Overview of the railway market in Russia as of December 2014
The transportation volume recorded a YOY change rate of - 0.8%. The turnover growth amounted to 4.7%
In December 2014, the transportation volume decreased by 0.4% compared to last year and amounted to 102.9 million tons.
Construction materials transportation (-5.2%), petroleum and petroleum products (-0.4%), iron ore and manganese (-1.1%), chemical and mineral fertilizers (-6.8%), nonferrous metal ores (-6.3%) decreased by December 2013. For the rest of goods there was traffic flow increase: ferrous metals (+4.9%), timber (+13.3%), grain and grain mill products (+17.6%), ferrous steel scrap (+ 7.7%). Transportation of coal, cement and coke remained unchanged.
The total transportation volume decreased by 0.8% in 2014.
In December 2014, the turnover amounted to 198.4 billion ton-km, which is less by 0.4% year-on-year. At the end of 2014 turnover increased by 4.7%.
Based on the daily loading plan of the Russian Railways, the year-on-year loading volume anticipated for January 2015 will decrease by 0.9%. According to the forecast of leading industry experts, the growth of transportation will be 1.0% this year, the turnover growth is expected to be up to 1.5%.
Construction materials and cement: the current low level of transportation will remain unchanged
In December 2014 the construction materials loading at the network of Russian Railways totaled 9.2 million tons (-5.2% to December 2013). 141.1 million tons of construction materials have been shipped by rail since the beginning of the year, which is by 17.1% less than in 2013.
The cement transportation at the network of Russian Railways has reached the point of the previous year and amounted to 1.7 million tons. 32.2 million tons of cement have been shipped by rail since the beginning of the year, which is by 6.4% less than in 2013.
In December, the underrun rate from the previous year decreased because domestic traffic maintained at the level of previous year. However, it is ahead of time to talk about recovery trends.
During 2014, the following reasons determined the constantly low level of construction materials and cement transportation. The construction of Olympic facilities in Sochi has been over, funding for the development of industrial capacities has been reduced, borrowing cost has increased, which led to a lack investment in construction industry.
In present situation, the demand for construction materials and cement will depend on the financing at the federal level, the performance of state-run programmes for housing and infrastructure construction, as well as reduction of rates of debt financing. The recovery of strong demand should not be expected before 2016.
Coal: the transportation growth due to export shipments in 2014
In December, the coal transportation at the network of Russian Railways totaled 28.9 million tons, and remained at the level of the previous year. In general, 315.4 million tons of coal were transported by rail in 2014 (+1.5% compared to 2013).
In December 2014, the growth in coal shipments stopped because of decline in Russian coal import to Poland and Ukraine by one-half.
Beside the transportation growth slowing, the second important trend of the end of 2014 was the decline in world price of coal. The implementation of China's domestic programme for reduction of coal consumption and diversification of energy sources, the export growth from the Australian and Brazilian suppliers, as well as the declining oil prices led to an excess offer of coal in the world market.
However, the coal transportation in Russia has increased from January to November. The main drivers of growth are the Japanese changeover to coal-fired power industry after the Fukushima accident and an increase in coal consumption in Europe as part of energy sources diversification programme. The devaluation of the ruble has become an additional factor that strengthens Russian companies’ position in the world, as it caused a significant fall of Russian coal exporter costs in dollar terms.
In this context, in 2015 coal transportation will rise due to the increase of export cargo traffic to Asia-Pacific countries.
Petroleum and petroleum products: transportation remained at a high level in 2014
In December, the petroleum and petroleum products transportation at the network of Russian Railways totaled 22.8 million tons (-0.4% compared to December 2013). Since the beginning of 2014, the transportation volume has steadily increased, 256.5 million tons have been sent by rail (+2.5% compared to 2013).
In December for the first time since the beginning of the year, the oil transportation was below the level of 2013 due to export reduction (-8.3% compared to December 2013). The reason of such decrease is slump in oil that is why the marginality of exporting companies has not increased much despite the devaluation of the ruble. Deliveries in countries such as Belarus (-72%), China (-37%), Turkey (-44%) and the UK (-85%) have fallen.
In 2015, crude oil production in Russia may be reduced due to limited access to financing and the slump in oil. In recent years, geological exploration underinvestment and quick brownfield depletion inhibit access to oil resources. It could be possible to increase oil production with the help of shale oil extraction techniques, but sanctions are hindering the excess of such equipment to the Russian market.
In the medium term, petroleum and petroleum products export transportation from Russia will decline until oil prices start rising again.
Ore mineral: year-on-year transportation is still less in 2014
In December, the ore transportation amounted to 8.9 million tons, which is 1.1% less year-on-year. Per annum, 108.6 million tons of ore have been shipped by rail, which is 1.9% less than in 2013.
