Source: EURO Date: 23.03.2023

Rail is the logistical backbone of Europe. By 2030, up to 30% of all goods should be transported on it. However, the current trend is toward something other than this. We asked Adam Šotek, Chairman of the Board of CE Industries, from owner Jaroslav Strnad - an industrialist who is active in rail freight transport, energy, recycling, and, more recently, in the FMCG sector, about possible reasons why this is the case and what the challenges of doing business on rails in the 21st century are.

 

What is the key to selecting the areas of your business?

We operate in the power engineering, railway, waste recycling, and FMCG sectors. These strategic sectors have a great future in Europe and will be the backbone of business sustainability on the old continent. For this reason, we also have great ambitions in terms of economic indicators. This year, we are planning EBIDTA of 836 million CZK and sales of over 15 billion.

Why is rail freight at the heart of your business?

There are 700,000 freight railway cars in Europe today, which will practically double by 2030. The lifetime of a wagon is about 30 years. The average age in the EU is over 28 years. And that means only one thing - a big push to renew and modernize them. At the same time, the standards for unique railway cars for transporting chemicals have become stricter. There is a severe shortage of truck drivers in Western Europe. And one wagon can replace up to 25 drivers. All of this suggests that demand for transporting goods by rail will grow. Not to mention the ecology driving Europe, which also favors rail, it has nine times lower CO2 emissions than road transport.

Is there more interest in the market for your rail freight services?

You could say yes. Logically, the volumes of goods transported must be transferred from the road to the railways to achieve climate goals. This opens up opportunities for our rail companies and us. In addition, when we know an area makes sense, we provide comprehensive services with as much added value as possible. Let me explain on our rail division. We bought the traditional Croatian engineering company ĐURO ĐAKOVIĆ, where we produce modern freight wagons tailored to the needs of our customers. In the company Vítkovice Railway Repair Works (www.vitkovicke - zo.cz), we repair railway rolling stock and provide a mobile repair service, which we repair in the field. Company Vítkovice Transport operates a railway siding, which it leases to customers for whom we repair or manufacture railway cars. It also provides ECM services to companies owning railway cars. Our strategy is to verticalize our services in the freight rail sector. We cover the broadest possible range of activities where it is possible to do business in that area.

What are your medium-term ambitions for the railway business?

We are currently out of the top five in Europe in railway car production, but we are getting there. Increased output in ĐURO ĐAKOVIĆ will help us a lot. After entering Duro Dakovic, we have raised the year-on-year production of manufactured railway cars from 265 to 580 pieces, and we have set a new record for the number of railway cars manufactured and sold in 2022. With a total of 580, this represents an increase of 120% compared to 2021. We want to keep the trend going, and this year, we will produce and deliver 803 railcars, and in 2024, we plan to sell 1,000 railcars. So in just two years, we will practically triple the production there. We have one rail repair facility in Ostrava and another north of Zagreb, Croatia, in Čakovec. We are looking at northern Bohemia to get closer to our customers in Germany, of which we have plenty. But there, we would have to build on greenfield sites. Then we are looking at possible acquisitions in Serbia.

 Isn't it challenging to do business on the railways due to the slow construction of infrastructure in our country and Europe?

Yes, it is a problem, but the potential is still there. The EU's support and ambition to decarbonize freight transport is clear. Globally, transport volumes in the CEE region are growing by 12%-30% every five years, but unfortunately, the growth in volumes is different from the speed of infrastructure development. The EU's target is to increase the share of goods transport by rail to 30% by 2030, at the expense of road transport. At the same time, according to a McKinsey study, transportation and its green transformation have a potential earning potential of a staggering CZK 54-64 trillion by 2030. We want to cut as big a slice of that pie as possible. The important thing is not to fall asleep.

The total share of goods transported by rail in the EU in 2018 was 18.6%. According to Eurostat, the figure has dropped to 16.8%. What do you think is the reason?

It is a paradox. We have the explicit support of the European Commission and EU countries, but we are currently heading toward something other than the target. And we need to catch up on the huge amounts of money we can gain from the industry transformation. More than ever, we need to realize that a modern zero-emission economy is not just a current trend but also an opportunity for a massive cash injection for the public purse. We can find the answer to why the trend is going against expectations in the Czech Republic. We do have the densest rail network in the whole of Europe. This seemingly positive fact could be more cheerful. We have mainly local lines in the Czech Republic, and the main corridors must catch up to the European average. The main problem is slow construction, insufficient investment, and, linked to both factors, insufficient electrification. The EU average for electrified lines is over 50%. In Switzerland and Belgium, they are currently at 80%. In the Czech Republic, we are at 30%. Yet it is the electrified lines that transport the most people and goods. These lines are overcrowded in the Czech Republic for the reasons mentioned above. The situation is also not helped by energy prices, which are more conducive to transporting goods by road.

What do you think would help change the trend?

Passenger and freight rail transport today is in a situation where trains cannot fit on the tracks of busy main corridors, and carriers must find other ways to get goods where they need to go. The total volume of goods transported by rail is therefore falling. We must step up if we want to take some potential earnings from green transport. The low capacity of the main corridors is a problem throughout Europe. Unfortunately, it is even more significant in this country. We have the densest rail network in Europe, but these are mainly regional lines, and the main corridors still need to catch up to the European average. This is due to slow construction, low investment, and insufficient electrification.

Has this stayed the same in recent months or with the new government?

There is a change in attitude, and the motivation to move goods on the rails is more significant than in the past. But the pace of infrastructure development still needs to be faster. We must want it, prepare for it and implement it. The government has approved the SFDI's draft budget for this year of 150.9 billion CZK, with an increase of 27.5 billion CZK  compared to the June draft. SŽ will receive 70.4 billion. In addition, at the beginning of November last year, government members signed a memorandum with the European Investment Bank on financing railway projects in 2023-2027 up to 7 billion EUR. The state has also declared in its transport construction plan for the next ten years that rail will play a significant role. Let us hope that this will indeed be the case.