How the grain cargo market developed in 2020 and prospects for 2021

2020 was not an easy year for the whole world. The pandemic has made its own adjustments in all spheres of human activity. In addition to restrictions on citizens in almost all countries, quarantine has also become a big obstacle to business development. The damage was suffered not only by representatives of small and medium-sized businesses, but also by large enterprises. However, as the results of the year showed, the major owner of grain wagons-JSC «Astyk Trans» not only maintained its position in the grain transportation market, but also ensured stability in this segment. And today we decided to talk about transport management in the crisis period, about the strategy and, in general, about the situation in this sector. We asked the head of the Company — the President of JSC «Astyk Trans» — Sanzhar Yelyubayev to answer our questions.
— Sanzhar Bakhytovich, good afternoon! 2020 was a difficult year for most companies in the country. What did you come out with by the year of 21?
— Good afternoon, thank you! Yes, «Covid-19» did not pass without a trace. However, despite all the difficulties, the grain market of Kazakhstan showed a good result. One of the main markers of the state of the market — «grain transportation volume» in 2020 was higher than expected. In 2019, there was the lowest harvest in the last 5 years. So, if in 2018 20 million tons of grain were harvested, in 2019 only 17 million tons were harvested. Nevertheless, in 2020, the volume of traffic in comparison with the previous year decreased by only 1 million tons.
— The main driver was the growth of demand for Kazakh grain. It is the pandemic and the isolation regime that have sharply raised the problem of food security in the Countries of Central Asia and the Middle East. The main direction of export traffic traditionally remained the countries of Central Asia, the growth of traffic in 2020 compared to 2019 was 7%. Grain shipments to China increased by 10%, and to Afghanistan by 66%.
It should be noted that during the period of total quarantine, JSC «NC KTZ» provided prompt delivery of grain cargo, and all freight forwarders of grain wagons, including JSC «Astyk Trans» fully met the needs of their customers in rolling stock and ensured uninterrupted grain supplies both to the domestic market and for export.
— And in what areas were there problems, and how is the situation in the Chinese direction?
— In comparison with 2019, rail transportation to Iran via the Aktau port, as well as export transportation through the Russian ports of the Black and Baltic Seas, decreased. The decline in demand in Iran and the difficulties in making payments by Iranian consumers have unfortunately led to a significant reduction in exports to the region. At the same time, it should be noted that grain suppliers fr om Russia were able to bypass the barriers of complexity of payments and compete with Kazakh grain, thanks to proven payment mechanisms and lower grain prices.
One of the features of the twentieth year is the increase in traffic in China by a specialized fleet of grain wagons, which was a consequence of the pandemic and increased requirements for the safety of grain products. (Previously, transportation was carried out mainly in covered wagons in sack tare). However, in the 1st quarter of 2021, the unloading of wagons in the People’s Republic of China is practically not carried out, and about 2000 grain carriers have been standing at the border since December 2020. JSC NC «KTZ», our company, shippers make every effort to unload grain. But the delay on Chinese territory is associated with slow unloading, and practically the Chinese side is not solved.
— And the harvest of 2020, its transportation, how are things going?
Despite a good harvest in 2020, which amounted to 19.5 million tons of grain and 2.5 million tons of oilseeds in weight after completion, shipments in the 4th quarter were far fr om record highs. Infrastructure constraints continue to be a constraint on the development of the market. This includes downtime in Uzbekistan, problems with the unloading of grain by China, as I said above, and a decrease in the capacity of the railway network inside Kazakhstan.
-What did it lead to?
— Infrastructure restrictions have led to an increase in the turnover of grain wagons on the network by up to 20% compared to last year, which means that more grain carriers are needed to service the same volume. Despite this, while maintaining the average monthly traffic of more than 1 million tons in the 4th quarter, which corresponds to the average figures of previous years, there was no shortage of grain wagons on the market. This was partly achieved due to the involvement of JSC «Astyk Trans» of an additional fleet of rail wagons.
— It turns out that you provide your customers with the required wagons as much as possible. But the growing volumes of transportation, loading and unloading on the ground, the need to store grain probably require the appropriate infrastructure, what is the situation with grain producers?
— I agree, the development of storage infrastructure and improving the financial stability of farms-has a positive effect on the stability of the supply of grain during the marketing season. Grain producers have a certain financial reserve and are not ready to sell grain for a few months in the fall at bargain prices in order to pay off loans. Farms have moved away fr om elevator dependence, grain storage facilities have been built, and farmers can wait until spring, when grain prices are at their highest, without fear of deterioration in grain quality. This fact inspires optimism to the owners of the logistics infrastructure of the grain market, since it allows more evenly ensuring the movement of grain flows during the calendar year. It is still too early to talk about a decrease in the seasonality factor, but the development of grain infrastructure is a clear trend in recent years.
— Can we say that despite the pandemic, the carrier market is also «hot»? What is the current situation?
— Good question. Competition in the grain cargo transportation market is increasing. The number of participants in the transportation process is also increasing. Thus, during 2020, the fleet of owners of the Republic of Kazakhstan increased by almost 20%, not counting the permanent presence in the market of the CIS fleet. In accordance with the interstate Agreement on the joint use of freight wagons and containers owned by the CIS member states, as well as the Republic of Azerbaijan, the Republic of Georgia, the Republic of Latvia, the Republic of Lithuania, and the Republic of Estonia, access to transportation in Kazakhstan to a foreign fleet (about 102.3 thousand grain hoppers) is always open. So, only the fleet of the Russian Federation today has about 52.8 thousand grain hoppers, having increased by 7.4 thousand wagons over the year. In addition to the fleet of grain hoppers, grain cargo transportation is carried out by a fleet of covered wagons in the amount of 100 thousand units on the territory of the CIS countries, which are also suitable for grain transportation, and the share of which in the transportation of grain cargo is up to 25% of the market.
