Containing transport costs

With increasing container traffic and environmental concerns, double-stack container trains are gaining ever -greater importance worldwide.

In India, Prime Minister Narendra Modi flagged off the world’s first double-stack container train under electric wire in January 2021. The 3,300-km long dedicated freight corridors (DFCs) are projected to move about 5.3 million TEUs [twenty-foot equivalent unit] per year owing to lower operating costs of higher-capacity wagons in longer trains. Arbitrage is one of the existing pricing issues that can reduce the cost of container transport further.

For the railways, double-stacking of containers can double the revenue, while leading to only a minor increase in variable costs. In order to incentivise double-stacking, the railways charges the containers loaded in the upper-stack position at 50 per cent and in the lower-stack at 100 per cent of the prevailing rates. An analysis of container train operations and haulage charges shows that the haulage charges provide an arbitrage opportunity to container train operators (CTOs) due to the loading of multiple types of containers in different loading patterns (eg, double-stack, single-stack, and empty wagon).

For a simple illustration, let’s consider a set of three 40-ft containers, one empty and the others with gross weights of 25 and 30 tonnes, respectively, loaded on the two wagons (see figure). For about 1,200-km haulage of these three containers according to plan A, a CTO would pay ₹90,000. However, the CTO can also pay much lower charges, ₹80,000, by adopting load plan B. Both plans A and B satisfy all the safety and operational requirements. And both load plans A and B can be used for transporting the same set of containers having the same weight loaded on the same train dispatched at the same time on the same route. However, the charges corresponding to plan B is 11 per cent lower than that of plan A because the 50 per cent saving on the charges of the upper-stack container increases with an increase in the container weight.

Here, arbitrage gain refers to the guaranteed risk-free saving for the CTO accrued by swapping a heavier container in the lower stack with a lighter container in the upper. For example, the arbitrage gain is ₹10,000 in the figure.

Extending the above real-life example to a train of 45 wagons, a CTO can make an additional profit of up to ₹2,20,000 per train by exploiting the potential 22 arbitrage opportunities in the train. Practically, the CTO has the flexibility to pay any amount between ₹19.8 lakhs and ₹17.6 lakhs to the railways depending on the exploitation of the arbitrage gain for this train. Therefore, arbitrage gain for the CTOs can be seen as a loss of revenue for the railways.

This arbitrage has existed since 2006. A research study shows that the average total arbitrage gain for a CTO can be about 3 per cent of the total haulage charges. Therefore, the total annual arbitrage gain can exceed one billion rupees on DFCs by 2022.

Implications

Due to the incentive for loading of heavier containers in the upper stack, the exploitation of arbitrage increases the weight of the upper-stack containers unnecessarily. Compared with plan A in the figure, load plan B increases the weight of the upper-stack container by 21 tonnes, which is not productive but quite profitable due to the pricing anomaly. Plan A for the train is also safer than plan B.

There are other externalities of arbitrage for the container supply chain. Arbitrage makes the container haulage operations and pricing more complex. It also increases the average time and cost of container handling at terminals. Moreover, it also provides an incentive to delay certain containers, whenever possible, just to maximise the arbitrage gain.

Overall, arbitrage reduces the efficiency of container supply chain because the same container transport can be carried out at a lower total system cost without compromising the utility for any entity (railways, CTOs, port operators, and shippers). Therefore, by eliminating arbitrage, the container supply chain can become more efficient. Until the pricing formula is revised, the CTOs can optimise their arbitrage, which can also reduce the transportation cost for end-users.

The authors Amit Upadhyay and Abhijeet Chandra teach operations & analytics, and finance & accounting, respectively at VGSoM, IIT Kharagpur. Views are personal.

COMMENT NOW