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Ukrzaliznytsia

Market participants point to the need to optimize UZ's costs and improve its operational efficiency

The European Business Association (EBA) has sent an official letter to the Prime Minister of Ukraine asking him to prevent an increase in rail freight tariffs in view of the situation in the real sector and export markets.

According to the letter, the tariff increase will create an additional financial burden for businesses and reduce the competitiveness of rail logistics.

The EBA Logistics Committee members are concerned about the consequences of the tariff increase for business. According to EBA experts, logistics costs have increased significantly as a result of Russia’s military aggression, in some industries – up to 40% of the cost of production. Together with the difficult situation in the energy sector and staff shortages, this significantly increases business costs and worsens the competitiveness of Ukrainian goods in international markets.

The association notes that even current tariffs exceed the capacity of market participants.

Due to the loss of competitiveness of rail logistics, the EBA points out, UZ is losing revenue. According to the company’s publicly available financial statements, in the first 9 months of 2024, it made a profit of UAH 1.6 billion (UAH 8.2 billion in the same period in 2023). At the same time, the carrier’s management expects losses of up to UAH 2.5 billion by the end of 2024. According to the business, the situation with Ukrainian Railways’ (UZ) financial performance demonstrates the need for an urgent review of its spending policy.

According to the EBA, Ukrainian Railways’ main financial problems are not related to freight transportation (which, according to EBA member companies, was 27% profitable in 2023), but are a consequence of the situation with passenger transportation, and in a time of war, covering these costs from the state budget is unrealistic.

Optimizing costs, increasing operational efficiency and attracting customers to the railroad through a competitive tariff policy can significantly improve its financial condition. According to the EBA experts, instead of raising tariffs, it is important to focus on supporting exports. Preventing the growth of logistics costs will help keep cargo on the railroad, preserve foreign currency revenues to the budget and contribute to economic stability.

At the same time, the country’s largest metallurgical enterprises, including ArcelorMittal Kryvyi Rih, Zaporizhstal, and six mining and processing plants, are asking the head of the Ministry of Development, Oleksiy Kuleba, for a moratorium on raising UZ tariffs, Interfax-Ukraine reports.

As noted, the current situation is extremely unfavorable for raising tariffs, as the impact of the war on mining and metals companies and the already high logistics costs are bringing the time when the consequences for the industry will become irreversible.

The steelmakers remind that their situation has deteriorated sharply during the war, in particular due to power outages and rising electricity prices, staff shortages caused by mobilization and migration, falling prices and production volumes.

The share of mining and metals in GDP decreased from 10% in 2021 to 5.7% in 2023, while export earnings fell from $22 billion in 2021 to $5 billion in 2023 and $4 billion in the first eight months of 2024.

However, the industry still accounts for about 40% of Ukrainian Railways’ cargo transportation and seaport transshipment.

The authors of the letter called on the Ministry of Development to help UZ find internal reserves to optimize costs and increase efficiency. They also propose to appeal to the Cabinet of Ministers to revise the owner’s expectations letter to prevent the adoption of the state railroad monopoly’s financial plan with tariff increases.

“At present, Ukrainian Railways has every opportunity to maintain the current level of freight tariffs by optimizing costs and restoring the cargo base, while remaining profitable. We call on the Minister to take into account that raising railroad tariffs for freight transportation is unacceptable in the current circumstances and to introduce a moratorium on raising tariffs for UZ freight transportation until the end of the war,” the letter says.

Ksenia Orynchak, Executive Director of the National Association of the Extractive Industries of Ukraine, believes that a 37% increase in Ukrainian Railways’ tariffs could destroy the mining industry.