Russian rail freight operators’ profitability will come under pressure in 2015-2016 as the decline in cargo volumes becomes more acute following contracting domestic demand and also because of current railcar surplus, according to a report of Moody’s Investors Service, entitled “Weak Domestic Economy and Railcar Surplus Put Sector on the Wrong Track.”
Operators with business models based on long-term contracts, such as Globaltrans, or in niche segments, such as TransContainer, will experience less pressure as they are able to maintain comparatively higher capacity utilisation rates. However, their profitability will still suffer because prices in these agreements can be renegotiated by shippers on a quarterly or even monthly basis.
Companies with high debt service requirements and exposure to foreign currency risk, such as Brunswick Rail, will face severe liquidity challenges over the coming 24 months.
Moody’s believes that a weakening market and constrained access to funding for private rail freight operators will squeeze out smaller and less resilient operators and leasing companies. The remaining players will need to assume a more disciplined approach to fleet management, with a view to eliminating the surplus of railcars and reducing dumping so that freight rates can rise to economically viable levels.
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