Financial Daily from THE HINDU group of publications
Friday, Nov 26, 2004
Industry & Economy - Outlook
Industry fears rise in raw material costs on account of Railway freight hike
New Delhi , Nov. 25
CORPORATE India has expressed apprehensions that the proposed hike in Railway freight rates ranging between 3.5 per cent and 7.5 per cent will lead to cost-push inflation through the cascading effect.
According to industry sources, coming on top of the recent increase in diesel prices, which has made road transport costlier, the hike will have an impact on the cost of bulk commodities such as coal and iron ore, which are ferried by rail, "leading to an upward pressure on prices."
Steel and thermal power plants are major consumers of iron ore and coal; therefore, a hike in input costs will push up the prices of end products, industry insiders said.
Reacting to the proposal, larger cement companies including ACC and Grasim said that they may raise the prices of their products following the 3.7 per cent increase in rail freight rates for cement and 7.7 per cent increase in clinker rates.
Companies such as ACC transport nearly half of their cement by rail. An ACC official said that since the increase has come on top of the increase in prices of coal some time back, companies have to pass on the increase to consumers.
"Since the monsoons are behind us, we should be able to pass on a good part of the increase to the market," an ACC executive said.
According to industry estimates, higher freight rates for cement may result in a Re 1 increase in price of each 50-kg bag.
An executive with a mid-sized cement manufacturer said that the move to jack up freight rates could also force cement companies to rely more on road transport.
Coal industry sources said, "The impact would be partial but it would be the integrated steel producers and the sponge iron industry that would be affected more."
Most of the iron ore and coal mine are located close to the plants, therefore, the total impact per tonne would be in the range of Rs 100-150 per tonne.
Increase in input costs would have an effect in the long run and any round of price hike may be within the next two months, industry sources said.
According to FICCI, it would have been better if the Railways had absorbed its cost escalation through productivity and efficiency gains and cost reduction.
FICCI is keen that the Railway Ministry reconsiders the proposal and if the hike in freight were inescapable, then perhaps affect an increase in the 2005-06 Rail Budget where the cross-subsidy vis-à-vis passenger fares could also be reconsidered.
Our Mumbai Bureau adds: Cement makers like Gujarat Ambuja, however, will not be much affected by the hike in railway freight, as relatively smaller volumes are moved by rail. "Out of the total movement of about 14 million tonnes of cement, less than 10 per cent is moved by rail, the remaining being moved both on road and by ship. Hence the freight hike will not affect us much," a senior official of Gujarat Ambuja told Business Line.
Sources in the steel industry view the revision in railway freight rate as rather arbitrary and sadly bereft of prior consultation. The industry had some time back given an undertaking to the Government that it would try not to increase the price of steel, despite raw material costs going up over the past several months. The upward hike in railway freight rate has happened atop that.
The industry sees the changed freight rate as a pass-on cost, which the retail customer will have to eventually bear.
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