Corporate blog

WARTIME LOGISTICS: HOW BUSINESSES SURVIVE DURING THE ATO

The complicated military and political situation in the country's east has significantly affected industrial logistics. Logistics in the ATO (antiterrorist operation, or the Ukrainian government’s security operation) area are almost paralyzed today. This is especially true of the territory not controlled by the Ukrainian government.

7 September 2015

The main reason for this is the devastated infrastructure of Donetsk Railways (DR). The DR used to account for 40–45% of the loading and unloading operations of the whole of Ukrainian Railways, i.e. almost every other tonne of the country's freight. Many DR stations are now inoperable in practice. Shipments have been reduced dramatically. The traffic pattern of rolling stock has changed drastically. Only one of the main railway lines leaving the territory not controlled by the Ukrainian government is currently in operation: the Kostyantynivka line. The connection between two main railway lines, Donetsk—Avdiyivka and Donetsk—Mariupol, is still cut. As a result, the movement of goods at individual DR stations has dropped by 80–90%.

Railcars are used less effectively. Trains may be delayed for days in the ATO buffer area waiting for authorization at way stations not equipped to accommodate a large number of cars. The length of routes has also changed, with trains taking a 700–800 km way around instead of the usual 300 km. For example, limestone from United Minerals Group flux dolomite companies, which used to take 24–48 hours to go from Olenivka Station to Kryviy Rih, may now take up to two weeks. And the size of the carriage fleet is shrinking. Some cars were left in Crimea and some remain out of operation in the ATO area.

In addition, there is the old unresolved problem of Ukrainian Railways, whose carriage fleet continues to age. The maximum service life of 80% of the rolling stock will expire in the next 3–5 years. The situation with locomotives is equally alarming, which have also reached 80–90% of their service life and require immediate replacement. Unlike with cars, where fleet modernization can be funded in part by private operators and freight owners, there are no such solutions for the locomotive fleet.

Carriage charges have started increasing. According to all the laws of economics, the recession in Ukraine and the 20% decrease in freight volume should drive carriage charges down. However, because of the hostilities in the country's east, the deteriorating performance of the transport and logistics system, and a shortage of cars, rates have increased, primarily those of private operators.

All operators traditionally set their rates on the basis of the cost of carriage by state-owned railcars, with this being equal to 1.0. In recent years, private operators have applied the average coefficient of no more than 1.05.

Paradoxically, the price is increasing as the carriage volume falls. We have to pay at 1.5 times the base rate to private operators for some destinations. The 50% markup and excess payment results from the military and political situation in Ukraine.

United Minerals Group clay extraction assets are located outside the hostilities area. But here we have another problem: ports. We have lost Feodosiya. We cannot ship clay from Mariupol because the railway capacity is inadequate. So, we were forced to shift to Odessa ports and Berdyansk. But working with them is not that simple either: Odessa ports are overloaded with grain, while Berdyansk bears the cost of the coastal shipping raw materials to Mariupol-based steel mills. For our company, this results in a higher cost for freight operations and ultimately affects the price of products, making them less competitive.

Even after hostilities are over, the restoration of infrastructure will take several months, followed by the startup of production. Destroyed production facilities will have to be restored. New equipment will need to be purchased to replace what has been damaged. It will take significant technical and financial resources to restart equipment after the lengthy downtime.

Source:
delo.ua 

Author:
Sergey Melnichenko
Sales Director