Alterations to the market rules in the grain logistics sector of Ukraine

Source

APK-Inform

32566

The logistic component is one of the hottest challenges for Ukrainian agrarians and companies-exporters in the beginning of a new grain season-2016/17. The problem influences not only on delivery of grains by the chain field-elevator-port, but also has a direct impact on the price level of agricultural products. The current article covers the conditions of work for agricultural producers, traders and logistics companies, and the methods to solve available problems.

 

Ukrainian exports & grain logistics

Development of the export infrastructure plays rather important role in ensuring the supply of products for Ukraine as one of the major players on the global grain market. In addition, many experts expect that the position of Ukraine in realization of the potential of agricultural production and exports, will continue strengthening.

The prospect of further strengthening of Ukraine's positions on the global grain market is the major driver for development of the port infrastructure, and contributes to construction of new grain terminals. So, in the second half of 2015/16 MY the companies COFCO Agri and Bunge opened new grain shipment complexes in the Ukrainian sea ports. In addition, many large-scale traders announced their plans to construct their own transshipment complexes. The following companies plan to construct grain terminals: UkrLandFarming, Kernel, Louis Dreyfus, Brooklyn-Kiev, Cargill, MV Cargo, etc. In turn, the existing terminals are going to increase and / or modernize their facilities.

According to APK-Inform figures, as for the beginning of a new grain season in Ukraine the general transshipment capacities of sea and river terminals, taking into account the recently put into operation ones, total 64 mln tonnes per year, with the simultaneous storing capacities at 2.81 mln tonnes. At the same time, the general designed capacities of the main terminals in Odessa and Mykolaiv oblasts are estimated at 55.6 mln tonnes per year, with the simultaneous storage at 2.46 mln tonnes. Large sea terminals in Ukraine are able to accept the vessels with a deadweight varying within 25`000-92`000 tonnes, and provide the loading rate at 3`000-30`000 tonnes/day.

However, grain shipment capacities form only one link in the logistics chain of grain supplying for exports. Railway transport ships the major volumes of grains to the ports (62-63% of the cargoes), vehicles – nearly 35%, river transport - 2-3%. In the current MY, the reporting ratio may significantly change in the nearest future, due to the existing problems in the agricultural logistics sector.

 

Grain delivery to the ports

Since June 1, 2016, restrictions on movement of heavy vehicles on most public motor roads in Ukraine came into force. So, from 10:00 to 22:00 there are restrictions on certain roads for movement of vehicles with weight of more than 24 tonnes or one axle load of more than 7 tonnes. The reporting ban is introduced each year, due to increasing of air temperature, which leads to heating of the asphalt concrete pavement and its destruction.

Generally, most traders agree that the weight control on public roads is necessary, and call prevention of further destruction of motor roads as the main advantage of such innovation, which is quite important, taking into account the current condition of roads of Ukraine. However, in the current year such limitations complicated the work of market participants, and increased pressure on the market compared with previous years.

Growing of the tariffs for motor transportation became the first negative effect for the market. According to market participants, the tariffs for motor transportation from field to elevator grew by 15-20%, to the port - up 50-70%. In turn, the number of vehicles for transportation of the same agricultural cargoes increased, and the daily volume of cargoes acceptance in the ports decreased. Also, such transportation regime often causes formation of cargo transport queues. According to market participants, there is some corruption element in the inspection process at the weight control.

The Deputy Director at Atlanta-Agro, one of the largest operators of railway transportation in Ukraine, Anton Vidnitsky gave his opinion about the current situation on the market of motor transportation of agricultural cargoes:

"Due to strengthening of the weight control on public roads, in the current season many companies prefer using railway transportation of agricultural cargoes.

According to the current weight control, grain carriers have to carry 40 tonnes of gross weight regardless of the number of axles. If previously they carried 40 tonnes of wheat in net weight, then to date the index totals 20 tonnes. Of course, many operators found it unprofitable to work in such way. Perhaps, small-scale businesses which previously shipped grains at 20-tonne vehicles, find it profitable to use motor road transport, but they represent rather small share of the market. And large-scale companies that develop their motor vehicles, have many losses.

Therefore, many companies prefer shipping agricultural cargoes by railway lines. According to preliminary calculations of our company, in July 2016 the shipment volumes by rolling stock increased by nearly 1.5 times compared with July 2015.

To date, the market already has problems due to the lack of rail cars. The reporting situation is traditional and has seasonal character. In the current MY the problem became even more significant, due to mass shifting of traders to transportation by railway”.

