Ukrzaliznytsya reform to spur railcar demand

Ukrzaliznytsya plans to transfer its freight railcar fleet to five subordinated companies as of January 1, 2012. The objective of the transfer is to increase control over the Ukrainian monopoly’s railcar turnover. The move would involve changing the legal status of the monopoly’s railcars from “inventory” (which can be used without permission of the nominal owner) to “private” (which must be used with permission from the owner). Roman Dmytrenko: The tougher controls will naturally worsen railcar turnover in Ukraine, as it will increase time for negotiating over the use of railcars with the new owners. According to Ukrainian statistics, inventory railcars have 1.5x better turnover than private ones. The change increases the risk of reduction in freight turnover in Ukraine and the CIS and could even spur a slowdown in commodity trading, in our view. On the other hand, the move should be beneficial for local wagon producers, as it should significantly increase the need for new freight railcars. Moreover, the reform will allow for the translation of increased needs into real orders, as: (1) better control over fleet turnover will improve the economic efficiency of railcar-use, making operators of Ukrzaliznytsia’s railcars cash-richer; and (2) commercial enterprises (vs. government entity Ukrzaliznytsya) seem to have better access to external financing to order new cars.