Despite cut in fuel prices, freight costs stay firm

Following two rounds of fuel price cut–Rs 4 for diesel and Rs 10 for petrol–by the government in the last two months, steel and cement manufacturers have expressed concern that road transporters have not cut freight tariff.

Steel and cement players whom FE spoke to said they could not pass any benefit to customers unless transporters reduce prices. The cement industry transports approximately 60% of the commodity by road, and freight cost accounts for about 18-20% of the operating costs for them. For steel, freight cost is 4-5% of the total cost, which is not very significant.

HM Bangur, CMD, Shree Cement, said, ?We don?t expect the freight cost to decrease immediately. The monthly contracts are already done. However, maybe with competition getting intense, there might be some fall after 10-15 days.?

The government first, on December 5, 2008, had cut petrol prices by Rs 5 and diesel prices by Rs 2 with immediate effect. However, the industry had not received any intimation from the transporters about a cut in the freight rate then. Later, the government announced a similar cut in petrol and diesel price on January 28, 2009, which again did not result in any freight cut by the transporters.

?Transporters have not yet reduced any prices, which they should have done immediately after the reduction in diesel prices,? said Anil Surekha, executive director-finance, Ispat Industries Ltd. Vinod Juneja, MD, Binani Cement, said, ?We will increase cement prices by Rs 3-5 per bag in a week?s time across Maharashtra. It is unfortunate that the freight rates are not going down and we are unable to pass on the benefits to the consumers.?

Transporters, however, blame the poor load factors and taxes for the high freight costs. Says Vineet Kanaujia, GM – marketing, Safexpress, ?From a supply chain point of view, our utilisations have decreased ie, the load factor is not 100%. Also, taxes like the toll tax have increased, due to which the bottomline of the transporters have taken a hit. Hence, it’s not feasible to change the cost structure at the moment.?

Currently, the freight charges are about Rs 1.25 per tonne per km with an average of about 450-500 km for a company.

According to experts, diesel prices had increased 9-10% y-o-y in FY09, which has led to an increase of Rs 1.5 to Rs 2 per bag in FY09.

According to players, the freight price depends on the demand and supply and if the economic activity increases, the transport prices are likely to go up.