Steel, cement freight rates rise as construction activity picks up

New Delhi: Steel and cement freight rates have seen a healthy month-on-month increase in December backed by a pick-up in construction activity.

The resumption of construction activity comes after extended southwest monsoon rains affected freight rates in November.

These are the findings of CRISIL’s CRISFrex, the first-of-its-kind index in India, that captures the changes in freight rates on a sequential basis and tracks the free cash flow, or FCF, (pre-EMI) of transporters on an ongoing basis.

Typically, higher FCF improves demand for commercial vehicles.

According to the ratings agency’s index, freight rates in December improved at a mid-single-digit level on-month. They rose for almost all commodities barring FMCG and petroleum products.

For consumer essentials such as FMCG/FMCD, which are relatively resilient and stable segments, the drop was limited to less than 1% on-month.

Industrials such as mining products (coal, iron ore, and limestone), cement and steel saw a sequential recovery as freight rates for these applications have improved by more than 5%.

A key driver for this improvement is the resumption in construction and mining activities, which were subdued in December after a slow November due to prolonged monsoon, CRISIL said.

As per the index, discretionary goods such as automobiles and textiles also saw an improvement in freight rates. The improvement in auto carriers is driven by a slowly improving scenario

in terms of vehicle dispatches (which has thus far been marred by supply issues), while that in textile is driven by restocking of inventory in December after festive buying seen in November.

Cumulatively, the CRISFrex Index improved to 120 in December 2021 from 114 in the past month due to these factors. Further, relatively stable fuel prices have resulted in this increase translating into a direct increase in margins. FCF, (pre-EMI) as assessed by CRISIL, is estimated to be at about 20% of freight earnings compared with 15% in November 2021, translating into a sequential rise in terms of margins, but margins are still slightly below levels seen in December 2020.