Overview of the railway market in Russia as of August 2014
The rate of transportation volume reduction and freight turnover growth have slowed down
In August 2014, transportation volume has been still lower than that one of the previous year (105.8 million tons), but the decline rate has slowed down (-1.6% compared to August 2013 against -3.4% in July compared to the same period of 2013.)
The decrease index remained the same. Construction materials and cement showed a negative trend in August in comparison to August 2013: - 19.2% and - 8.1% respectively.
At the same time transportation of coal (+4.0%), oil and petroleum products (+3.4%), ferrous metals (+6.9%), mineral fertilizers (+2.5%) and corn (+20%) has increased.
Gradually the growth rate of freight turnover began decelerating. In August 2014, the freight turnover was 191.4 billion ton-kilometer, which is 4.2% higher than in August 2013 (in July it was +6.0% by 2013). The growth rate reduction of the turnover results from the decrease in the export share of Russian goods by rail in August.
In some degree, the decrease in railing has slowed down because of the limited capacity of freight delivery by inland water transport. The fall in water level has forwarded a large freight traffic of coal, petroleum products, rolled metal products, scrap and coke for railway transportation. However, it is ahead of the game to talk about a long-term positive trend of transportation volume rehabilitation.
At the end of the year, the factor of "low water" will stop playing its part, and the transportation of most goods by rail may continue its decline in reference to the previous year.
Construction materials and cement: the main driver of goods traffic reduction
In August, the transportation volume of construction materials and cement at the network of Russian Railways was 13.5 million tons (-19.2% compared to August 2013) and 3.4 million tons (-8.1%) respectively. Since the beginning of the year 96.7 million tons of construction materials (-16.9% year-on-year) and 22.6 million tons of cement (-7.0%) have been shipped.
Two main factors have influenced goods traffic reduction: the completion of the facilities construction for Olympic Games in Sochi and the slowdown in the construction of large industrial facilities.
Cement and construction materials supply for Krasnodar Krai halved after the completion of preparations for the Olympics with respect to eight months of 2013. Nevertheless, as early as in 2015 the adjoining Karachay-Cherkess Republic will plan the building of large-scale projects with the government support with the investment volume of more than 160 billion rubles. For example, there are plans of developing a year-round health resort "Arhyz", included in the tourism cluster project in accordance with the decree of Government of the Russian Federation. As a result, in 2015-2016 the scope of construction materials delivery in the Southern Federal District will start recovering.
Private industrial enterprises reduced their building plans, as they had to suspend many investment projects on industrial construction due to the limited access to the European and American financial backing. It will take some time to build relationships with Asian banks willing to offer their services and to resume works. As a result, the demand for construction materials, incl. cement, may remain at the same low level at least during the next year.
At the same time, demand for cement in housing sector remains high. This can be explained by the construction cycle time to a considerable extent. At present the projects funded in the post-crisis period of 2010-2012 are being built. On the other hand, people prefer to invest their savings in real estate because of depreciation of the ruble. Nevertheless, in the mid-term demand for housing may decrease against the background of the growth retardation of disposable money income (an increase of 0.2% in January-July 2014 against 4.3% in 2013) and rising in interest rates of real estate credit.
In general, the recovery of mass demand for cement will arise no sooner than 2016 due to the coming intensive preparation for the FIFA World Cup in 2018.
Coal: the growth of export freight traffic
In August, the coal transportation volume at the network of Russian Railways totaled 26.2 million tons (+4.0%). 202.3 million tons of coal (+0.2% compared to January-August 2013) were loaded for these eight months.
There are significant changes in structure of coal transportation of 2014 in relation to data of 2013. Domestic consumption decreased on 7.0%, while export supply increased and redistributed. Exports to countries such as the Netherlands, Korea and China fell by more than one half. At the same time, supplies to Japan, the UK, Turkey and Finland increased on 16-30%.
The rate reducing of Russian coal transportation to China is due to internal programme of cutting coal consumption in Chinese economy, launched in 2012. The power system in China is gradually reorientating towards alternative fuels, for example, the share of natural gas in power production could double by 2020. Thus, in 2014 according to the prognosis of the government of China, coal consumption growth may slow down up to 1-2% by 2013 (compared with a rise of 8.6% in 2012 to 2011).
