Mark Carter

2017 a milestone year for rail, good and not so

COMMENT: 2017 is a big year for rail anniversaries in Australia, some important, some not so important, some to celebrate and some, well probably best if you make up your own mind. Mark Carter reflects on three of the most notable milestones.

 


Most would agree the anniversary of greatest significance will be the this year’s centenary of the Trans Australia Railway (TAR) which was completed in October 1917.

Events planned for this October to celebrate the 100th anniversary of the opening of the standard gauge railway between Port Augusta and Kalgoorlie are quickly gaining pace.

On 17 October 1917, two track laying teams, one working eastward from Kalgoorlie and the other westward from Port Augusta, met near Ooldea on the Nullarbor Plain. There was no official opening at the time, no doubt due to the nation’s involvement in the First World War. Five days after the rails were joined, the first transcontinental passenger train departed Port Augusta for Kalgoorlie on 22 October 1917.

Fifty years later the 50th anniversary of the joining of the rails was commemorated by the former Commonwealth Railways with the installation of two monuments at Ooldea in 1967, though over time these timber structures have virtually disintegrated under the harsh outback conditions.

Australian Rail Track Corporation has manufactured two replicas of the 50th anniversary monuments, which will be unveiled at the same site on Tuesday 17 October, to commemorate the ‘joining of the rails’ and all of the track workers who over the years have maintained this important link.

Well over 500 people are expected to travel considerable distances to attend the unveiling at this remote location, with the event sponsored by businessman and philanthropist Dick Smith.

Further celebrations are expected to follow at Port Augusta on 22 October to commemorate the 100th anniversary of the departure of the first westbound passenger train. The nearby Pichi Richi Railway intends to operate a special steam train to Port Augusta from Quorn to coincide with displays and exhibitions mounted at the Port Augusta railway station.

The National Railway Museum at Port Adelaide will be launching a special Trans Australian Railway Centenary Exhibition from Friday 22 September, culminating with a formal TAR Centenary cocktail function at the museum, sponsored by Bowmans Rail, on Friday 13 October for special guests and rail industry participants.

The 1700km long TAR was completed long before the phrase ‘’nation building’’ entered our vocabulary, but obviously the term would be every appropriate providing it providing the first reliable land link between the east and west of the country across incredibly hostile terrain, and all achieved during a time of war.

Unfortunately, one gets the feeling that if this kind of project was put forward in today’s political climate the chances of getting it off the ground would be slim. It is worth remembering that for much of its early life the TAR was primarily a passenger carrier and much of the freight was supplies to keep the railway running.

It was only after dieselisation in the 1950s that it started to develop as a freight route to eventually grow into the strategic corridor it has become today, commanding as it does over 80% of the East West land transport freight task.

It is a tad ironic that less than a month after theses celebrations it will be the 20th anniversary of the break-up of the federally owned Australian National (AN), the direct descendant of the Commonwealth Railways which had been established in 1917 to administer the TAR.

The events leading up to the sale of AN in 1997 are complex. A good doctoral thesis could be written on AN’s demise which would have to draw on the early days of competition policy, the move to separation of above and below assets, and the sale of government business – all of which have brought huge changes to the industry in the last 20 years.

The sale of AN heralded the privatisation of much of the Australian rail industry. AN’s mainland freight assets were sold off to US regional operator Genesee & Wyoming Inc; the interstate passenger assets to a consortium operating as Great Southern Railway; and the Tasmanian assets to US railway mogul Ed Burkhardt’s Australian Transport Network.

The interstate track controlled by AN stayed in government hands through its shareholding in Australian Rail Track Corporation, and remains so to this day. And of course, ARTC has since grown to encompass the entire interstate network west of Kalgoorlie through to Brisbane.

It’s interesting to reflect that of the original purchasers of the AN business only G & W has survived. The interstate passenger business has seen its ownership structure modified several times and is now in the hands of private equity. Tasmania’s rail services have gone full circle and are now back in government ownership.

And of course, this also means that G & W will celebrate their 20th anniversary in Australia in November as well. The wave of major US railroads rumoured to have been coming to Australia’s shores back in the 90s never materialised and after a few other early starters fell by the wayside it was left to regional operator G &W to fly the US flag for many years until the more recent arrival of Watco in Western Australia

Over those 20 years G & W has done well for itself. There have been ups and downs, but their Australian operations, fluctuating exchange rates aside, have always been one of the company’s biggest money spinners. Things of course got even bigger last year with their latest acquisition of the Glencore rail business and assets in the Hunter Valley.

While the Trans Australian Railway has well and truly met the test of time, the jury is still out on whether the gradual privatisation of the nation’s rail freight assets that started with the sale of AN, was a good idea.  Fair to say it’s not been the rip-roaring success promised at the time, but with the way things were going under government control back in the 1990s, things could have turned out a lot worse.

It will be interesting to see if the TAR is around in another hundred years’ time and whether its ‘nation building’ status will have been matched by that of the long anticipated Inland Rail project?

Malcolm Turnbull on a tram. Photo: Facebook / Malcolm Turnbull

Well that was a nice surprise

VIEWPOINT: The Federal Government stunned everyone back in May with an outpouring of largesse for the rail industry in its 2017/18 budget. Mark Carter argues that now would be a good time for industry to capitalise on this and generate some positive headlines for rail.

 


There can be no arguing that the government’s $20 billion package of funding, investment, equity – call it what you will – directed at the rail industry is historically unprecedented.

The long-term investment program represents the largest ever commitment to rail by an Australian federal government. Over the next year, the true devil in the detail will become clearer, but for now it is something that should be capitalised upon, and indeed celebrated.

