Brazil $42 Billion Rail Bet to Cut Iron Ore-Farm Costs: FreightRaymond Colitt
Diorginis Seron, a farmer in Brazil’s western grain belt who will lose money harvesting corn this season, is counting on a government rail project to return him to profit.
“If they bring in a new railway and break the monopoly on the existing routes, as they say, that could make a big difference on our bottom line,” said Seron by telephone from his 2,500 hectares (6,178 acres) farm in Mato Grosso state.
President Dilma Rousseff plans to build 11,000 kilometers (6,835 miles) of rail and grant wider access to existing privately operated lines to cut shipping costs by as much as 30 percent. The auction of a concession to build and manage the first of a dozen railways costing a total 96.1 billion reais ($42 billion) will take place as early as October.
Forging disconnected bits of rail into a single-gauge network is aimed at reducing the continent-sized country’s dependence on more costly road transportation, said Bernardo Figueiredo, head of the state-run Planning and Logistics Company, known as EPL. Currently, only about one-third of Brazil’s 28,692 km of railway are in operation, and 30 percent of freight moves by rail, compared with 52 percent by truck.
The bulk of the rail network operates under concessions the government grants to companies. The operators can prevent anyone else from using their lines.
The railway projects are part Rousseff’s efforts to speed up the modernization of Brazil’s infrastructure by attracting private capital. New roads, railways, ports and a high-speed train will require investments of 242 billion reais, according to EPL.
“Logistics in Brazil are inverted -- we use roads for long-haul and railways for short-haul,” Figueiredo said during a railroad seminar on July 31 in Brasilia. “That’s what undermines the competitiveness of our productive sector.”
Growth in the second-largest emerging market after China slowed to 0.9 percent last year, from 2.7 percent in 2011 and
7.5 percent in 2010, as manufacturers lost ground to foreign rivals and indebted families consumed less.
Brazil spends 12 percent of gross domestic product on logistics, compared with 8 percent for the U.S., according to a 2012 study by the Fundacao Dom Cabral, a business research group. The difference amounts to $83.2 billion a year, the Fundacao said.
Pot-holed roads that cause trucks to lose as much as 3 percent of their cargo in Mato Grosso, along with backups at the country’s main port in Santos that surged to a record 15 miles in March, are among the reasons Seron loses 50 percent of the market price for his corn to logistics costs. A privately operated railroad from Rondonopolis, 100 kilometers from Seron’s farm, charges nearly the equivalent of road transport, he said.
A universal rail gauge, improved signal system and larger economies of scale should bring rail costs down by around 30 percent, said Alexandre Porto, who manages the bidding process at the National Ground Transport Agency, an industry regulator. Making available private railways’ excess capacity will add to the savings, he added.
In turn, lower freight costs should help stimulate demand and allow the government to resell more of the capacity it acquires. Even so, the government expects to lose money on the projects, Porto said in an interview.
Because of poorly maintained track, frequent road crossings and a lack of bridges and tunnels, trains in Brazil travel at an average speed of 20 kilometers (12 miles) an hour, he said. Average rail speeds in China and the U.S. are 80 km/h and 40 km/h respectively, according to Rio de Janeiro-based logistics consulting company ILOS.
Rousseff’s rail proposal offers low-cost financing for as much as 80 percent of each project. The government also will buy 100 percent of the new railways’ capacity, thus ensuring a 16 percent return on equity for the concession winners, Porto said. Existing, mostly private, rail operators will be required to offer excess capacity to the government in exchange for a user fee. The idea is to produce maximum investor interest and consumer benefit, Porto said.
“We intend to recover the railroad as a competitive alternative,” Porto said. “The first lot will be auctioned between October and December.”
Projected demand for 3,900 locomotives, 31,000 wagons and services have sparked the interest of suppliers, operators and consultants, including France’s Alstom SA.
The country’s main construction companies also are interested in the auctions and have been studying the projects for months, according to Sao Paulo-based industry trade group ABDIB. Closely held Andrade Gutierrez SA confirmed it will participate. To boost competition in the sector, no existing railroad operators can bid.
Progress Rail Services, a unit of Peoria, Illinois-based Caterpillar Inc. that sells, leases and maintains locomotives, estimates Brazil could generate as much as 30 percent of its revenue, up from 7 percent currently, said Alexandre Barros, manager for new business.
“We’re certainly betting these projects will gain speed,” Rogerio Mendonca, commercial director for Latin America at GE Transportation, which builds heavy locomotives in Contagem, Minas Gerais. “We’re very anxious for the program to be implemented and construction and operation to get under way.”
Concern about timing may be well-founded, given Brazil’s track record of delays and cost overruns on large-scale infrastructure projects. A 1,022 km railway linking iron-ore deposits and agricultural areas in western Bahia state with the Atlantic port in Ilheus was scheduled to start operating on July 30 this year. So far, no track has been laid and the completion date has been pushed back to December 2014, according to state-run railway and engineering company Valec.
Another problem is that current railway operators aren’t sure how open access will affect business and doubt it is the best model for railway maintenance and oversight, says Rodrigo Vilaca, head of Brasilia-based industry trade group ANTF.
“We’re going to lose efficiency and productivity with a system in which several operators can use a railway,” Vilaca said in an interview.
While the open-access plan is laudable, not all existing railways may have the excess capacity needed to allow interconnection. That will make it harder to create the nationwide network the government is striving for, said Paulo Jorge Cepeda, partner at Sysfer, a Rio de Janeiro-based logistics-consulting company.
“The concept is correct,” Cepeda said in a telephone interview. “The question is whether the government has the right tools and capacity to implement the model.”
To continue reading this article you must be a Bloomberg Professional Service Subscriber.
If you believe that you may have received this message in error please let us know.
- Under Fire and Losing Trust, Facebook Plays the Victim
- Uber Victim Stepped Suddenly in Front of Self-Driving Car
- Fed Lifts Rates, Steepens Path Through 2020 for More Hikes
- YouTube Bans Firearms Demo Videos, Entering the Gun Control Debate
- Facebook Just Lost More Than Tesla's Entire Market Cap in Two Days