In the midterm, China's coal purchases in foreign markets may also reduce due to the expansion of its railway network in China. This will put down the cost of delivering coal to Chinese enterprises, located on the coast of the coal-mining regions in the country and diminish the share of imports. However, at present, China is still the largest consumer of coal, generating about one-third of world demand for this type of energy.
Japan is gradually increasing the coal consumption subsequent to changes in the structure of its energy industry after the Fukushima nuclear disaster. Many old nuclear power plants do not meet the new demanding standards of safety, and their modernization is not cost-effective. In this situation, coal delivery is a good alternative to expensive imports of natural gas or the use of solar panels.
European governments (United Kingdom, Turkey, and Finland) are increasing coal supply from Russia to diversify energy sources and to reduce their dependence on gas supply.
The growth of coal loading at the railroad network of Russian Federation year-on-year started in June 2014. The main reason for the growth is the capacity restriction of freight delivery by inland water transport as a consequence of the fall in water level in rivers. At the end of the year, this factor will no longer play its role, and rail transportation of coal may start declining again compared with the same period of previous year. As a result, in 2014 coal transportation volume may decrease on 0.5-0.6% year-on-year.
Petroleum and petroleum products: domestic traffic growth against the decline in through traffic
In August the petroleum and petroleum products transportation volume at the network of Russian Railways totaled 21.4 million tons (+3.4% compared to August 2013) and reached a historical peak in August since 2003. Since the beginning of the year, 170.3 million tons have been loaded (+ 2.2% year-on-year).
At the same time, there have been some changes in the freight traffic structure. Thus, transportation in transit of petroleum and petroleum products fell by almost half in August, but an increase on 5.6% of domestic traffic partly balanced this transit decrease.
The cause for the transit decrease is the changeover of petroleum supply from Kazakhstan to Italy from the railway network to the pipeline of the Caspian pipeline consortium. This trend may only become more entrenched in 2015 because of the plans of increasing the pipeline capacity by 90%.
One of the growth drivers in petroleum domestic transportation is the development of the Southern Federal District oil industry, the projects ratio of which increased from 30% in 2010 up to 50% in 2014 in the Southern Federal District investment programme. Enterprises modernizing and increasing their production facilities are "Ilsky Refinery", "Tuapse Refinery", "Krasnodar Refinery — Krasnodarekoneft" and "Afipsky Refinery". Alongside with the development of petroleum industry the depletion degree of oil deposits in Krasnodar Krai reached 87%, which gives reason to believe that in the midterm an additional transportation of crude oil and derived products may appear in the Southern Federal District.
In addition, counter deliveries of petroleum from Kazakhstan to Russia have started since the end of August. These deliveries should make up for losses of the Russian budget from the tax-free export of petroleum products in Kazakhstan in 2012-2013.
This scheme assumes the following: Kazakhstan supplies petroleum in exchange for petroleum products to Russia, it goes for export, and the resulting export tax covers losses of the Russian budget from tax-free deliveries of petroleum for Kazakhstan. Kazakhstan is planning to deliver about 600 thousand tons of crude oil for Russian oil companies until the end of September 2014.
Thus, by the end of 2014 the demand for rolling stock for transportation of petroleum and petroleum products is supposed to increase on account of crude oil deliveries from Kazakhstan and rearrangement of internal traffic flows.
Ore mineral: search for alternatives to the Chinese market sales
In August, ore transportation volume totaled 9.1 million tons (-4.2% compared to August 2013). As a whole the amount of ore transportation volume from January to August 2014 at the network of Russian Railways was 71.7 million tons, which is 2.2% less than in January-August 2013.
The main reason for such decrease is the reduction of export deliveries, mainly to China, due to 20% year-on-year fall of international iron ore prices.
Despite the fact, that China is increasing ore imports (7.3% for 8 months of 2014 relative to 2013) in 2014, the deliveries from Russia halved, giving way the price-based competition with Australian and Brazilian producers. As a result, the Russian-mining companies are looking for new outlets. Thus, one of the largest iron ore exporters Lebedinsky GOK (the producer of beneficiated iron ore products) has redirected its deliveries to Japan.