Half of the funding will go towards an $10 billion ‘National Rail Program’ for new and planned urban rail projects in Australia’s major cities, as well as providing for better connections between these cities and regional centres.

This investment progresses the government’s ‘Smart Cities’ agenda, recognising that urban rail projects have the capacity to provide opportunities for urban regeneration and create better integration between land use and transport planning. Quite a turnaround from the anti public transport rhetoric of the Abbott administration.

The other major commitment is to the $8.4 billion for construction of the Melbourne to Brisbane Inland Rail project through an equity injection to Australian Rail Track Corporation, who will be responsible for overseeing construction of the bulk of the project. The size of the amount surprised many in the industry who had expected only a fraction of this investment at this stage.

There was also around $1.5 billion in loose change for a variety of projects including $500 million to upgrade regional rail networks in Victoria; $792 million for Perth’s suburban rail Metronet; and $30 million towards development of a business case for Melbourne Airport Rail Link.

Unfortunately, it didn’t take long for the knockers to emerge and turn the headlines surrounding these announcements around to focus on gripes about certain states being been left out of the funding cycle, someone’s pet project missing out, or not enough funding for specific projects.

It is true that these announcements were a little light on specifics, but there was no pressure on the government to make a commitment of this magnitude. They could easily have carried on throwing out the odd crumb for public transport here and there, and left the Inland Rail project dangling once more in mid-air, much as they have been doing for the last five years.

To be frank, anyone who expected the $20 billion to fall out of the sky all at once has unrealistic expectation as to how the system works and rocks in their head to boot.

Shadow infrastructure minister Anthony Albanese has criticised the announcement saying no money has been set aside until the 2019-2020 financial year.

“The third Budget paper shows a A$200 million commitment to the National Rail Program in 2019/20 and A$400 million in 2020/21, with no further projections offered at this stage.”

True Anthony, but I think I can point to examples of every government, federal and state, pulling that stunt on more than one occasion.

Fact is, now is the time to seize on the government’s intent and pressurise them to bring forward more funding by ensuring quality projects are put forward.

The federal government says there are several city-shaping rail projects around the country at various stages of development.

Projects that are eligible for funding include, but are not limited to: Cross-River Rail in Brisbane; AdeLINK extensions to the Adelaide tram network; potential rail links to Melbourne Airport and the proposed Western Sydney Airport; and Perth’s Metronet rail project.

Regardless of the caveats and time frame, the rail industry needs to seize the moment here. We have the single largest funding allocation in the history of the industry and we should be celebrating and dancing in the streets.

Plans should be put in place to ensure that the government sticks to its promises and at the same time use this largesse as a foundation to ensure the continuity and longevity of funding for rail in future budgets.

And while the economic rationalists argue about rates of return and the impact on credit ratings, just maybe the government has realised that the economy has been stagnant for far too long and needs stimulus.

Turnbull’s promised ‘jobs and growth’ shows no signs of materialising and the global economy has been in a slump for over a decade.

Things aren’t gonna get any better anytime soon, so if a $20 billion injection into our rail industry can play a small part in turning things around, then I ain’t complaining.

While the slogan may have been dropped – this is one way to turn ‘jobs and growth’ into a reality

The rail industry has not been upfront enough in promoting its own cause in recent years – the governments obvious faith in rail provides an ideal opportunity for it to get out there and spruik the industry’s benefits.

Rather than squabbling over the spoils and whingeing about what’s not there, the industry and its stakeholders need to band to together to ensure that the government delivers on this commitment now and beyond.

After all, $20 billion is $20 billion – enough said!

Rail turning over new leaf in 2017

ANALYSIS: After a tough year for rail in 2016, things are looking up already in the new year, Mark Carter writes.


Last year was not one of the best for the rail industry, with freight volumes down across the board, especially in the minerals sector, combined with a general lack of direction.

But with big changes at the top recently, and the movement of a bumper harvest in full swing things may be looking up.

Remarkably, Australia’s three largest freight operators have all seen changes in senior management in the last few months.

After six years as CEO and managing director of Aurizon, Lance Hockridge, who had overseen the transition of the company from QR National to private ownership, stood down in December.

His replacement, Andrew Harding, was formerly with Rio Tinto. It will be interesting to see what leadership strategies he will transfer from the mining giant to the rail operator over the coming months.

One of Harding’s first jobs was to announce Aurizon’s results for the first half of the 2017 financial year.

Despite significant write downs, totaling well over $300 million, the company still made an after-tax profit of $54 million, considerably up on the $108 million loss recorded in the same period for 2016.

Coal volumes remained relatively flat, however, decreasing by 1% to 103.5 million tonnes for the six months. Aurizon’s expectations for coal haulage for the full year 2017 remain unchanged at 200-212 million tonnes.

Its intermodal business continues to be a problem child and despite volumes increasing towards the end of last year, they were static for the last reporting period and revenues are down.

Harding says Aurizon’s intermodal business has been restructured as a standalone function with full profit and loss accountability, reporting to directly to him pending the conclusion of the broader review of the company’s freight activities expected mid-year, which may also see service cuts in other areas.

This has given credence to rumours that have been circulating for quite some time now that Aurizon’s intermodal business is up for sale at the right price.

It could make a nice addition to QUBE’s portfolio, although players may also be interested.

Unfortunately, we won’t be getting the same kind of detailed reporting from Pacific National (PN) as we do from Aurizon for a while. With the complete separation of PN from the Asciano business in August 2016 and purchase by a consortium of foreign superannuation funds and investment banks, volume and financial data is no longer readily available.

It’s hard to know how the business is really performing. Certainly, to the outside observer the company seems fully focused on its coal interests, but there seems little emphasis on growing the business outside of this area.

