Ukrainian Railways’ tariffs indexation will increase logistics costs of the mining industry by more than UAH 10 billion per year

Starting in 2021, there was a significant increase in tariffs for the transportation of extractive industry goods. For example, tariffs for the transportation of coal, ore, and limestone increased by 140%. The increase in railroad tariffs disproportionately affects the extractive industry, as a significant portion of the transported cargo belongs to the 1st tariff class (ore, coal).

Further indexation of tariffs will lead to an additional financial burden on the industry, which may worsen their competitiveness and complicate the recovery of production.

Negative impact

Quantitative estimates of the negative impact of the indexation of Ukrainian Railways (UZ) freight tariffs:

1. Increase in overall logistics costs. Given the previous record tariff increases in 2021-2022, which for our industry reached up to +140% for the transportation of key commodities, the new 37% indexation will lead to a further disproportionate increase in the total logistics costs of extractive companies. According to our preliminary estimates, the total increase in transportation costs for the extractive industry could exceed UAH 10 billion per year if this decision is adopted.
2. Increase in production costs. The increase in transportation costs is automatically included in the cost of extracted raw materials. This reduces the competitiveness of Ukrainian producers both on the domestic and foreign markets. According to our estimates, the cost of a ton of ore may increase by at least $2-3, and a ton of coal by $5-7, depending on the transportation distance.
3. The risk of a decline in production and exports. Due to rising costs and reduced profitability of exports, many mining companies may find themselves on the brink of survival and be forced to cut production volumes and, in some cases, even shut down operations. This will lead to a decrease in foreign exchange earnings, a drop in GDP and an increase in unemployment in the regions where our businesses are located. According to our forecasts, the potential decline in exports of mining and metals products could reach 10-15% in the medium term if this tariff policy is maintained.
4. Shift to alternative modes of transportation and destruction of roads. Excessively high railroad tariffs encourage cargo owners to switch to road transport, which leads to an increase in the load on roads and their premature destruction, especially in the context of limited funding for road infrastructure during the war. The increase in road transportation of ore and coal could grow by 20-30%, which would have catastrophic consequences for the state of the road network.
5. Impact on related industries. A decline in production and exports in the extractive industry will have a negative multiplier effect on related sectors of the economy, such as energy, engineering, logistics (automotive, port), etc. According to our estimates, the total losses for the Ukrainian economy could be much higher than the direct losses of the extractive industry and reach tens of billions of hryvnias.

Conclusion

We fully support the thesis that the tariff increase is unjustified, that there are reserves to optimize Ukrainian Railways’ costs, and that it is necessary to reduce tariff pressure on business. We believe that the management of UZ should finally stop the practice of covering its own inefficiency by endlessly raising tariffs and focus on real reforms and optimization of its operations.

The National Association of Extractive Industries of Ukraine insists on an urgent review of the tariff policy of Ukrainian Railways and the introduction of a transparent and economically sound tariff setting mechanism that would take into account the interests of both the carrier and cargo owners and contribute to the sustainable development of the Ukrainian economy.