The price factor also have an impact on the structure of the domestic demand for iron ore. Amid the stable level of domestic demand for this raw material, Russian companies have reduced purchases of domestic mineral processing plants and increased ore import from Kazakhstan. EVRAZ ZSMK and Magnitogorsk Iron and Steel Works are increasing ore supplies from Kazakhstan.
When worldwide trends of ore price reduction are constant, Russian producers may be forced to diversify the sales geography. Until the end of the year, export flow of traffic is likely to continue its decline, but the transportation volume may restore after forming new export logistics in 2015.
Ferrous metals: reorientation of export market channels
In August, ferrous metals transportation volume at the network of Russian Railways was 6.2 million tons, that by 6.9% higher than in previous year. From January to August 47.4 million tons of ferrous metals were shipped (+0.9% compared to January-August 2013.)
Exports have risen by 1.2% for 8 months of 2014 compared to the previous year, after undergoing structural changes. Countries such as Turkey, the United States, Belgium, Mexico, South Korea increased ferrous metals import by several times, while Italy almost completely abandoned ferrous metals supply from the Russian Federation, and exports to Germany grew twice less.
According to Federal State Statistics Service, from January to August 2014 iron and steel works are increasing production output of ferrous metals. For example, production of sheet hot-rolled steel has increased by 17%. The increase in ferrous metals output is coming among other things from the putting new extra capacity in operation (NLMK-Kaluga, Severstal – Long Product Mill Balakovo) and the upgrading of existing mills (Volgograd Steel Works “Red October”).
The factor of "low water" was instrumental in the ferrous metals transportation that shifted to the railway. Transportation growth slowdown from the current 6.9% to 1.2%. is expected until the end of the year.
Grain: transportation growth as a result of the record harvest
In August, transportation volume of grain and grain mill products at the network of Russian Railways totaled 1.8 million tons (+20% compared to August 2013.) 9.8 million tons were shipped from January to August 2014 (44.1% compared to last year).
The record harvest of 2014 is the main reason for such growth of grain transportation volume. As a result, the export freight traffic has increased threefold, and its share in the forwarding structure has risen from 10% in 2013 up to 30% in 2014. The main importers of Russian grain are Egypt, Azerbaijan, Israel, Saudi Arabia, Israel and Yemen.
Further rise in export transportation is expected until the end of the agricultural year 2014-2015.
Mineral fertilizers: at the height of production capacity
In August, mineral fertilizers transportation volume at the network of Russian Railways totaled 4.1 million tons (+2.5% compared to August 2013) 33.3 million tons have been shipped since the beginning of the year (+7.1% compared to last year).
Since November 2013 the mineral fertilizers transportation is displaying extremely high monthly rate over the last 10 years. For eight months of 2014 year-on-year, fertilizer exports have risen by 9.1%. The countries, increasing the import amount are China, Germany, Brazil and Finland.
In the meantime, plants producing mineral fertilizers are at the limit of production capacity. However, the major players are trying to cope with the situation and are planning the construction of new industrial facilities or upgrading of the existent ones. For example, Uralkali is working on building of Ust-Yayvinsky mine and is increasing the capacity of granular potassium production. EuroChem is planning to invest $750 million to finance its potash project EuroChem-Usolskiy Potash. In addition, in 2013 PhosAgro-Cherepovets and an international consortium of companies headed by the Japanese company Mitsubishi Heavy Industries Ltd. entered into a contract for the construction of new ammonia plant capacity of 2.2 thousand tons/day, which will be put in force in 2017.
In the midterm the transportation volumes will remain at the same level, but they are expected to increase since 2017.
Timber freights: a delayed increase in transportation after WTO accession
Timber freight transportation is still growing in 2014. The growth trend began in August 2013. 26.3 million tons were shipped during the first 8 months of this year (+9.1% year-on-year). In August, the timber transportation volume at the Russian Railways network totaled 3.1 million tons that is remained at the level of August 2013.