The company had a recent win, securing a contract with Glencore for the movement of various traffics associated with the Mount Isa mines in Queensland, although this has come at the expense of Aurizon.

But elsewhere, especially in Victoria, it has lost several contracts over the last couple of years without picking up any new business.

The fact that under the new owners the PN business will have its second CEO in just over six months won’t be helping. Former PN Coal boss David Irwin took over the reins of the company at the time of the sale, but stepped down last month citing personal reasons.

And over at Genesee & Wyoming Australia the search is also on for a new chief executive after CEO Greg Pauline parted ways with the company just before Christmas, after a four-year stint at the helm.

It’s possible more changes could be on the way, with GWA doubling its size late last year with the $1 billion plus purchase of the Glencore coal rail business, and the taking on board of Macquarie Infrastructure and Real Assets as a 49% partner.

Possibly another prospective buyer for Aurizon’s troubled intermodal business?

All three of these companies will be watching closely as SCT Logistics seeks to build up its new intermodal service on the North South corridor between Melbourne and Brisbane which commenced towards the end of January.

Traffic is already way up on that previously carried by Aurizon on SCT’s behalf on the corridor and with SCT’s newly opened terminals at Barnawartha and Bromleton, North South freight services are in for a shake-up.

And to end on another positive note the movement of this season’s bumper harvest is going gangbusters, providing plenty of business for rail operators across Australia, most noticeably in New South Wales and Victoria.

In NSW no less than four operators – Pacific National, Aurizon, QUBE and Southern Shorthaul Railroad (SSR) are competing to run export grain services from country areas to Newcastle and Port Kembla.

Older locomotives and hoppers that have been in storage for several years have been reactivated and given a new lease of life pressed into grain service once more, though crewing resources are being stretched in some areas.

In Victoria, V/Line says record amounts of grain have been transported on the rail freight network, with 69% per cent more trains running so far this financial year, despite some serious curtailment of services due to heat impacts on the track infrastructure.

The total harvest of 10.2 million tonnes was more than double that of last year and with the recent arrival of QUBE onto the broad-gauge network hauling grain for the very first time, it is to be hoped that the increase will soon reach 100% or more.

Let’s hear it for the little guys

ANALYSIS: While the big end of town continues to put most of their eggs in the coal basket, there is a small but growing band of small- and medium-sized freight operators that seem prepared to pick up business the other guys reject. Mark Carter looks at the new kids on the block.


If there’s been too much doom and gloom in some of my recent columns, let’s try and lift the spirit a bit by looking at one of the positive aspects of the rail freight business today.

I stand by my criticism of the two major players’ laissez-faire attitude to the general freight segment of the market, but from personal observations during a trip east in October and other information sources there appears to be a mini-revolution underway amongst some of the smaller freight operators.

It would seem that in New South Wales, and to a lesser extent elsewhere, considerable volumes of containers and new grain flows are making their way onto rail, with the latter’s bumper harvest seeing locomotives and wagons hurriedly pulled from storage and pressed into service.

It has been refreshing to see businesses such as Fletchers and Crawfords being prepared to invest in new high horsepower locomotives and rolling stock to operate what are comparatively short haul operations linking regional freight flows to Port Botany.

Agricultural processor and exporter Fletchers has created its own rail intermodal division to handle its transport needs with a thrice weekly intermodal service between Dubbo and Port Botany carrying export containers and loading to over 6,000 tonnes per trip, requiring three 4400hp locos for the train.

Road haulier Crawfords Transport has purchased two similar locomotives to handle its daily intermodal service between Sandgate (Newcastle) and the Port.

Elsewhere we are seeing containerised logs being pulled out of Bathurst and Goulburn and substantial flows of mineral ores around the state.

It’s not all been plain sailing: The trial service started by Access Recycling in 2015 to move scrap metal from Canberra to Port Botany came to a sudden halt with the crash in the price for scrap and problems with the loading facility in Canberra.

Last word I heard though they were still keen for the service to restart and also expand their rail footprint in NSW. In a conversation with their MD at the time of the launch of the service, he was quick to point out how it was so much easier just having one train to deal with rather than the multiple issues associated with managing a fleet of trucks and drivers.

Talking to SCT Logistics MD, Geoff Smith a few weeks ago he raised a similar point saying, “Customers are expecting a medium to long term change away from road. They realise if you have one train replacing 60 B-doubles then you can significantly reduce your Chain of Responsibility exposure.”

While SCT remain primarily an interstate operator, in recent years they have established port shuttles in Adelaide, Melbourne and Perth and also service the Wimmera region in Victoria via the terminal located on the ARTC mainline at Dooen.

NSW-based Southern Shorthaul Railroad are quiet achievers who have been gradually building their business over the last decade. While having some of the hallmarks of a typical US shortline operation, they remain an open access operator – the Australian regulatory regime continuing to discourage the traditional shortline model.

SSR have used open access to provide services for a diverse range of customers, for example from managing the Fletchers Dubbo train through to heavy coal trains for Centennial Coal in the Blue Mountains and the Hunter. Their entry into the grain market in NSW has seen a number of innovative solutions initiated for producers and handlers.

In a state where just about every regional rail line has been shut down in recent years, Bowmans Rail in South Australia is a remarkable entrant to the market, growing in stature from its original business running port shuttles over 100km of ARTC mainline between Bowmans and Port Adelaide.

The company scored a major coup at the beginning of 2016 winning the Cristal Mining mineral sands traffic between Broken Hill and Port Adelaide away from Pacific National. With some critical mass behind it the company is now looking at further expansion opportunities in 2017 and hopes to commence an Adelaide to Leigh Creek intermodal service early in the new year servicing the mining and petroleum industries.

