Tuesday, 30 October 2012

Gold Plating versus Making Do

The power industry has come in for recent criticism as it spends billions - and passes that on to consumers - so forty hours of extreme annual peak load can be catered for. Likewise governments have time and time again gone looking for the 'best' solution to urban infrastructure projects rather than seeking the most affordable. Again, someone else has to pay for it - or, more usually, no shovels ever hit the ground. And, as infrastructure goes, we're seeing the same thing in the resource industry too...perhaps to the detriment of even getting that primary product out of the ground. Recent news reports out of India suggest the GVK/Hancock consortium planning a 30-million tonne thermal coal mine at Alpha and an associated 495km rail line to Abbot Point is having trouble raising the $6.4-billion for the project. A large part of that project cost is the heavy-haul rail line, which will exceed $2-billion to race low value thermal coal across several large river valleys via the most direct route awaiting ships at Abbot Point. This of course is the 'best' transport solution for the mine. However at $2-billion, and perhaps threatening the mine proceeding at all, is it the most affordable solution?

The answer is probably no. And here's why - an existing low volume narrow gauge rail route already exists in the vicinity of the mine. So far its current government ownership, low capacity and more circuitous route of about 650km (via Emerald and Blair Athol) has discounted this corridor from consideration...but let's have a look at it. Fifty-five percent of this existing open-access corridor is already available to 1450m 12,000-tonne coal trains, and the cost in upgrading the remaining 291-km to this standard is around $405-million (just twenty percent of the GVK/Hancock's estimated cost). There are few if any land resumptions required or environmental barriers and the most serious operational issue, the Drummond Range, was partly deviated in 1998, with remaining works at that time being valued at only $12-million. No doubt operations of this "Central Line" corridor would be higher, however compared to the absence of any profits if this greenfield project cannot reduce its establishment costs, maybe a few extra cents per tonne over the life of the mine would be better spent than those the consortium are currently trying to save.


Monday, 29 October 2012

A new name should mean a new start

With QRN's impending name change to Aurizon, perhaps it's time for Australia's largest rail operator to consider changing more than just its letterhead. For too long the name QRN has been synonymous with coal - and in the last decade this has been at the expense of almost every other aspect of its operations...except perhaps its related iron ore task. So what should this new Aurizon be? For one it should develop a goal of diversification. Rail's greatest strength is its ability to move whatever the economy demands...as one sector falters, another can be there to bring black ink to the ledger - few other industries have this ability to change their stripes - and it is why investors are flocking to railroad holdings in North America. So where can Aurizon diversify? Almost anywhere. For example, opportunity abounds in the domestic container business, despite the global ructions impacting on the resource industry. In the Brisbane to Townsville corridor alone the Bruce Highway carries the equivalent of forty trainloads of freight every day. Much of this has appeared during the decade of growth QRN spent concentrating on Queensland coal - a time during which the size of the North Queensland economy has more than doubled, and could double yet again in another decade - by 2021 more than 1-million people will live between Mackay and Cairns. However, for their part, PN and QRN actually haul less rail freight on this corridor than the former QR hauled in the late nineties. So name changes are all well and good, but will shareholders see a change in attitude? Surely this isn't the time for just more of the same?


Distributed Power - where it stands

So I've banged on about the advantages of DP to the likes of QRN and PN. Lets see what they've got on the ground now. QRN is the clear leader in DP outside of the North America. The company in its previous forms has been using the various incarnations of Locotrol for forty years and its current fleet includes 186 electric locomotives and 124 AC traction narrow gauge diesels fitted with DP. Seven narrow gauge DFZ are currently receiving DP equipment for Western Australian iron ore traffic. On standard gauge QRN has 36 DC and AC traction diesels in Western Austrlalia DP service. That's a total of 353 locomotives - more DPs than some US Class 1 roads. BHP-Billiton has nearly 100 AC and DC traction diesels with DP in the Pilbara and has just ordered 13 E40 AG-V1 AC traction electrics for narrow gauge coal service in Queensland. For its part PN has built up a fleet of 40 GT42CU-AC diesels and 32 E40 AG-V1electric locomotives in narrow gauge distributed power coal service in just four years. So it's pretty clear our major operators possess considerable experience in DP use and its advantages. Further to this many of the locomotives in standard gauge coal and intermodal service are the same models as those being used elsewhere in DP operations - meaning retrofitting is not out of the question.

So why the delay? Traditional operating practices on specific corridors? Cost? Radio signal loss? Loading and unloading issues? Whatever they are the savings DP offers can't be ignored simply because "it's never been tried here." This isn't reinventing the wheel, this is a new industry standard, and those who embrace it will become far more competitive than those who don't. The race should be who gets there first, not who waits to be last.


