CHAPTER 5
ECONOMICS OF CARGO DIVERSION TO
COASTAL SHIPPING
Annually about 1500 million tonnes of cargo is moved as per the figures for 2001-02 in India.
The road network comprising of NH, SH, MDRs and ODRs have over 25,000 Origin-
Destination (O-D) pairs between major production and distribution / consumption centers
spread across the country. The railway network also connects almost all major centers and
competes with the road network for the freight movement.
While road offers a definite advantage of door to door connectivity and considerable
flexibility, rail offers advantages of economies of scale especially over long distance O-D
pairs. While road transport is constrained by small parcel size and high costs freight
movement, rail suffers from delays (passenger trains enjoy priority on any segment) and lack
of flexibility in services. Loss / damage in transit is high on both the modes contributing to
higher costs. Congestion on both the networks as a constraint is even more serious.
5.1 CARGO AMENABLE FOR DIVERSION FROM ROAD & RAIL
Viewed in the above background, the divertibility of goods from these land based modes to
sea transport offers several advantages in terms reduction of costs, decongestion of road &
rail networks, savings on fuel consumption etc. At the same time, the cargo is subject to
additional handling at load and discharge ports leading to longer transit time.
Neither all the cargo moving on land can be diverted to sea nor can sea transport be
independent of the other modes since land based transport modes would be required to move
cargo to or from a port. Hence what can economically be diverted from road or rail depends
on several factors and zeroing in on all the O-D pairs on road and rail networks is a daunting
task in view of the fact that a variety of commodities are moved in a complex matrix
especially on roads in the unorganized sector involving numerous small players who
contribute to the volumes but not to a common data base. Information about the movement of
cargo between O-D pairs by other modes of transport was collected from several secondary
sources and certain O-D pairs were selected to study the diversion of cargo from these modes
to Sea transport on the basis of some criteria that are discussed below.
5.1.1 Criteria for Selection
The following factors were considered for selection of goods across O-D pairs amenable for
diversion.
− Both Origin and Destination are located on the seacoast with access to an active port.
− Either the Origin or Destination is located in the peninsula within 100 Km from a seaport
or the direct land movement across them is > 600 Km.
− The distance between the O-D locations is over 1000 Km running North – South
− The quantity of goods between such long haul O-D pairs is over 20000 T in a year in the
case of railways and over 200000 T in the case of roadways
Chapter 5: Economics of Cargo Diversion to Coastal Shipping
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− The percentage of land lead to the nearest port is less than one-third of the total direct
land distance
a) Thumb rule for diversion
The thumb rule is derived from a formula that takes into account the handling costs at various
points of goods transfer from one mode to the other and the distance between the location of
these transfer points and the cost of transportation per tkm by different modes involved.
Simply stated the cost of handling per Tonne at ports would determine the minimum distance
over which diversion would become viable.
The formula is
(Q*H1)+ (Q*D1-4*F1-4) + (Q*H4) > (Q*H1)+ (Q*D1-2*F1-2) + (Q*H2) + (Q*D2-3*F2-3)+ (Q*H3)+ (Q*D3-4*F3-4) + (Q*H4)
The simplified formula would read:
(D1-4* F1-4 - D1-2 * F1-2 - D3-4* F3-4) - (H2 + H3) > D2-3 * F2-3
where,
F1-4, F1-2 and F3-4 are the per tkm road / rail freight rates in rupees as the case may be
on L1-4, L1-2 & L3-4 respectively
F2-3 is the per tkm sea freight and
D1-2 is the distances in km between L1 & L2 and similarly for D1-4, D2-3 and D3-4.
H1 is the handling cost in Rs/tonne at L1; and similarly for H2, H3 and H4.
Q is the quantity of cargo moved in T
b) Selection of O-D pairs
Based on the above criteria and the guiding thumb rule, O-D pairs were further examined in
respect of
i. Location,
ii. Industrial / commercial activity,
iii. Highway / railway connectivity,
iv. Other advantages from road or rail,
v. Proximity & connectivity to major / minor ports etc.
c) Commodities moved
As the cost of transportation and the economics of diversion depend on the nature of
commodity, commodity wise movements were examined in detail. The commodities moved
in large quantities are
− Coal
− POL Products
− Iron Ore
− Iron & Steel
Origin L1
Load port L2 Discharge port L3
Destination L4
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− Cement
− Fertilizers & Fertilizer Raw Materials
− Food grains
− General Cargo in break bulk and in Containers
d) Quantities moved between pairs
For the diversion to sea mode to become viable, it is not only detrimental that the direct land
distance between the O-D pairs be long but the volumes moved between them should also be
large enough to attract operators on the coastal sea trade. Hence O-D pairs with at least
20,000 T one way were considered as potential. O-D pairs with both ways potential attract
diversion even better.