QUBE also deserve a mention despite their ASX listed status. Their expanding rail operations are more akin to those of a regional operator and they have picked up several traffic flows In Victoria and NSW that the larger operators had neglected or were on the point of abandoning.  While many of its freight flows are tied to traditional port related supply chains, it had also taken up a number of more traditional bulk hauls including grain.

It will be interesting to see what happens with the erstwhile Freightliner intermodal operations associated with the cotton industry in NSW. Now under the ownership of Genesee & Wyoming Australia, will its current operations remain as is or will GWA use them to launch an expanded regional presence in NSW?

Of course this mini revolution is only scratching the surface and not everyone is popping champagne corks just yet. I had a long conversation with former CRT owner Col Rees late last year, who is in the process of growing his Regional Connect rail business based on Ettamogah hub near Albury/Wodonga.

He was quick to point out that transport decisions and government investment are still carried out in an ad hoc manner with little regard for policy or planning. He reminded me too that our current access regimes and regulations, especially in relation to regional branch lines are skewed against the little guy.

I have pointed this out in past columns that something more akin to the US shortline model would be more appropriate for our branch lines. More of that and Col’s thoughts in the New Year.

What now for Old King Coal?

COMMENT: A few months ago, coal seemed to be on the nose – it still is – but with the recent jump in global prices and mothballed mines re-opening, the champagne corks appear to be popping once again in boardrooms around the world, Mark Carter writes.

Bulk coal movements account for around half to two thirds of the revenues of our three largest rail freight operators and arguably the pursuit of further coal dollars often deflects their attention from lesser traffic flows.

Throughout the first decade of the 21st Century and continuing post Global Financial Crisis, Australian coal closely followed iron ore in leading the mining development boom with a phenomenal growth in exports.

But over the last couple of years, while tonnages have remained high, things have started to slow down and a new set of dynamics is starting to emerge, in fact in Europe and the US these are already emerging, that challenge the ‘civilizing’ benefits of coal.

Government action on carbon emissions and a rapidly escalating shift to renewable energy is starting to have an impact around the globe and the question is, how long before these changes start to catch up with Australia?

I’ve highlighted before in previous columns that I’m not convinced that our major rail operators in Australia are taking these changes seriously and starting to position their businesses for the post-coal era.

It’s not that it will happen tomorrow, but the winds of change are blowing strong and show no signs of abating.

We saw some token words around a year ago from Aurizon that it might shift some its focus away from coal to its intermodal and general freight business, though little seems to have happened since then.

In fact with the sudden rapid upturn in prices for metallurgical (coking) coal in the last few months and softer upturn on thermal coal prices, Aurizon appears to be quick in jumping back on the coal bandwagon.

Whether we are witnessing a full on coal revival or this is just a ‘dead cat bounce’ remains to be seen.

Coal represents 68% of Aurizon’s revenue and outgoing Aurizon MD, Lance Hockridge was recently quoted as saying, “We believe Aurizon’s assets are well placed to serve continued demand for Australian coal as demonstrated by the steady increase in Australia’s coal exports since 2010.”

According to Aurizon over one billion additional people in Asia will gain access to electricity by 2040 while an additional two billion will double their current levels of per capita consumption.

Acknowledging that a greater share of investment in Asia will go towards renewable energy capacity, the operator still expects coal-fired generation in the region to increase 43% in absolute terms by 2030, though not everyone agrees with that position.

Current coal volumes suggest that growth is currently stagnant. Aurizon’s coal task decreased 2% to 206.8mt in FY2016 and little or no growth is anticipated in 2016-17.

Pacific National volumes were down 2.5% from 162.8mt to 158.8mt for the year with increased tonnages in Queensland, but lower volumes in the Hunter Valley.

Coal exported through the Port Of Newcastle was virtually static in FY2016 when compared to FY2015.

Lloyds List Australia recently highlighted a report by energy market analysts Wood MacKenzie that predicts that measures aimed at limiting global average temperature rise to two degrees Celsius will further dent Australian thermal coal exports.

The report predicts a 40% fall in the international thermal coal trade as the result of the formal ratification of the COP21 Paris climate agreement. While Australia would be impacted less than most of its competitors, due to higher quality of its coal, the prediction is that exports will decline 35% by 2035 from current levels.

That’s 20 years off, so I can imagine many will be saying “why worry?”, but there is additional disruption afoot that may well bring that scenario forward, maybe by up to a decade.

In Europe, Genesee & Wyoming Inc’s (GWI) Freightliner subsidiary has seen its coal haulage task drop by around 55% over the second and third quarters of 2016 as the result of changes in the energy market and government policy.

In North America, GWIs carload figures for the same period show a large, though less dramatic, drop of around 19%. Greater pain is being felt by other US railroads with BNSF recording a 24% drop in coal carloads (year to date) as at the beginning of November.

The rise of renewables is also having an effect and is partially being blamed for the closure of coal fired power stations in Australia such Port Augusta and Hazelwood.

In Europe they are way ahead of us and a few weeks ago Netherlands Railways announced that all electric trains on the Dutch network will operate exclusively using power from renewable sources effective 1 January 2017.

The Swedes are going the whole hog with a target to run the whole country on renewable energy within the next 25 years; last year, 57% of Sweden’s power came from renewables.

And in the middle of writing this article the International Energy Agency released a report which says that a dramatic shift to renewable energy is underway in China and India.

Its World Energy Outlook Report estimates that China’s coal use is likely to have peaked in 2013, which could have significant ramifications for Australia.

