Sergei Generalov: "The development of transit can become political issue"

FESCO Transportation Group is consolidating its assets and focusing on container service business. In a recent interview with PortNews FESCO’s President Sergei Generalov has told on the sale of the Group’s noncore assets and outlook of traffic on the Trans-Siberian Railway.

- Mr. Generalov, are you satisfied with the Group’s highlights in 2011? Have you managed to restore your business profitability after the crisis?

- Yes, in general, we have restored the profitability. According to provisional data of the management statement consolidated revenues of the Group will be some more than $ 1 billion. EBITDA, I believe, will reach $ 210 million. This is pretty good numbers for the non- ‘bull market’, characterized by persistent fluctuations. If we talk about our operations results of production, then we have achieved a substantial growth in different areas of our business, which ranges from 27% to 40%. Therefore, we expect good results.

Actually, it’s difficult to forecast net profit numbers, since we do not yet know how much the cost of the fleet will decline due to its revaluation on the market, which, in accordance with IFRS, will affect the bottom line of profit and loss account. For now, our fleet earns little, the market conditions are poor, which leads to lower estimated value of ships.

In 2012, by the way, for the first time the consolidated statement of FESCO will include the performance of OJSC Commercial Sea Port of Vladivostok (CPV), since we completed the deal for acquisition of the remaining shares of the port. In 2011, the asset was taken into account as an investment one, because at that time we owned a 50% stake in the company. I think, the acquisition of CPV business will push the consolidated EBITDA to grow by about $40 - $50 million.   

- When are you planning to legally complete the full consolidation of CPV?

- During 2012, all legal entities in the stevedoring business of the port of Vladivostok will be merged into one legal entity - JSC CPV. CPV will be a single stevedoring company in the port of Vladivostok operating on Berths Number 3 - 17, with a common reporting format.

- Why were you bidding for the 50-percent stake in CPV?

- First of all, the buyout of the remaining 50% shares will allow us to consolidate all those revenues, generated by stevedoring business and to manage them. Secondly, for us, to port is a key point of our integrated services, the point where the synergy is formed between the sea port and railway. It is therefore very important that the port has one master. If we look back and recall a number of uncoordinated actions, which were caused by disagreement of different owners on the development of port infrastructure, it becomes clear – back then we were all losing, both we and former partners and CPV and Vladivostok Container Terminal and the business in general. Now is probably the most important task of the port of Vladivostok.

Now, perhaps, the most important task of the port of Vladivostok is it’s development consistent with the capabilities of the railway. The possibility of a significant increase in the number of our container trains-shuttles is directly related to the expansion of railway infrastructure capacity, not only inside the port. There is a need to upgrade and expand the near-dock railyards, to build other infrastructure. For us now it's a number one priority.

- Is there a project to develop railway infrastructure in the port of Vladivostok? Are you participating in it?

There has been no single expansion project of Vladivostok railway so far. There are scores of proposals of RZD (Russian Railways) and a package of our proposals. They have yet to be consolidated. But we are not just sitting around idly. Over the past three years we have invested over RUB 88 million in the expansion and extension of rail tracks within the port of Vladivostok. With this money we’ve built an additional rail facilities, with switches, purchased a specialized container crane for handling container trains, our own shunting locomotive. In addition, we have developed and launched the system of operational control and accounting information on the movement of rolling stock at the Vladivostok Container Terminal.  

In 2012 we expect to utilized all available rail capacity. In the maritime sector we have a lot more opportunities for development: it is possible to actually double the waterfront, although it is still not operated by 100%. There is additional land area owned by Russian Troika, but without sufficient railway capacity. And most importantly, we need to reach an understanding with RZD for the implementation of the agreed investment to eliminate ‘bottlenecks’.

- How long the railway traffic capacity deficiency is going to persist in Vladivostok port?

- This will largely depend on our maritime policy. The capacity of all marine container terminals at the port of Vladivostok is now ranges from 440,000 to 450,000 TEUs. Last year the volume of containers handled across the port’s berths totaled 432,000 TEUs. That is, the maritime component of the container throughput is close to the limit. We plan to boost it in future to 650,000 TEUs. Among the measures, is the upgrade of crane equipment (a few new cranes are scheduled for delivery in May-June 2012 on Berths # 14-15).

In the volume of containers handled at the port are seaborne containers shipped by FESCO lines to Vladivostok for further transshipment and transportation by FESCO’s coasting vessels to the Russian Far Eastern ports. 

