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Rising Prices, Inflation, and Shortages in the Supply of Materials and Components. What Should the Railway Market Prepare for?

Rising Prices, Inflation, and Shortages in the Supply of Materials and Components. What Should the Railway Market Prepare for?
photo: Archive/Rising Prices, Inflation, and Shortages in the Supply of Materials and Components. What Should the Railway Market Prepare for?
06 / 05 / 2022

Increasing prices is the most frequently used word in the public sector lately. Record inflation, increases in energy, materials, and fuel prices. But how will this situation affect the rail sector?

Increase in material prices

Materials, which are crucial to the rail industry, are seeing sharp price increases. These have been going on since the Covid-19 period. At that time, the prevailing view was that the material price situation would gradually stabilize. The companies with fixed long-term contracts profited from the pandemic situation, while other companies often had to postpone the purchase of materials or conduct extended negotiations. Today, however, the situation is slowly becoming even worse as a result of the war in Ukraine. It was Russia's invasion of Ukraine that quickly triggered a price rise, and by the end of March, the price of steel had risen by more than 60% on average month-on-month. Moreover, most experts agree that prices could rise even higher. The cost of transport, i.e., energy and fuel prices, also affects steel prices.

Fuel price increases

Most carriers' pricing is being shaken to its foundations by fuel prices. Even though long-distance routes are located mainly on the electrified part of the railway, freight carriers cannot do without diesel in some locations. These include services within industrial estates and terminals, some regional routes, and last-mile services where carriers also use trucking. Rising fuel prices, of course, affect the final goods' price. Moreover, carriers have no choice but to make their services more expensive.

Increase in energy prices

Environmentally friendly rail transport using electricity is plagued by the problem of electricity prices, which are also reaching record highs. Some large European companies are already introducing special energy packages as an imaginary add-on to existing contracts with clients. These packages have the sole purpose of making up for the loss to freight operators from such rapid price increases. The payment of these packages also applies to existing contracts. The pioneer of this solution in the European market is Lineas. In the Czech Republic, there is another problem, namely the payment of charges for renewable energy sources, the so-called RES, which can again have a crucial impact on pricing.

Inflation

Inflation is at an all-time high in European countries. In the Czech Republic, it has reached 12.7% year on year. What does this mean? Not only companies but also people will lose significant amounts of money. People will have less money, they will be able to buy fewer things, and their savings will not be enough in many cases. They will therefore want to negotiate with their employers for higher wages. It is wage policy that may lead to another wave of price rises at all levels.

Ukrainian grain

Given the state of war in Ukraine, the largest grain producer in Europe, this year's harvest is not expected to be large. Although Ukrainian farmers are trying to sow grain with the help of the army, the situation is complicated by, for example, landmines planted in the fields. Another problem is the ongoing fighting. Grain will therefore be scarcer, and food will become more expensive. It again affects wage increases for railway workers, which will logically reflect in the pricing policies of the individual companies.

Based on these points, it is clear that the rail sector cannot avoid price increases. Who will be affected, and what should we prepare for? The correct answer is clear. All areas of rail are likely to be under the impact. Carriers' prices will increase, but so will the cost of repairing wagons or new carriages. At the same time, the world market for materials such as steel, which has been significantly affected by the war in Ukraine and the subsequent market panic, will also become more expensive in direct proportion to these increases. One can also expect that prices will be increased for already concluded contracts, for example, through special 'crisis' packages.

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