Coal still generates 84% of all electricity in China in 2014, though the IEA’s current policy scenario forecasts that market share is going to drop down to 54% by 2040, although a more aggressive scenario actually has coal dropping to 26% market share by 2040.

Uncertainty is the new order. While there is supposedly a regulatory degree of separation of costs between the coal task and other aspects of rail freight industry, there is no doubt that the coal business provides the industry in Australia with significant economies of scale.

Whether the end of coal is ten years away or twenty years away, collectively the industry needs to be instigating research now to chart its longer term survival beyond these dates and beyond coal.

Changing fortunes for Genesee & Wyoming

COMMENT: Last week’s announcement that Genesee & Wyoming Australia (GWA) has agreed to purchase Glencore’s Hunter Valley rail business will no doubt shake things up in the Hunter, but more importantly has the potential to turn around the fortunes of GWA, which has been down on its luck of late, Mark Carter writes.

Glencore announced the potential sale of its coal rail haulage business, Glencore Rail (GRail) in March this year with a deal anticipated to have been reached by September, though things did take a week or two longer.

For $1.14 billion, GWA has picked up 30 relatively new locos, close to 900 coal hoppers and long term contracts with Glencore Coal to carry at least 40 million tonnes of coal a year.

The announcement appears to have wrong-footed the Australian Competition and Consumer Council (ACCC) a little, which only two weeks before had announced an extension until mid-December on its deliberations on the two other competing bids for the GRail assets from Pacific National and Aurizon.

Despite being Australia’s third largest freight operator, GWA’s reach in the Hunter and around Australia will not be sufficient to raise the ACCC’s concern in regard to this acquisition.

It’s an interesting twist in the fortunes of GWA which next month celebrates its 19th anniversary in Australia. Four years ago I wrote an article highlighting the importance of its Australian subsidiary to the bottom line of US-based parent Genesee & Wyoming Inc (GWI).

In 2011 GWA’s accounted for just under 33% of GWI’s global revenues, though this was about to be diluted to around 20% as GWI acquired the US regional business of Rail America boosting annual revenues by 70% at the time.

On the back of its purchase of the Tarcoola to Darwin railway business and burgeoning iron ore revenues hauled for Arrium at Whyalla, GWA still remained GWI’s single largest division both by size and revenue, and its ratio of total revenues was set rise again with the imminent commencement of the 3.5mtpa Southern Iron ore haulage contract.

Back then with the Australian dollar at better than parity with its US counterpart, and GWA anticipated revenues exceeding $US 300m in 2012, it was the parent company’s jewel in the crown.

But then largely through no fault of its own, GWAs’ fortunes took a turn for the worse with the collapse in the global price for iron ore and other minerals. The Southern Iron contract died less than 18 months of start-up and other minerals traffics adjacent to the Tarcoola to Darwin line dried up as mines closed.

Even though the dollar to dollar ratio is still considered high, when profits are repatriated they are now only worth three quarters of what they were back in 2012.

So what does this deal mean for GWA and the rail industry in general?

The Financial Review’s headline proclaimed “……..win opens NSW rail haulage to competition,” which to be frank is pushing the truth a little too far. Rail freight haulage in NSW has been open to competition for close to two decades now and the fact that there are no less than five operators moving coal in the Hunter would suggest that competition is alive and well.

The ACCC was concerned that that a win for Aurizon or Pacific National might reduce competition, however it appears to have been little more than sabre rattling – the fact that GRail existed n the first place suggests that a third party operator could be established if the will was really there.

Centennial Coal owns a small discrete fleet for servicing its mines in the Hunter and Blue Mountains and jack of all trades Southern Shorthaul pops up from time to time operating short term coal contracts for miners.

What it means for GWA is yet to be seen. In the short to medium term one would imagine it will restore some of the lustre to the ‘jewel in the crown’ status with their US parent.

Even though Macquarie Infrastructure and Real Assets (MIRA) will take a 49% equity stake in GWA, Jack Hellmann, GWI President says, “We are effectively doubling the size of GWA and retaining 51% of a business with stronger long-term free cash flow and a significant portion of GWA’s rail shipments under long-term, take-or-pay contracts.”

GWA has achieved its long coveted goal of establishing itself in the Hunter and with the new regional economies of scale in the region will no doubt be hoping to capitalise on any new opportunities that come along. In the medium term, GWA says it anticipates purchasing two additional train sets (approximately $50m each) to handle incremental tonnages that are expected to be available under the rail haulage contract with Glencore Coal.

And at $ 1.14bn, have they paid too much for the assets and long term contracts? I’ve not seen anyone really crunch the numbers yet but the purchase price was at the top end of the scale of $800m-$1bn suggested back in March.

GWA will gain a 20-year rail haulage contract with Glencore Coal (GC), to exclusively haul all coal produced at GC’s existing mines in the Hunter Valley. Initial volumes under the rail haulage contract are expected to be at least 40m tonnes per year with minimum guaranteed volumes over the first 18 years.

And that’s where some doubt must creep into the deal price. The thermal coal market may not be in turmoil, but certainly the market is volatile and most indicators are casting doubt on the long term future of the commodity – 20 years seems a long way out.

In 2015 GWI purchased the UK Freightliner rail business which derives a substantial amount of its revenue from coal haulage – a part of the business which has already weakened since that purchase. Some analysts predict that coal haulage by rail in the UK will be a thing of the past within a decade.

The Australian coal market, much of which is export, has not seen any decline at this stage, but globally the warning signs are there.

Definitely a case of ‘more to come’.

