Relief for rail woes as freight rate rises

The largest increase in the tariff in a decade comes as the Ministry of Railways seeks to improve profitability amid mounting debt load

PUBLISHED : Monday, 25 February, 2013, 12:00am
UPDATED : Monday, 25 February, 2013, 4:52am

The largest increase in the mainland's rail freight rates in a decade is to subsidise the country's loss-making high-speed railways, said James Chung, an analyst with MasterLink Securities.

One reason for the losses made by the high-speed-rail services was the central government needed to keep the ticket prices low to make them affordable to the public, Chung said.

On Wednesday, the Ministry of Railways and the National Development and Reform Commission raised the rail freight tariff by 13 per cent, the largest rise since 2003.

In the past 10 years, there had been eight increases in the charges, including this year's, Chung said.

Last year's 9.5 per cent jump was already high, Bocom International analyst Geoffrey Cheng said.

"The cost of rail operations is increasing. The Railways Ministry's target this year is to improve profitability, given its high debt load," Cheng said.

"High-speed rail is a heavy debt burden. The escalation of the ministry's debt level has been in line with its high-speed-rail programme."

Prior to 2008, borrowings did not exceed 50 per cent of the expenditure on rail projects on the mainland, but after 2008, when the country launched its high-speed-rail network, the debt percentage was allowed to reach 70 per cent, he said.

The ministry's gearing ratio rose to 61.8 per cent at the end of September from 53.06 per cent at the end of 2009, while its debt doubled to 2.6 trillion yuan (HK$3.2 trillion) from 1.3 trillion yuan, Chung said.

Last year, the ministry had 320 billion yuan of revenue from freight, but this was only slightly above its debt servicing of 300 billion yuan, Chung estimated. Freight accounted for 50 to 70 per cent of the ministry's revenue, and passenger services, including high-speed rail, accounted for 20 to 30 per cent, he said.

"High-speed railways in every country are loss-making because the costs are very high," Chung said.

Although a few high-speed-rail routes, like the Beijing-Shanghai line, had 70 per cent occupancy, high-speed trains in central and western China were less than half-full, Chung said.

He predicted the ministry's debt would continue to rise because the central government intended to aggressively build more high-speed-rail lines.

Last month, capital expenditures on railways jumped 71 per cent to 21 billion yuan, the ministry's website said.

Beijing would spend 1.88 trillion yuan building 16,448 kilometres of high-speed-rail links between 2011 and 2015, a bond prospectus issued by mainland train-maker CSR said.

Unless there was severe inflation or an economic crisis, high increases in rail freight rates were very likely to continue in the next few years, Cheng said.

"The largest increase in the rail freight tariff since 2003 reinforces our view that inflation will rise above 3.5 per cent in the second half and lead to two interest-rate rises," a Nomura report said.

The increase in rail freight rates suggested the central government might raise the tariffs of electricity and other utilities, Nomura said.

"This, together with slowing growth and a tight labour market, supports our view that inflation will rise to 3.5 per cent for the full year in 2013," it said.

Whether the ministry would be able to raise rail freight rates in future depended on whether the coal and electricity industries would accept rising costs, Chung said.

Most electricity plants on the mainland were coal-fired. In 2011, coal accounted for 64.2 per cent of the country's rail freight, he said.