Saturday, 27 October 2012

Distributed Power - the no brainer

Distributed power is nothing new to Australia, QR introduced GE's Locotrol to the country in the early seventies and within 10 years had most of it's Bowen Basin coal trains running in 3+3 or 2+3 configurations. BHP followed suit in the Pilbara and in recent years we've seen PN adopt DP for its Queensland coal and magnetite operations, while QRN has extended modern DP operations to its standard and narrow gauge iron ore operations in Western Australia. Yet, despite the extensive experience the country's two largest rail operators now have with DP, they have not followed the recent rush by North American rail operators to convert additional corridors to DP (Union Pacific is now moving 70-percent of its gross tonne miles with DP), despite, in some cases severe capacity constraints.

Yes, DP can be inconvenient for crews dealing with distant remote locomotives, but the advantages are too many to be ignored. Most significantly DP reduces the lateral friction of a train, allowing the same number of locomotives to move more tonnes, use less fuel and increase velocity. Likewise rail wear is reduced as are braking distances. A case in point is the QR-owned capacity constrained crossing of the Toowoomba Range in South East Queensland. Here a rail route dating to 1867 - restricted by several heritage listed structures - forces rail operator QRN to run 41-wagon coal trains at axel loads of only 15.75-tonnes. Doubling train lengths would not only double capacity on this corridor, but using Canadian Pacific modelling, an 82-wagon train running in 2+1+1 configuration would produce only 10-percent more rail wear than an existing 41-wagon train. Double consists could be achieved by extending just five crossing loops and constructing a run-around road between Ipswich and Darra. Total cost would be less the $100-million while rail maintenance costs could be reduced by up to 40-percent while moving the same tonnage.

But it's not just coal and mountains that can use DP. PN and QRN experience considerable difficulty running 1500m intermodal trains on the east coast corridor where curves and grades are in constant supply. Converting these services to DP would produce fuel savings and increase velocity with the same horsepower by decreasing lateral friction on the ever present curvature. In the end, it doesn't matter how sharp a curve is...DP offers savings. This is literally the silver bullet for existing operations. An operator can increase the capacity of their existing locomotive fleet and reduce rollingstock maintenance simply by converting more operations to Distributed Power. It really is that easy.


Wednesday, 24 October 2012

The Industry Disconnect

The race towards containerisation by those rail operators that eventually became today's PN and QRN was to bring efficiency and modality to the industry. Rather than serving customers individually - no matter how many daily carloads they produced - all of their freight could be collected by road and delivered to a container terminal somewhere in the nearest city. Suddenly those turnouts and sidings were no longer needed. Money was saved. It was a win win, right? This isn't going to be a post advocating putting sidings back into every shed and factory and having shunting locos and crews idling day and night to move a couple of carloads - that horse has long bolted. What I'm going to say is that containerisation has produced a grievous disconnect between operators and industry.

For one, trucking that container to and from a rail terminal is frequently the most expensive component of that container's journey. A few too many kilometres or too many truck moves and suddenly that container is cheaper to move the whole way by road. It's a simple rule; once something is on a truck, it's all too easy for it to stay there.

Domestic containers also meant industry no longer needed to have rail access - which means rail options quickly become some ephemeral nether world to the logistics managers trying to get their product from one place to another. The last thirty years has seen hundreds of road-only served industrial estates spring up around the country, all of which are one hundred percent reliant on road options. So this is where containers fail again; they reduce the visibility of rail to industry.

Meanwhile, that 20 or 40-foot container fixes the parameter of those who use them. Rail lost many industries to road during the containerisation process, simply because the container was not a one-size-fits-all. Those businesses that needed specialised rail equipment were simply left to the trucking industry if containers didn't suit them - which is hardly a positive way of generating business rapport. Rail operators became all too used to giving up profitable freight flows just because it didn't suit their transport model anymore - and this in turn feeds into the simple of factor of them-and-us. Containers mean industry and rail operators can cluster around their factories and terminals completely oblivious to the needs of the other. They become completely disconnected, physically and metaphorically. There is no longer any one-on-one contact between rail operators and industry, there is no longer a presence of either in each other's operating world.

So how do we get around this? The easiest would be for rail operators to increase their presence within their potential customer base by using the human factor. More proactive communication and face-to-face contact would be start. Determining better ways of handling and growing each other's business would be even better. In the future rail operators should look upon future terminal developments as including shared space with greenfield industries rather than relying on the current truck to terminal model. And then there's the alternative, where sidings remain, to move containers via rail to business rather than road. I realise those last few kilometres by rail could also be an expensive component of the overall task, but it is up to rail operators to find savings in using lower-cost higher-efficiency local rail service models where labour and motive power costs can be minimised. It might surprise large rail operators just how little more time and effort could go into moving that container from A to B by rail...and more importantly, just how much more traffic such a move might generate. The container is here to stay, so lets use it better.



Monday, 22 October 2012

Express freight - lost potential?

If you've ever bought something over the Internet and you live in the US, then there's a reasonable chance that product travelled by rail for some or most of its journey. That same package in Australia is almost certainly going to stay in a truck from the point of purchase all the way to your front door. For several reasons Australian rail operators have largely missed the boat when it comes to express freight delivery. And it's not as though this is some flash in the pan thing...Internet purchasing is likely to completely change the movement of domestic freight, with container loads to large chain stores giving way to more personalised freight delivery. So why are Australian rail operators allowing the likes of Australia Post, TNT and DHL to dominate a business they are making little attempt to enter? After all, this is the next big thing in Australian freight, and so far it's been almost completely missed.