Aurizon freight train. Photo: Aurizon

Down, down, volumes are down

A new lease of life for Pacific National and a new MD for Aurizon might signal that the winds of change are about to blow through the rail freight industry in Australia, but the latest round of figures suggests the winds will need to be gale force, Mark Carter writes.

As most of us know, the split up of logistics and transport specialist Asciano, parent of company of Pacific National, was finally initiated on 19 August. While the ports and logistics business units have been purchased by QUBE and Brookfield, ownership of the PN business has been transferred to a group of pension funds and investment banks.

Now I’m sure these guys have done their due diligence, but I also have a sneaking suspicion they haven’t quite got a grip of what they have bought into? With both major rail freight operators reporting reduced revenues and volumes for FY2016 it could be argued that the rail freight business is at its lowest ebb since the brave new world of privatisation was thrust upon us at the end of the 1990s.

Prior to the official breakup of the company, Asciano revealed its FY2016 results showing revenues down 5.4% from $3.84bn in FY2015 to $3.63bn, with statutory net profit after tax falling 24.4% to $272m, down from $359.6m the previous year.

Pacific National revenues, which accounted for a whopping 65.2% of the Asciano total, dropped by 2.3% to $2.37bn. PN experienced a 3.8% decline in bulk rail revenue (net of coal access) driven by a 3% increase in coal ntks, but offset by a 13.9% decline in other bulk ntks.

Things were no better over at rival Aurizon whose results also highlighted a modest profit based on falling volumes and a number of asset impairments. Statutory net profit after tax was down by 88% to $72m, which included $226m related to the failed investment in Aquila Resources. Overall revenue declined by 9% to $3.5bn while freight revenues were impacted by a 9% reduction in volumes.

Coal remains the dominant earner for both companies, but the outlook does not appear particularly promising whichever ever way you view it.

Aurizon’s haul decreased 2% by volume to 206.8mt for FY2016 and the company says it sees little growth in FY2017 with volumes expected to remain flat in the range of 200mt – 212mt.

Pacific National coal volumes were down by 2.5% from 162.8mt to 158.8mt for the year and though tonnages increased in Queensland, in the Hunter Valley they were down; the length of haul (measured in net tonne kilometres) did increase by 3%.

There are other factors at work that can skew the figures a bit, with some miners running their own trains in New South Wales, and BMA in Queensland, but the overall consensus would be that the coal market remains challenging with little sign of any significant growth in the future.

It will be interesting to see what value, for example, is put on the 15-year contact offered by Glencore as part of their sell off of rail assets – something that seems to have gone quiet in recent months?

A recent article in Lloyds List Australia highlights a report by energy market analysts Wood Mackenzie that predicts measures aimed at limiting a global average temperature rise to two degrees Celsius would further dent Australian thermal coal exports, the report released soon after the USA and China formally ratified the COP21 Paris climate agreement during the G20 summit in China.

While Australia would be impacted less than most of its competitors due to higher quality of its coal, it would still see exports decline 35% by 2035 from current levels.

So with coal already on the nose and market conditions likely to get worse, to what will the rail industry turn to in order to shore up its profits? There is only so much you can claw back from Business Improvement Programs, before you have to look at growing the business again.

Grain has been a staple for the rail industry in the past, but the rates of return aren’t great and the volatile seasonal nature of the industry doesn’t help plan for the future.

Perhaps intermodal or even general freight? There’s a lot of contestable traffic out there still, especially on the North South corridor, but even here the industry has failed to innovate to capture market share.

PN’s Intermodal rail revenue dropped by 3.7% to $878.1m in FY2016, driven by a 6.4% decline in ntks. Despite the drop in revenue, container volumes did increase from 771,500teu to 799,100teu for the year – a 3.6% increase.

Aurizon’s intermodal figures are not so easily separated from its general freight revenues, which in FY2016 dropped by 20%. The company says it will undertake a performance review of its intermodal and diversified bulk freight businesses over the coming months in light of “difficult market conditions”.

Despite suggestions of a ‘flat economy’ in defending some of these figures, the most basic equation has the Australian economy continuing to grow. While claims of a doubling of the freight task by 2030, a tripling by 2050, even a quadrupling by 2040, may now be seen to be rather outlandish, the reality is that despite slowdowns and hiccups the economy has continued to grow and logically so has the freight task.

So even if things are a bit sluggish the patient should still be showing some signs of life? Unfortunately there is no real data to determine whether or not rail is capturing market share from the road transport industry, but it would seem that that rail has failed to capitalise on any of the growth of the last couple of years and there is little evidence to suggest the answer is anything but negative.

And just in case you were wondering, a report released last week by the National Transport Commission projects domestic freight to increase by a more modest 26% over the next decade – let’s hope we see at least a portion of that on rail.

High Speed Rail’s vanishing act

COMMENT: While health, education and jobs featured heavily in this lacklustre election campaign, high speed rail seems to have been virtually dropped from the agenda, Mark Carter writes.

As we wait patiently for the counting that looks like it will never end, my mind has turned once again to the future of high speed rail in Australia, if indeed there is one.

What has in the past given the impression of being a sure fire vote winner, this time around it hardly rated a mention in the campaign.

Although not widely reported The Liberals have come out and said the project is virtually a dead duck. This is a major surprise given that three months ago they were dangling the HSR carrot as a prime example of using value capture to fund major transport infrastructure projects.

As it turned out that this was just a temporary illusion, and in mid-June, major projects minister Paul Fletcher made it clear to The Australian Financial Review’s National Infrastructure Summit that HSR was definitely not part of any Coalition transport agenda.

“The $114bn price tag for a high-speed railway by the previous Labor government is considered by many to be “an optimistically low assessment,” he said.