 

Reaction of traders

Generally, most exporters do not see anything critical in the current situation, as they are interested in storage of grains at elevators with further transportation by railway. According to traders, storage of grains at elevators provides confidence in the quality and quantity, and reduces the corruption component.

The Head of trading department of Cardiff Trading, Ivan Cherevko commented on the situation with agricultural logistics:

"In my opinion, low-quality government management is the main reason for development of the major problems with logistics in our country. In particular, the government does not support the balance of rail cars suitable for carriage, their number continues reducing, moreover, there are no steps to stimulate the further increasing of the private car fleet. As a result, there is a shortage of rolling stock during the seasonal activity in transportation. In addition, the regulation of conventional problems for transportation by railway is quite bureaucratic and corrupt. For example, very often regional directorates face shortage of diesel fuel to supply rail cars for loading to the elevator. Such situation are formed due to the fact that it is not ordered in time or supplied at wrong time.

I should note that the roads in the country are not supported at the appropriate level of quality.

Another problem is corruption of the traffic control mechanism. Despite severity of the weight control, there are some carriers who exceed the permissible limits, and there are some grain terminals that accept such cars to be unloaded. Such situations create unequal conditions for competition. However, I do not blame only government regulation mechanism of logistics. Unfortunately, the problem of corruption and bureaucracy are already in minds of many market participants.”

 

Opinion of agricultural producers

It is worth noting that the rise of prices for logistics component will not affect price formation by buyers, but the selling prices of agricultural producers will continue rising. As a result, the seller will be the first to feel the growth of prices in the supply chain. The managing partner at AZOTFOSTRADE LLC, Alexander Savenkov told his point of view as agricultural producer:

“Generally, tightening of the weight control is the right decision, as it will contribute to preservation of motor roads, which condition is quite poor in Ukraine. On the other hand, I believe that it is necessary to solve the issue of increasing of the authorized weight of transported goods at the legislative level.

At the same time, in such circumstances railway transport is more preferable mean of grain shipment. As for our company: if previously the ratio between vehicles and railway transportation totaled nearly 90:10%, then in the current season the ratio totals nearly 50:50%.

As for tariffs, railway transportation is definitely cheaper compared with vehicles. However, there are such things as the station charges, plus loading from elevator, etc. Therefore, in terms of short distances vehicles is more favorable transport.”

 

Opinion of Ukrzaliznytsia

The Department of information policy and public relations at OJSC Ukrzaliznytsia answered APK-Inform on increase of the load on railway transportation of grain cargoes due to increasing on the weight control at motor roads; and what volumes of grain cargoes can Ukrzaliznytsia carry, prospects of increasing of the figures:

"In 2015, the Ukrainian railways transported 29.32 mln tonnes of grains and by-products, which became the highest figure during many recent years. There were mainly export shipments - 27.33 mln tonnes, or more than 73% of the general grain exports from Ukraine.

After increasing of the weight control at motor roads, motor carrier will increase their costs for cargo transportation. But taking into account the lack of any real statistics on motor roads traffic, the share of redistribution of cargo volumes on the railway can be designated within the range of 3-10%.

As of April 7, 2016, Ukrzaliznytsia has more than 10 thsd grain rail cars. In addition, nearly 3 thsd private rail cars take part in grain transportation operations. On the basis of available resources (13 thsd rail cars per daily) and the turnover of grain rail cars at 7-8 days, the possibility of loading totals nearly 40 mln tonnes per year (3.3 mln tonnes per month) in the case of uniform load during the year. It is possible to increase the figures after enlargement of the fleet to 20 thsd rail cars, as well as improving the turnover of cars to 5 days.”

 

To date, it is difficult to estimate whether the logistics adjustments somewhat influenced at the export volumes. Only in three months it will be possible to realistically estimate the impact of the logistics component, but we hope that the market will regulate the situation, and in the new season the export market will bring new positive results to Ukraine.

 

Market figures

According to statistics figures, in the first month of 2016/17 MY the export volumes of grains from Ukraine totaled 1.98 mln tonnes (down 15% compared with the exports in June, and down 25% compared with July 2015). According to APK-Inform analysts, the exports reduced compared with the previous year, at the expense of significant fall of corn and wheat supplies. In particular, the July exports of wheat totaled 0.6 mln tonnes, down 56% compared with June exports, and down 25% compared with July 2015. In turn, the July exports of barley broke a record, and totaled almost 1.1 mln tonnes, up 11 times compared with June 2016, and up 28% compared with July 2015.

 

APK-Inform Agency

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