Obviously the express nature of the package delivery business is a negative to rail. Overnight road delivery via road is possible between Adelaide and Melbourne, Melbourne and Sydney, Sydney to Brisbane. Rail simply can't offer this. Underlying factors include government-controlled rail-corridor owners more interested in saving money than offering reliable or road competitive rail structures. However rail operators have to take some of the blame too. They have made no attempt to improve service reliability or transit times by paying for corridor improvements, and they prefer to run their trains to maximum length and minimum horsepower to avoid having to buy more slots from the corridor owner. But then, maybe senior rail managers haven't taken a good look at just how long that package they ordered took to arrive.

Most Internet or phone purchases aren't completely time reliant...sure some have to absolutely be there overnight, but many can just be expected to arrive within a few days...and many do. Express parcel delivery between Sydney and Townsville is frequently five-working days. A rail delivered container could potentially travel that same route in four. Suddenly it looks like rail could compete, even in the capital city corridors, providing next day or second day delivery suited the express freight handler.

However train speed is one thing, what about the dislocation of the the express freight handler and the nearest rail terminal? Face it, rail has been out of this business for a long time, so with road dominating most of the big distribution centres are near highways rather than railways. How can rail woo express? This might be the time revisit the 'Roadrailer' concept. They've been successful both on narrow and standard gauge but have suffered from having no clear vision of their purpose. We know they provide less terminal dwell time and are able to move to multiple destinations from a single departure point. Roadrailer trailers are also cheaper to purchase than traditional rollingstock and require less horsepower per train to move. All in all these could tick enough boxes to offer rail a budget entry into the express business. But who should buy them? I can't see the likes of DHL or TNT rushing out to buy roadrailers just because an operator wants to haul them. Instead, interested rail operators will pretty much have to start buying a new generation of hi-cube dry trailers themselves. After that they can lease them to any express freight handler rather than being locked into some sort of exclusive contract. Money is money and trailers are trailers, whether they go on rail or not, they mean new business for a rail operator. Sure this is a tentative step, but it has to start somewhere - ignoring this freight type would be like QRN and PN ignoring the last coal boom - we all know they didn't do that, so why ignore express freight?       


Where to now?

So here we are, the China boom that has defined the last decade is on the wane. All that fast tracked growth QRN and Pacific National have poured into the NSW and QLD coal industry is now mostly in place just in time to see export and domestic tonnages plateau or in some cases decline. It's a story no different to the hapless investor who buys into the top of the market. He might feel good he made it for a few days, but when the value of his assets starts going down he's got nowhere to run. In many ways and certainly more so than Pacific National, QRN is that hapless investor. While still under government control, it was caught flatfooted in 2004 by the China syndrome and came to the party late. It shouldn't have been a surprise, at the time the Beatie Government was more interested in watching their budget outlook than keeping an eye on infrastructure development, making QRN's government-owned form the fall-guy for the export bottlenecks of the mid-naughties.

For its part, QRN threw everything it had at the problem. Anything that wasn't nailed down and still had wheels went into the coal division. Grain hoppers went back to coal, locomotives hauling freight went to coal. Staff from regional depots went to coal. Billions were spent on new rollingstock. The trouble was, the exporters were already burnt by QRN's slow reaction - and it should have been fairly evident that the moment an alternative operator appeared on the horizon, they would jump ship. And that's exactly what has happened. After buying or rebuilidng 108 high horsepower and very expensive electric locomotives for the Goonyella system - the corridor worst hit by rail bottlenecks - the modern QRN has lost much of its market share to Pacific National. As a result many of those locomotives that were so desperately taken from freight in 2004 are now sitting idle with nothing to do.

Why have they nothing to do? Can't they go back into general freight? For the moment it's not so easy. You see, nothing happens in a vacuum - to prop up its struggling coal division, QRN had to give up on much of its less productive - or for a better definition - more complicated traffic. The shunt locos needed for the sidings around Townsville went to the coal division. The timber millers around Maryborough were encouraged to move to trucks. The graingrowers in the west didn't have grain wagons anymore. The Brisbane based fuel refiners were told QRN was closed for their business. The big winner was the trucking industry. Coal booms come and go but domestic freight keeps on moving. Now former staples of the Queensland rail industry a decade ago are firmly in the hands of the trucking industry. As a result this state's automotive products, timber and forestry, most fuel, agricultural products and priority freight are almost exclusively handled on its highways.

And this - rather oddly - makes the China boom's lasting legacy for QRN one of lost opportunity. Instead of finding lower cost methods to serve local industry and improve the productivity of its non-coal divisions QRN decided to become the hapless investor. It threw away everything it owned to win the coal business, and now, in many ways the chickens have come home to roost. Yes, hindsight is a wonderful thing, but destroying a diversified traffic base to haul a product infamous for its global trade volatility should have been given more thought. Is it all too late? Well, that will have to be another post.