“If you look at a country like Spain, it’s taken 30 years to get to point as having as many kilometres of track as will be proposed between Brisbane and Melbourne.”

“So, newsflash: There is no commitment by the Turnbull government to that kind of funding. It’s just not a sensible priority.”

Earlier the same day two international speakers at the AFR Summit highlighted the benefits of HSR, especially in regard to regional development.

Sir David Higgins, Chairman of Britain’s HS2 high-speed network planned to link the North and South of the country, highlighted the benefits it will bring to that nation’s unbalanced economy.

“Sixty six of the top 100 FTSE companies are in Greater London, while there are only six north of Birmingham,” he said.

HS2 will link London with Birmingham, Manchester, Sheffield and Leeds, more than halving current journey times.

“HSBC is moving their entire UK headquarters to Birmingham on strength of HS2,” Higgins said.

He emphasised that getting the argument right for the project was a key, with the need to shift the focus from speed to capacity increases, the need to rebalance the national economy and for engagement at a regional level.

“It’s important that as much effort is put into explaining the benefits of the project as in planning and designing it,” he said.

Pierre Izard, chief rail system officer for French operator SNCF, echoed Higgin’s comments and suggested his company would be interested in participating in the development of a HSR network in Australia.

HSR was part of Labor’s election platform, although again it got very little mileage in terms of the overall campaign.

Labor did say that if elected to government it would establish a High Speed Rail Authority, which it had attempted do to back in 2013, to work through a process for gathering international expressions of interest for construction of an East Coast HSR.

The 2013 Phase 2 feasibility study found the project viable, with the Sydney to Melbourne leg expected to return a benefit ration of more than $2 per dollar spent.

In some ways general lack of mention of HSR during the campaign could be seen as a positive at this stage as there have been a number of recent press articles berating the HSR ideal. Even in general railway circles there is a good deal of cynicism surrounding the project.

This combined with a fairly large budget deficit is not going to have politicians rushing to add to the debt pile.

But to just drop the project completely is not only negligent, but arrogant. Paul Fletcher’s jibe at the $114bn price tag somehow being Labor’s legacy is puerile in the extreme, and highlights how short term political propaganda wins out over any semblance of sensible policy making every time.

Note to everyone: One of the reasons this particular vote count is taking so long!

What Fletcher failed to point out to delegates at the AFR Summit, was that the cost of an East Coast HSR would be spread over 30 years – a bit like Spain really, Mr Fletcher.

Construction wouldn’t start for another decade, in 2026, ironically about the same time that HS2 will be completed in the UK.

Fletcher did qualify his comments by saying, “It’s conceivable that in 30, 40, 50 years that the population may make the economics of it less challenging than it is now.”

But is this really the best we can do?

Even if that is the case then surely planning has to start now and not be left on the shelf for another two decades?

I have made the point before that unfortunately too many people insist on living and thinking in the now, rather than the future. It is fatal mistake to underestimate the impact projected population growth will have upon our major cities especially Sydney and Melbourne both expected to be more than bursting at the seams by 2050 – some form of regional expansion to alleviate this looming problem will be required and HSR will be just the tool to do it.

The failure of Australia to have a coherent long term transport plan was a recurring theme at the AFR summit, but unfortunately common sense goes out of the window at election time and we then have to spend the next three years, or in the case of HSR, the next 20 to 30, picking up the pieces.

ARTC news slips spotlight as election takes hold

COMMENT: With this year’s federal election being called so quickly it’s unfortunate some of the usual budget fallout and commentary vanished on the winds of potential change, Mark Carter writes.


 

Despite a steady flow of strategic leaks to the financial media over the last few years that it was looking to privatise the Australian Rail Track Corporation, the federal government was quick to temper a possible sale in the recent budget, insisting all options for the future of the company were on the table.

After one false start in calling for expressions of interest to carry out the study, late last year the government chose business and legal advisers to look into options for the future management, operations and ownership of ARTC, to report back in time for the 2016 budget.

Despite it being rumoured for some time, the privatisation option gained credence in 2014 when the National Commission of Audit (NCoA) handed down its report which included a recommendation that ARTC be considered as a medium term privatisation objective.

The NCoA suggested the Commonwealth could privatise either all of ARTC, or just the Hunter Valley networks, saying that the monopoly characteristics of the network could adequately be managed and regulated in the public interest.

It went on to say a scoping study could examine an appropriate access regime, implications for ARTC’s leases and wider considerations stemming from the intergovernmental agreement that established the ARTC.

The hiccup in the timeline last year seems to have been caused by one of the Canberra ‘Hollowmen’ suddenly realising, and pointing out, that any such sale would have serious implications for the government’s Inland Rail plans.

I wonder if the poor guy still has a job?

So fast forward to this year’s budget and all of a sudden the sale of ARTC is off the agenda with the Canberra saying, “The government will retain the ARTC in Australian government ownership to enable the project to access funds at the lowest cost to the taxpayer, testing the market to optimise private-sector involvement in the delivery and financing of Inland Rail.”

And that’s all she wrote!

Reportedly $10 million spent on the scoping study and all the taxpayer gets is one 60 word sentence – which at a rough calculation equates to approximately $166,500 a word. I’m sure many people wish they could get work like that.

Given the relative hype of the last few years over a potential sale, it seems a little strange that since the announcement that it won’t proceed has been made, precious little has been said since.

The government implies the study has highlighted the need to retain ARTC as a vehicle for the Inland Rail project, but this was obvious to many in the rail industry from the outset.

It shouldn’t have required a $10 million study to come to that conclusion.

There may have been several other factors considered by authors of the study, Macquarie Capital and Herbert Smith Freehills. It would have been beneficial to hear their take on the broader issues against a sale.

