Railway Budget 2015: Increase in freight rates may push up cement production cost, power tariff

Steel producers hope deliveries will pick up on big five-year investment plan

Updated - December 04, 2021 11:04 pm IST

Published - February 26, 2015 11:40 pm IST - NEW DELHI:

RATE RATIONALISATION: Freight rates in cement will increase to Rs.806 from Rs.785 a tonne. For coal, it will go up to Rs.769 from Rs.723 a tonne. In the case of iron and steel, it will increase to Rs.1,391 from Rs.1,379 a tonne, according to Angel Broking estimates. Photo: M. A. Sriram

RATE RATIONALISATION: Freight rates in cement will increase to Rs.806 from Rs.785 a tonne. For coal, it will go up to Rs.769 from Rs.723 a tonne. In the case of iron and steel, it will increase to Rs.1,391 from Rs.1,379 a tonne, according to Angel Broking estimates. Photo: M. A. Sriram

The freight hike announced in the Railway Budget for 2015-16 is likely to drive up the prices of certain critical items such as cement, coal, steel, and iron ore.

The increase in freight rates for select products has been in the range of two to 10 per cent. The manufacturing cost for cement is likely to go up by Rs.7-10 a bag of 50 kg due to the proposed freight hike on various inputs and the commodity, but domestic firms would prefer to wait for the main Budget to take a call on raising the price.

“The cost of production will go up in the range of Rs.7-10 a bag. This is a back-of-the envelope calculation,” said a spokesperson of a leading cement firm. Asked whether the company would pass on the increased cost of manufacturing and despatch to consumers, he said the company was yet to take a call on that.

A freight hike of 2.7 per cent on cement has sent the cement shares tumbling on Thursday.

A representative of a leading cement firm based in South termed the freight hike as ‘uncalled for’ burden on consumers when the diesel prices was coming down. Moreover, he said, the industry was struggling with weak demand, surplus capacity and lower capacity utilisation.

Pankaj Kulkarni, JSW Cement Director, said “freight hike will make transportation of slag unviable for companies located farther from steel units. Disposal of slag will be a huge concern. As more than 50-60 per cent of cement moved by rakes, the final price has to be borne by the end consumers.”

The Railway Budget proposed to increase freight rates of coal and slag, used in the manufacturing of cement, by Rs.45.70 and Rs.20.9 a tonne, respectively, and also hiked the rate by Rs.21 a tonne for cement, but reduced the tariff for limestone by Rs.2.70 a tonne.

Coal is a basic necessity for cement-making. However, the domestic steel makers do not use slag for making the building material. Those which use it, however, generally carry them by road. Limestone is also mostly ferried by road only.

“The freight rate hike is likely to increase our cost of production in the range of Rs.2-4. However, the price is determined on the demand and supply,” said Mahendra Singhi, whole-time director, Dalmia Bharat Cement. Jaypee Cement whole-time director Shiva Dixit said even as the freight rate hike had an impact on input price, they would wait for the main Budget to see the cost implication before taking a call on raising the price.

Electricity tariffs may rise as the Railway Budget increased the freight rates for coal by 6.3 per cent, which would increase transportation cost for power producers. An official of state-run miner Coal India said the impact of freight rate hike would be on the landed cost of coal. Another official said that the freight was paid by the consumer so the PSU “would not be impacted by the change.” Leading power producer NTPC said that the cost of production would rise by about 4-5 paise due to the freight rate hike. “Around 2 per cent increase in cost of generation ...that is, about 4-5 paise,” the PSU said.

The Association of Power Producers (APP) said that the increase in freight rates would have a direct impact on power retail tariff — depending on the distance from the mine, the power tariff would increase from about 5 paise a unit, which shouldn’t be difficult to absorb. “However, this increase in revenue should result in increased rakes for power sector to ensure full materialisation of committed quantity of coal by Coal India,” it said.

Languishing long over a chronic low demand, steel makers, however, lauded the Rail Budget hoping their deliveries would pick up as the government plans to spend Rs.8.5 lakh crore over the next five years on capacity building.

Though there has been a marginal 0.8 per cent hike in the freight rate, which translates in to Rs.11.50 a tonne of iron and steel transportation, some said it would have a marginal impact. Others felt it could have actually been brought down since diesel prices were ruling low now.

“Thrust on capacity augmentation for railways, including upgradation of network, increasing of track capacity, gauge conversion and track doubling and tripling would lead to an improved steel consumption, which we welcome,” said SAIL Chairman C. S. Verma.

A private sector steel maker also hailed the proposal of staggering investment in various areas such as network expansion and decongestion, high-speed rail and elevated corridor, saying it would spur demand for steel.

“The tariff rate hike will have a very marginal impact on us. The key takeaway is the proposed investment, which will have a far-reaching impact on domestic steel consumption. You will need steel everywhere,” said spokesperson of a leading steel firm. Another steelmaker echoed the view. However, a section of them felt a little disappointed on the Railways Minister Suresh Prabhu not bringing down freight rates despite lower diesel prices being witnessed currently.

— (With inputs from agencies)

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