The Langreo Railway runs from the mining area of the valley of Langreo to the seaside harbor of Gijón, both located in what was the remote Northern Spanish region of Asturias. Construction began in 1847,
[1] with private money and a state guaranty of a minimum return of 6 per 100. The main promoter of the railway was the Duke of Riánsares, husband of the queen mother and at the time the owner of important mines and mining rights in the area of Langreo. The Duke was subsequently to lose control of the railway, after falling from political power.
At that time, import tariffs on coal were as high as 65.21
reales per ton, but were reduced by half in 1862. although they still accounted for 85 per 100 of the cost on board of British coal. However, in 1869, they were further reduced to 5
reales per ton (Nadal, 1975, pp. 135-6), approximately 10 per cent of the cost in Great Britain.
The railway began working in 1853 and was finally completed in 1856. When construction was almost complete, one firm was extracting three out of four tons of all the coal produced in the area served by the railway. Later, the company “Houillère et Métallurgique des Asturies”, created in 1865 and owner of the steel works “Fábrica de Mieres”, was said to have funds “for acquiring ... a block of shares of the Langreo railway and the coal mines of Sama” (pp. 171-2). The railway was extended in 1895 to reach Laviana, another mining town. This extension was undertaken as a joint venture with mining firms (Ojeda, 1985, p. 124).
From 1842 to 1856, transport costs from Sama to Gijón went down from 2.50 to 0.745
reales per
quintal (a traditional unit of weight) but over the same period the price of coal at pit head increased from 1.50 to 2
reales per
quintal. This increase coincided with a decline in the price of coal in Gijón as from 1849, from 4 to 3.30
reales per
quintal. During its first year in 1853 the railway charged a standard price for all commodities, whether coal or iron ore. However, from 1855 iron ore and coke paid higher prices than coal, and from 1869 different prices were paid for screened coal as opposed to non-screened (
menudos). The railway then charged a third more for iron ore, even though for the same weight this occupied a third less space than coal. The railway conceded a premium of Pta 3 per tm.—14.4 per 100 of the total transport fee for screened coal— to coal destined to foreign countries or locations to the south of Lisbon. There were also limitations on extraction and loading. (The capacity of Gijón harbor was insufficient at that time). The railway adapted its prices to the economic cycle. And the tariff reduction of 1869 (from 8.125 to 1.25 and later on to Pta 2.50 per tm) was accompanied by a reduction in the transport fee from Pta 5.89 to 5.21 per tm (11.59 per 100) and the concession of substantial volume discounts of up to 25 per 100 in 1869 and 35 per 100 in 1871 for coal transported in excess of 600,000 and 1,000,000
reales, respectively. Greater utilization of the railway did not seem to occur, however.
As soon as the railway was built, it faced strong opposition from its customers over its prices. A political battle was fought and, finally, the Government decreed a substantial reduction in the tariff in 1879.
Analyze the economic logic behind the main decisions in this case:
(a) the construction of the railway,
(b) the price reduction by the government, considering both short and long term effects; and
(c) the prior price movements.
[1] Most of the data for this case provides from Ojeda (1985). It has been further analyzed in Arruñada (1993, pp. 693-697).
1. OJEDA, G.,
Asturias en la industrialización española, 1833-1907, Siglo XXI, Madrid, 1985.
2. ARRUÑADA, B. (1994a), “El reparto del monopolio: Obreros y empresarios en la historia de Asturias”, en J.L. García Delgado y L. Fernández de la Buelga, (comp.),
Economía y empresa en Asturias: Homenaje al Marqués de Aledo, Civitas, Madrid, pp. 679-720.