One complication would be the leases ARTC holds over tracks in Victoria, NSW and Queensland, although given the length of those leases and freed of the maintenance burden, I’d wonder if those states have virtually forgotten what they still own?

Another factor is that while ARTC’s Hunter Valley operations are profitable, on interstate routes access charges do not provide enough return to fund long term capital replacement and this would have been a bit of distraction for potential buyers.

And while there are mechanisms in place to ensure that Hunter Valley coal access charges don’t cross subsidise the interstate network, there can be no doubting that the economies of scale the Hunter operations bring to the rest of the company and the impact that might have were ARTC to be split up.

Surely some wider background to what was the outcome of the scoping study would have been in order – or does the current government think we can’t handle the truth?

Returning briefly to the Inland Route the government’s budget statement says that $594 million in equity funding will be provided to ARTC for land acquisition along the proposed corridor.

The government seems to be still hedging its bets at this stage, providing equity for an asset it can always sell should the project fail to go ahead.

While it’s good to see some ongoing commitment it doesn’t really answer the recent call by Inland Rail Advisory Group Chair John Anderson to ‘fund it or dump it’.

The equity funding does not kick in for at least another year and the budget statement was ambiguous as to over what period this equity will be forthcoming. For the 2016/17 financial year $80.7 million from the previously allocated $300 million will be spent on continuing pre-construction works and due diligence.

As noted earlier the government says that it will continue to test the market “to optimise private sector involvement in financing the project”.

Maybe this is all a bit of a smokescreen to take it off the table during the election campaign.

The illusion remains that the project is going ahead and that there is funding on the table even though not a dollar of capital funding has yet been committed.

Budget shenanigans – announce now, pay later

COMMENT: The recent federal budget appears to have avoided the controversy of the last couple of years, but all is not as it seems, Mark Carter writes.


Last week I was reading an opinion piece that called for greater transparency and honesty from both sides of politics when it comes to budget announcements, and I couldn’t help but agree.

Trying to sort the wood from the chaff and report in relation to budget funding for rail, as just one example, is getting tougher each year.

Despite the bland nature of this year’s federal budget, on the surface things might have improved for rail compared to 12 months ago.

But a bit of digging leaves me nervous.

Last year I was bemoaning the fact that while spending on rail showed a 46% increase in the 2015/16 budget from $740m in 2014/15 to $1079m, rail investment was forecast to peak at $1303m this financial year before tailing off to $674m in FY 2018/19.

The decline in Federal co-funding of urban passenger rail projects with state governments painted a very bleak picture, effectively halved in 2015/16 from $657.4m to $329.1m in 2016/17 and fading away rapidly by 2018/19 when only a meagre $17m is committed.

Unfortunately I’ve not yet been able to track down a similar document for this year’s budget outlining the annual spread of funding, but it’s fair to say that federal contributions to urban rail projects going forward are significantly higher than at this time last year, although a considerable amount of this will be one off payments from the asset recycling fund.

One of the headline budget stories as far as infrastructure is concerned was the allocation of $594m in additional equity funding to Australian Rail Track Corporation (ARTC). This is for the proposed Inland Railway between Melbourne and Brisbane, and mainly for land acquisition associated with the project.

While this is a big positive, in that it shows at least a degree of commitment by the government beyond the usual recycling of the earlier $300m allocation, in the fine print we find that the $594m doesn’t start until the 2017/18 and even then it is “from 2017/18” meaning it will no doubt be spread out over several years.

This highlights the point I made earlier in this article, in this case $594m is a nice big round number appealing to voters, but it’s not being made available this year, and even then when spread over several years it is not particularly impressive, given the $10bn price tag on the project.

The government’s official budget press release for transport is useful in that it outlines what is being funded this year and also the total allocation for a project from 2013/14 through to 2019/20.

In the case of Inland Rail we can see that in 2016/17 $80.7m will be spent out of an allocation of $300m, but where it falls down is that at it doesn’t tell us is how much of that $300m has already been spent. Likewise $17.1m is allocated in the coming financial year to ARTC’s Automated Train Management System out of an original commitment of $50m, but we are given no idea how much is left in the kitty for this particular project.

New South Wales and Victoria have benefitted most from the magic of the Asset Recycling Initiative (ARI) which predicates federal funding on the sale of assets owned by the states.

Victoria will receive $A 857.2m towards the Melbourne Metro Tunnel through the ARI, which is considerably more than they thought they would get a week before the budget, but a fraction of the $3bn once promised.

In fact the whole issue of federal budget contributions to Victoria does my head in, and if governments on both sides of the political spectrum were being open and honest about their commitments, it shouldn’t.

New South Wales gets $1.7bn for Sydney Metro, $98.4m for the Sydney’s Rail Futures program, and $78.3m for Parramatta Light Rail, all from the ARI scheme. From the budget announcement, it would appear none of the ARI money is down to be spent on 2016/17.

Western Australia doesn’t get any ARI monies because it hasn’t got around to seeling any assets yet, but conveniently gets a handy $490m towards the construction of the $2bn Forrestfield Airport Link project, on the tenuous basis of “maintaining Western Australia’s GST relativity at 2014/15 levels”.

Poor old South Australian misses out on rail altogether … well not quite.

The South Australian government finally announced an EoI for the Torrens Junction grade separation project, jointly funded with the federal government.

I think the money was allocated so long ago it didn’t show up in the budget figures.

And of course if all else fails and the numbers don’t quite add up, you can always throw a lazy comment about other sources of funding such as “testing the market to optimise private sector involvement in the delivery and financing” which came out in this federal budget in relation to Inland Rail – something we’ll look at in my next column.