The main deterrent to increasing the presence of the CIS fleet in Kazakhstan is the level of tariffs, which is quite low (especially for domestic transportation), which is unprofitable for Russian companies and for most Kazakh companies that provide grain carriers. I.e., maintaining low tariffs for socially significant domestic transportation is beneficial (!) for the Kazakh fleet. At the same time, there are objective reasons that affect the growth of tariffs, such as the cost of repairs and spare parts, mainly imported, as well as the wear and tear of the fleet, which requires investment in its renewal.
— And how was the issue of domestic transportation of grain cargo resolved and the problems that were voiced by some millers in various media regarding the increase in tariffs for grain transportation within Kazakhstan?
This year, we have faced claims from individual grain processing companies that have accused the Company of raising tariffs. The reason for the publications in the mass media was the discrepancies in the assessment of the cost of domestic transportation. The cost of transportation for the Company’s customers-shippers consists of the railway tariff (infrastructure railway component) of JSC NC KTZ, which is re-presented to the customer and the cost of providing the wagon(payment for the use of the wagon). On this occasion, a number of meetings were held with millers, including directly in the regions, wh ere it was explained that the increase in tariffs was due to changes in the infrastructure component (which is determined by the KTZ).
We try to build long-term relationships with our customers and keep the tariff growth within the limits of inflation. However, there is a serious problem in increasing the turnover of wagons, i.e. with a standard period of, for example, 10 days, the wagon was actually used for 15 days. I.e., the next 5 days of transportation have not been carried out, and this is a loss to the Company. Therefore, the Company is forced to charge additional fees to Customers for this additional period of downtime under loading/unloading. In each specific case, the Company deals with the explanations received from customers and cancels the fees if the downtime occurred through no fault of their own. In 2020, the problem with downtime became widespread, so we received a proposal from the customers themselves to increase the time for loading and unloading from one day to three days for each operation, with the replacement of the fee for this additional period of loading and unloading for the cost of using the wagon.
Customers can choose a new tariff plan for domestic transportation at their own discretion and sign the corresponding additional agreement to the forwarding contract. Those customers who manage to load the wagon in one day can stay within the old tariff plan without signing an additional agreement. Each customer can choose a tariff plan that is convenient for them.
As for the tariffs themselves, during 2020, the cost for using grain carriers in intra-republican traffic was raised by the Company in stages twice. The total increase in the amount was about 300 KZT per ton of grain, which, in terms of the cost of 1 loaf of social bread, is on average 0.15 KZT or 0.2% of the cost of a loaf of bread equal to 83 KZT and can not affect its cost. In the cost of pasta and other flour products, this increase is even smaller and does not go into any comparison with the increase in the cost of grain. Thus, the cost of a ton of grain for 2020 increased by an average of 15,000 KZT.
We understand our responsibility for the market. Most owners of grain wagons offer tariffs for domestic transportation at the level of export tariffs, while JSC «Astyk Trans» offers an average of 28% cheaper for the same distance in domestic transportation. At the same time, the cost of buying a grain wagon, the cost of servicing the wagon and its repair are the same for both the wagon involved in export and domestic transportation.
But low tariffs severely lim it our investment opportunities. The existing tariffs (for domestic transportation) do not allow for a complete renewal of the Company’s fleet. Thus, as the old fleet is decommissioned, it will become more and more difficult to maintain the social tariff.
Nevertheless, realizing the importance of medium — and long-term planning for any businessman, and its responsibility to the market, JSC «Astyk Trans» supports social rates on domestic transportation and maintains a leading position in this direction.
— What news does your Company offer to its customers?
— Work is underway to reduce the costs of exporters, through the introduction of new technological solutions. The company has carried out work on the organization of route shipments in order to reduce the turnover of wagons. The number of route shipments in the export direction amounted to 35% of exports, which was made possible thanks to the discounts provided for route transportation and the efforts to organize them by JSC «Astyk Trans» together with JSC «NC KTZ». In addition, for the first time, in order to ensure the uniformity of shipment, the Company provided preferences for loading on weekends and holidays in December 2020.
— How to increase the transparency and availability of wagon services among market participants?
Participation in electronic trading on online exchanges will allow customers to significantly reduce the time to search for rolling stock during active transportation, increase transparency and accessibility in obtaining transport services, increase competition and the quality of services provided, and contribute to the formation of a fair market value for services.
JSC «Astyk Trans» for the first time from February 1 to 5 of this year presented lots for the provision of wagons in intra-republican traffic at the ETEX site.
If all wagon operators and Customers participate in electronic bidding, this will create a real opportunity to reduce the time and costs of customers to choose an efficient transportation option.
— I think you create optimal conditions for your customers. And at the end of our conversation — what do you go with in 2021?
The Company makes it a priority to ensure the full volume of transportation of its customers by implementing a stable tariff policy on a mutually beneficial basis. The society is always ready for a dialogue, as evidenced by the large number of negotiations and online meetings held during the quarantine with the main market participants, wh ere all problematic questions are not left unanswered. Once again, we thank our valued Customers for staying with us, and we are always ready to meet you halfway in ensuring mutually beneficial cooperation.
— Thank you for the interview!