also believes in a second potential rail project that would run east-west about 1,300km to reach coal markets in Japan and the US, a Mr Saikhanbileg said.

BEWARE:

This E-W rail line is a much higher investment risk according to my due diligence research on Mongolia rail options dating back to 2006.

Investors need to carefully reexamine these projects with updated due diligence.  Mongolia needs a real heavy haul big train design to make their expectations a reality.  That means trashing most of their prior rail designs.

It also means a fresh due diligence review of the feasibility options. In particular, it is a bad idea to depend upon a due diligence feasibility report that is prepared by the builders.  They are not exactly Independant.

South Africa Consumer Confidence Index Slumps to 14-Year Low

From Bloomberg, Jul 2, 2015

Consumer confidence in South Africa dropped to the lowest level in 14 years in the three months through June. The consumer confidence index slumped to minus 15 in the second quarter from minus four in the first three months of the year according to FirstRand Ltd.’s First National Bank unit.

The sub-index sentiment on the economy’s outlook hit the lowest level since the 1992-93 recession.

Will investors continue to support aggressive mining and rail projects in such a statistical environment?

What is the Strategic Plan B for infrastructure when confidence drops?

“Business as Usual” is now a bit riskier.

Who will step up and lead the change?

Is the current maket demand driven Transnet Rail set of commercial assumptions still valid?  If not, how do leaders change to meet the new competitive reality? Who has such an experience to help adapt to the new railway commercial market changes?

To read the entire article, go to http://bloom.bg/1KuWF3C

Competition for met coal sales to China in the summer of 2015

Reuters data http://mobile.reuters.com/article/idUSL3N0Z823E20150622?irpc=932

China’s imports of coking coal fell 24.2% to 14.7 million tonnes in the first four months of the 2015 from the same period last year.

Australia has about a 50% share of China’s imports Yet, shipments dropped 26.2 percent in the first four months as China’s steel production has fallen.

China’s imports from Mongolia increased by 9% to 4.5 million tonnes. It could have been higher if only Mongolia had a working export railway by now.

The next two largest coke coal suppliers are Canada and Russia. This year their shipments to China fell 14% and 39% respectively.

My technical observations.

MONGOLIA FUNDAMENTAL PROBLEMS as a COMPETITOR

The Mongolia customs price in northern China is about $46 a tonne as of April 2015. To that has to be added the rail cost to reach eastern Chinese steel producing markets. That adds a lot to the price given Mongolia’s poor rail infrastructure. It has zero heavy haul rail capability.

The quoted price from competing sources are $105 to $106 from Australia ~ $110 from Canada, ~ $93 from Russia mines Price to Japan Third quarter contracts for delivery from Australia to Japan were settled at $93 a tonne for premium hard coking coal, according to two people familiar with the negotiations says Reuters.

Back in 2012, the price was $330 a tonne.

The contract price tends to influence the spot price.

However, sellers need to price to a more reasonable long term contract rate to survive periodic economic down cycles.

Eskom the shrinking monopoly business’ – THINK ABOUT SIMILAR CASE STUDY OUTCOMES

Headlines this week show that local South African businesses are fed up with ESKOM.

We economist saw what happens in such scenarios twice before. To me as now an older guy, it first occurred when the PENN Central Railroad and 6 other USA eastern railways were declared to be so poorly performing as to be ruled unreorganizable under then prevalent bankruptcy laws… …and before the struggling freight rail could be reborn — truck market share zoomed from under 50% to more than 80% in many market lanes.

The WOW AFFECT was that rail lost all sense of former assumed monopoly position to the trucks and never really recovered in the high value business segments.

A current (2015) Bookings Report confirms that while rail is still important on long distance urban area to urban area fright moves… — the truck is really KING.

Rail freight is NOT COMPETITIVE in many urban to urban US markets and lanes anymore.

Where rail freight was reborn, it was structurally and service wise extremely different and much smaller. Literally, millions of rail jobs disappeared and hundreds of thousands of kilometers track were abandoned.

Although today profitable in North America, it is nowhere near the former market share leader in freight.

The second WOW case is the global example of how many of the incompetent telephone monopolies in the space of about one generation were displaced by the cellular phone business. Once the King Rex of phone conversations, the land wired phone utilities became the dying dinosaur.  The rapidly innovating highly service delivery new entrant mobile phone companies came in and within a decade or two killed off much of the land line dinosar’s market share.

Now come electric utilities like ESKOM.  The former electricity Kings of the Hill in marketing terms because the politicians said so with the monopoly law… … Now across South Africa being replaced as fast as possible by the customers who can pay for any solution in the present crisis.

Some customers are adapting via a non regulated “switching” to solar and or to alternate diesel or natural gas generators. Here the scenario is that the base load clients give up hope by voting with their wallets for an alternate supplier… They do so because they can afford to.

In fact, many are so commercially desperate that “they must switch”.

This electricity resourcing change in ways pretty much looks like the rail versus truck and land line versus cell phone case history all over again. If true, the ESKOM story could quickly become a classic Harvard Business School curriculum course.

We can argue that if ESKOM takes another four to five years to find a working rescue plan, they may see by that time a loss of highly prized base load business customers. If they lose a core of the customers most able to buy power to enable repayment of future ESKOM debt, how will that play out politically?

What might it mean for coal to central power station mines and railway links as perhaps a fifth to nearly a third of the former coal core energy sales disappear?

Thinking out of the box like this brings up WOW changes that could ripple though the nation’s economy. It is not inevitable.  But it is possible.

For more on how business leaders are thinking, log onto: http://www.timeslive.co.za/thetimes/2015/06/18/Eskom-strangling-business

Delayed Swazi Rail project — discussion held in Africa

Part of the rest of story not covered in the speeches.

Requires a bit more due diligence to attract private investor real interest.

The basic news report found here: http://www.observer.org.sz/business/73799-e150-million-injected-in-swazi-rail-link-so-far.html     From a 19/06/2015 report by Nomthandazo Nkambule

SO far, Swaziland has injected only E100 to E150 million in the multibillion proposed rail link spearheaded by Swaziland Railway and Transnet Freight Rail (TFR).

Speaking in an interview after the opening session of the first Southern African Railways Association (SARA) 2015 board meeting, Swaziland Railway CEO Stephenson Ngubane said this amount, amongst other things included environmental impact assessment.

The proposed line that would start from Lothair in South Africa and run to Sidvokodvo. Ngubane said the project has seen a pre-feasibility and a feasibility study so far. No solid funding yet. They are still looking for calculated project financials that might demonstrate ability to pay expenses and capital debt from projected freight revenues.

The Minister of Public Works and Transport Lindiwe Dlamini also spoke. Dlamini concludes that “Railways are the engines of economic growth, they enabled industrialisation in the past and they are even more relevant today.”

However, there is a logical mistake in that assumption. The mistake is that most industrialization railways were built to compete against horse and wagon and waterways. Swazi railways competes against trucks. That is a huge difference! Competition matters.

To beat the truck, the proposed new railway will have to employee big train technology. Will it?