Traffic volume of unprocessed timber is growing faster (+19% compared to January-August 2013) than traffic volume of wood processing (+12%).
Transportation volume increase in relation to eight months of previous year happened due to growth of domestic transport work by 6% and exports by 11%. China, Uzbekistan, Egypt, Kazakhstan are the countries actively increasing the consumption of Russian timber.
Innovative cars are ousting the rolling stock fitted with 18-100 bogie from the market
The data on the sales of the rolling stock by plants of the CIS are taken from the magazine “Rolling Stock Market”.
In August car building works of CIS sold 4.8 thousand cars (-33% compared to August 2013), 46.9 thousand cars as a whole since the beginning of the year (-20% year-on-year).
One of the main trends in the car sales on the market is the share reduction of model 18-100 bogies and its analogs. Thus, compared with August of the previous year, the share of such cars in the overall sales structure has decreased from 96% to 74%.
Several factors influenced the drop in sales of rolling stock fitted with 18-100 bogie. In particular, car-building works in Ukraine decreased the volume of sales by 4 times (18.7 thousand of pcs in January-August 2013 against 5.0 thousand of pcs during the same period of 2014.) However, despite the fact that the Russian productive capacity is utilized only at 65%, the railcar builders of Russian Federation exceeded the sales programme year-on-year only by 6.5%. This goes to prove that domestic plants are almost entirely catering for domestic demand.
Demand for gondolas is still stable, but there occurred some changes in its structure. Innovative gondolas are gradually ousting gondolas fitted with 18-100 bogie from the market. Therefore, in August 2014 (year-on-year), the share of innovative gondolas (produced in TVSZ, UVZ, RVRZ, NKVZ) rose from 5% to 32% of the sales structure of the gondolas by CIS plants.
The growth of demand for innovative rolling stock results from economic benefits of their exploitation: transportation tariffs for one ton of freight in the innovative cars are 10-15% lower at the average rate than transportation tariffs in the cars fitted with 18-100 bogie.
The tank car sales by both Russian and Ukrainian plants have seasonally decreased in summer of 2014: in August 2014 the sales of tank cars for light oil products halved compared to August 2013, and tank cars for LPG reduced five times. Demand recovery for tank cars is expected at the end of 2014 taking into account an increase of freight traffic.
It should be noted that the growth of timber transportation from January to August 2014 rose the demand for platforms fourfold: from 0.4 thousand (2013) to 1.5 thousand pcs. (2014).
A small increase in rates on the back of steady prices
In August as a result of the seasonal increase in freight transportation in gondolas (+3% of the previous month) rental rate for this type of rolling stock rose to 500-550 rub./day from 450-500 rub./day (+10% compared with July 2014).
Since May of 2014 against the backdrop of sales reduction, the rental rate for oil tank cars decreased seasonally from 900 rub./day to 700 rub./day (-20% compared to August 2013). Until the end of 2014, the rental rate for tank cars may restore to the level of 750-800 rub./day following the demand growth.
The volume rise in timber transportation has increased the demand on platforms and provoked into the growth of the rental rate for log platforms: 1 200 rub./day (+25% compared to August 2013).
The market responds conservatively to short-term drivers in changing prices on the rolling stock, that’s why in August 2014 the price of a gondola fitted with 18-100 bogie remained at 1 500 thousand rubles (-15% compared to August of the previous year), of a tank car for light oil products was 1650 thousand rubles (-11%), the price of log platforms was 1 800-2 000 thousand rubles.
Forced growth of faulty rolling stock
Despite some economic recovery in the sector, in particular in the sector of gondolas, in August the market rental rate was below the minimum level that would ensure maintenance service of rolling stock. This led to the growth of inoperative fleet at the network.
In August of 2014, the gondola rolling stock of the Russian Railways network totaled 558 thousand pcs where only 498 thousand took part in transportation process. Idle rolling stock of the Russian Federation is about 60 thousand pcs 48 thousand pcs of which are taken out of service from traffic, in particular because the owners were not able to send the rolling stock for programming repair work due to financial problems. This index doubled during the previous year – last August it was 24 thousand of cars.