Railway, among other cargoes, is able to handle 150,000 TEUs of containers a year. This is a great figure, because only a couple of years ago, the railroad shipped no more than 10,000 TEUs per year, while the remaining boxes were delivered to the local market and hauled from the port by trucks. In the past year we have transported from Vladivostok by rail more than 110,000 TEUs. I think it's really an achievement not only for our business - everyone understands what a burden on the city's transport network are the container trucks.

Of these approximately 80% of containers were delivered to Moscow. In addition, there is a regular train to Novosibirsk.
The rest containers were transported by trucks to the local market. This share will be growing in proportion to the volume of consumption in the region. This is not going to be a surge, but it will be growing.

- Why containers are shipped from China via the Trans-Siberian to Moscow?

- Because it is nearly twice as fast as the ocean route. Let me explain with an example. Take a 40-foot container on the Shanghai-Moscow route. By rail via Vladivostok its transportation to the station in Moscow will take approximately 25 days. Ocean route, taking into account all phases (transshipment in Europe, feeder services to St. Petersburg and trucking to Moscow) – it’s a minimum of 45 days. At the same time intermodal transport through the Trans-Siberian railroad will always be more expensive than by sea. The only question is how much.

Today the difference is about $ 2.500 per a 40’ container, and the optimal value for this difference is approximately $ 1.500. In this case the client gladly pays for the speed safely. Since there are different categories of goods, with varying sensitivity to the transit time, the demand for accelerated delivery through the Trans-Siberian Railway still exists. But its absolute value depends strongly on the pricing policy of ocean services.

- How the difference could be reduced?

- Actually, it’s impossible to implement by our own efforts   
We must understand that presently we have quite a tough situation on the competitive market. Large operators of Trans-Pacific services have started serious price wars. Most of them have been operating for a long time in the red. This is the impact on this market the financial crisis, a huge surplus of tonnage in the segment of ocean-going container ships, and the desire to scramble for market share at any cost.
While this war will continue, to achieve the required margin of $ 1.500 per 40’ container will be extremely difficult.

But when the market of ocean services bounces back to normal and the lines will begin to restore its profitability, and enventually this will happen, then the price gap could be reduced. The recent data on rates hike of ocean lines in March and April suggest that this will happen very soon.

- Maybe we should think about cutting down on tariffs on the Trans-Siberian Railway?

- Of course, RZD’s tariffs are not cheap at all, it could be changed, and we have a lot to do. But today the main problem is there, on the ocean routes, not here. Among the problems that we can solve by ourselves on our own territory, are ‘bottlenecks’ in the railway infrastructure and customs.

The problem of capacity of the railway is the most urgent not for containers but for bulk cargoes, such as coal. So far, the containerized volume, in general (if we count in tons), accounts for only 2.5% of total traffic on the network of Russian Railways. Accordingly, these 2.5% can be shipped out of turn any time. There is no problem to get a smooth schedule to Moscow. Today the average journey of our shuttles on the Vladivostok-Moscow route is 9.7 days. But at the same time, the average stay of containers at Vladivostok port’s customs post reaches 15.3 days! That's what we need to deal with. If the client will be gifted the same two weeks and for the same money, the competitiveness of the Trans-Siberian route, will definitely increase.

We try to minimize this time for our customers. Since early this year we have implemented the experiment with advanced containerized cargo electronic declaration.

- Are you set to boost your share in Transcontainer to majority ownership?

- The Russian government decided to sell some shares of Transcontainer back in 2009. In September 2009, FESCO Group offered Russian Railways to buy the 35-percent stake to be auctioned off. But we realized that it will be futile to offer our alternative methods of TransContainer privatization, when the scheme had already been approved by the government, and proceeded the way we had mapped out. In November 2010, RZD held IPO, we took part in it and got quite a large block of 12.5%. In accordance with the logic of reform, RZD was to sell more shares: 25% first, then another 25%. This was the decision approved by the Board of Directors of RZD in April 2011. For some reasons, the decision did not pass the government approval, and the issue was postponed and is in such a state. There are three different points of view: to sell a 25% stake, as it was previously planned, not sell anything, because it is not the time, and auction off everything as quickly as possible (50% + 2 shares). These three formulas are still discussed in the government circles, but without any significant practical progress so far. We hope that the government will finally dot the Is and cross the Ts.

Today Transcontainer is a good, profitable company. By the 2011 year-end results, it can show a record profit in the company history. We are happy, as stockholders, about its work, and will propose to the Board of Directors the payment of large dividends - up to 30% of net profit.
By the way, our rail units Russian Troika and Transgarant have also demonstrated excellent performance, and we are proud of it.

