India has a competitive edge over Brazil and Australia in sea freight due to the shorter haul to the Chinese market, which imports nearly 88 per cent of India’s iron ore exports. However, it is the high cost of inland transport, and not sea freight, that puts Indian iron ore exporters at a disadvantage, said Dr Jose Paul, Member, Executive Council, Indian Maritime University, Chennai, at the recent Logistics Summit 2009 organised by the CII Institute of Logistics in Chennai.
The transport cost component in the shelf price of goods varies from product to product, but it is marginal. For example, transport costs account for only 2 per cent of the shelf price of a television and just 1.2 per cent of a kilo of coffee.
However, in respect of high-volume low-value commodities, such as iron ore, the inland transport cost and the maritime transport cost become significant, Dr Paul said, in the case study that examined the market environment and India’s position in global iron ore exports.
International iron ore trade reached a record level in 2008 as exports increased for the seventh year in a row and reached 882 million tonnes, up 7.8 per cent, said Dr Paul, former chairman, Mormugoa Port Trust, in his case study presented at the summit.
Freight costs
An Unctad (United Nations Conference on Trade and Development) study suggests that the ratio of various freight costs to import values continues to decline. The total freight costs in world trade still represent, on average, less than 6 per cent of the import value of consumer goods. For high-value, low-volume manufactured items the proportion of the freight rate on landed value becomes insignificant.
The price of a product that can be sold in the international market depends upon the production and distribution costs. Transport cost is an important component of distribution cost.
In sea-borne trade, transport cost includes inland transport (between the place of production and the port of shipment and from the port of import to the consignees’ warehouse) and the maritime transport (the cost of handling the goods through the port of export to the port of import plus the cost of carrying the cargo on the sea leg and marine insurance).
Case studies
To argue his case, Dr Paul cited the instance of a recent shipment of 1,01,250 tonnes of iron ore fines with 62 per cent ferrous content made through Krishnapatnam port on August 21. The ship, Cape Santa Algeria — a cape size vessel with a dead weight tonne of 1,25,000, was berthed on August 18 at 19.30 hours and completed loading on August 20 at 19.30 hours.
The iron ore fines were transported by rail from Bellary, in Tumkur District, through the Banasandra Railway Station, to Krishnapatnam port, over a distance of 410 km. The iron ore was then stored on the port premises, handled at the port and all pre-shipment formalities were completed before the ore was loaded on board the vessel. The iron ore was shipped to Zhanjian port in China and the freight charged was $9 per tonne.
Price variations over the last two years suggest that the FOB (free on board) value appears to have fluctuated between $50 and $115 with a mean value of $83. The CIF (Cost, Insurance and Freight) value fluctuated between $70 and $158. The freight rates between Indian ports and Chinese ports fluctuated between $9 and $33 per tonne.
The lowest CIF figure at $70 and a freight rate at $9 per tonne have been taken as the minimum, with $158 and $33 as the maximum. The mean figure was $114 and the mean freight rate was $21 per tonne.
If the FOB was pegged at $50, the rail cost constituted 54 per cent of the total cost, production cost was 18 per cent and handling charge at port only 8 per cent. With the FOB taken at $83, the rail cost becomes 33 per cent; production cost 11 per cent and handling charge 5 per cent. And if the FOB is considered at $115, the rail cost is 23 per cent; production cost 8 per cent and handling charge 3.5 per cent.
In the three FOB price models, the segment dealing with inland transportation cost (logistics cost) becomes the most significant cost element, in some cases constituting three times the production cost involved, Dr Paul said.
Source : Business Line