- What is the future of Transgarant? Do you plan to sell it in 2012?

- We're really working on the sale of non-containerized business of Transgarant. As part of our strategy announce earlier, we are going to focus on container services and assets. Accordingly, the Group will be gradually divesting itself from businesses and assets not related to containerized cargo. To sell off each of these assets or businesses we are waiting for the best time, to get the maximum return on our investment.

Now, this is the right time to sell Transgarant after Freight One Company has been sold. In fact, the sale of FO stimulated the serious process of consolidation of the rail market in Russia, and this is confirmed by the significant interest of market participants to assets of Transgarant. At least, we have signed the "non-disclosure agreements" with more than a dozen of potential buyers.

- Let's go back to the container market. According to RZD estimates, the potential transit of containers by railway from China to Europe could reach one million TEUs. Do you agree with this forecast? Will Russia be interested in such transit?

- Presently, we do see flows of Chinese goods passing through the territory of Russia on the East-West trade. We could expect such goods entering the country, for example, through the port of Vladivostok and then hauled on our rail network, for example, to Finland, but there are none. The reason is the same, mentioned above, very low seaborne shipping rates. Today, there is no economic base for the transit of large volumes. The freight flows will appear only when the ocean lines begin to restore their profitability.

But there is another small transit freight flow. The overland transit from northern and western regions of China through Kazakhstan and the Russian territory bound to Central and Eastern Europe.

In 2011, the volume of transit traffic through the Russian Railways network was 174,000 TEUs, including about 118,000 TEUs of loaded containers. There are more than 50 participants on the market. However, the major players, which provide over 70% of transit traffic, are FESCO, Transcontainer and two foreign companies: the Latvian company AlpaTsentrums and Kazakh company Transsystem. The 2011 year-end volume of transit traffic by FESCO Group totaled more than 37,000 TEUs. Transcontainer hauled 34,000 TEUs of transit cargoes.

Most of the containers carried by TransContainer is the transit from China through Zabaikalsk.

And almost all of our volume has been achieved by regular train Baltic Transit, which delivers cargo shipments from the Americas and Europe through all the major ports of the Baltic with destination in Kazakhstan, Central Asia, Afghanistan, Iran and China. In September 2011 we launched in conjunction with Estonian Railways, another commercial project for the delivery of containerized cargo from Estonia (through Tallinn port) by the Baltika-Tranzit-2 fast train bound to the eastern Kazakhstan rail stations.

There are some prospects for transit traffic growth. However, the shipments from Southeast Asia (SEA) to Europe are main potential transit cargoes for Trans-Siberian Railway. Today, the major volume of exports from China and other Southeast Asian countries to Europe are transported by maritime transport, without the railroad.

Among the reasons for this, in addition to low rates of seaborne shipments is the tariff policy of the Russian government in respect to rail component of transit traffic, which makes the pass-through transportation rate noncompetitive as compared with rates for the deep sea shipping. We fully support the idea of RZD to remove price regulation of transit, to make the tariff for transit traffic free.

There is also the imbalance in freight flows from Southeast Asian countries to Europe and from Europe to Southeast Asia. Because of this imbalance it is necessary to ensure the return of empty containers back to the countries of Southeast Asia, which makes the overall economy in the current tariffs unacceptable.

China has an alternative to transport its cargo by sea, taking into account that almost 80% of the Chinese industry is based at a distance of no more than 200km from the sea. However, they are now actively developing central China, where they create the infrastructure and new industries, a base for future transit through Kazakhstan and Russia to Europe. I think this volume is formed very quickly, within 3-4 years. Therefore, we need to be ready to catch in time the transit freight and gain from it.

But we will not see in the foreseeable future the million TEUs on the Trans-Siberian Railway. Noteworthy, we ordered a study at a Dutch consulting company that had developed the world's container trade mathematical model. Based on this model they have calculated our freight volumes, including transit traffic. According to this study, the potential for cost-effective transit through the Trans-Siberian Railway with the existing tariff does not exceed 200,000 TEUs. Last year, the Trans-Siberian Railroad saw 40,000 TEUs of transit goods. This means that we still have a margin for transit growth. And with the reduction of RZD tariffs, or with an equivalent significant increase of rates on ocean routes, the network capacity increases to 500,000 TEUs.

The main point is: the Trans-Siberian throughput will be increasing mainly not by boosting transit volumes but by increasing containerization of Russian trade. And this may generate millions TEUs. Do I believe in transit? Yes, of course, but I do not think that it is transit cargo that will be dominant on the Trans-Siberian Railway.

Interviewed by Nadezhda Malysheva.