Despite the depreciation of the ruble in 2014, the ore export from Russia declined significantly. The main reason was almost twofold supply reduction to China. Flow of export was partially forwarded to Japan, but it failed to compensate fully for the decline.
In the second half of 2014, domestic ore shipping has been actively growing (+4.8%). Russian producers were trying to bolster their profit margins by cost cutting of internal ore processing followed by rolled metal export. The growth of domestic transportation failed to compensate for exports decline.
In 2015, this trend may pick up, which will translate into rearrangement of exports to the domestic market.
Ferrous metals: export supplies increased
In December, ferrous metals transportation at the network of Russian Railways was 6.4 million tons that is higher by 4.9% year-on-year. Per annum, 71.8 million tons of ferrous metal products have been transported by rail (+2.4% in 2013).
Export sales of ferrous metals from Russia has been actively growing since April 2014, where the transportation growth began accelerating by year-end. The main driver is the depreciation of the ruble and, as a consequence, the consolidation of Russian steelworkers’ position in the world markets. There is a supply increase to Turkey (+40%), the USA (+75%), Mexico (+150%), Belgium (+200%) and some other countries.
During the crisis, the slowdown in the construction and engineering industries, as well as recession of pipeline transport may result in capital reduction of domestic ferrous metals consumption. At the same time, the devaluation of the ruble has consolidated the position of Russia in the world market, which may contribute to the further growth of export cargo.
Grain: transportation growth continues due to the record harvest
In December, transportation of grain and grain mill products at the network of Russian Railways totaled 2.0 million tons (+18% in December 2013). 18.2 million tons of grain were transported by rail in 2014 (+33.9% compared to January-November 2013).
The harvest-2014 was record high during the past few years, which helped to expand the export flows significantly. However, at the end of November 2014, about 70% of the harvest for export have already been sent abroad. This led to restrictions on further grain exports imposed by government to reduce the threat of grain domestic shortages.
Mineral fertilizers: transportation remains at a high level
In December, mineral fertilizers transportation at the network of Russian Railways was 4.1 million tons, which is by 6.8% less compared to December 2013. 49.2 million tons were shipped in 2014 (+4.7% year-on-year).
The transportation volume declined due to export cargo reduction (-12.3% in December 2013), especially in countries such as China (15%), United States (-51%) and Ukraine (-44%).
Federal Antimonopoly Service is planning extra discounts on mineral fertilizers for agricultural producers, as well as a commensurate drop in commodity prices for mineral fertilizer producers. This support will strengthen domestic demand for fertilizers, and the devaluation of the ruble will increase exports margins of mineral fertilizer producers.
Sales of innovative rolling stock in Russia exceeded sales of freight cars equipped with the 18-100 bogie for the first time
The data on the rolling stock sales by plants of the CIS are taken from the magazine “Rolling stock market”.
In December, car-building works of the CIS sold 4.2 thousand cars (+2.2% month-on-month), and 64.9 thousand cars in 2014 (-26.4% YOY).
The sales of freight cars in Russia has not dropped much compared to 2013 - only by 8%. The reason for the relative stability in Russian car-building industry is the demand growth for innovative rolling stock, which is economically attractive. The sales exposure of cars with increased axle load has been steadily growing in Russia throughout the year, and in December 2014, it exceeded the share of cars equipped with the 18-100 bogie for the first time.
At the end of 2014, the sales of freight cars dropped fourfold in Ukraine, by one third in Belarus. These countries have just begun manufacturing of innovative rolling stock (at the facilities of Mogilev Carriage Works).
Market experts estimate that in 2015 many plants will reduce their manufacture programmes for freight cars fitted with 18-100 bogies and, if possible, change over to new models of innovative rolling stock.
The demand for cars with increased axle load will be growing. The increased tariff on freight shippers will be an added incentive for it. On January 1, 2015, the Russian Railways rose tariffs for transportation by 10%, and the decision on additional tariff raising on export shipment by 13.4% may come into force on January 29. Innovative rolling stock will let reduce the tariff pressure, as the cost of cargo ton transportation by the freight new generation car will rise only by 5-10% in 2015, and not by 20-25%, depending on the freight car model and the terms of transportation.
Despite the rental rates growth, freight cars fitted with 18-100 bogie are still dropping out of the Russian fleet
In December, car taking out of service of the Russian fleet continued growing. Write-off increased up to 4.6 thousand cars, and about 7.7 thousand cars were withdrawn from service as inoperative rolling stock. As a result, the size of inoperative rolling stock grew from 115.4 to 123.1 thousand cars, 57.6 thousand of which are gondolas. One of the main reasons for withdrawing from service is insufficient profitability of the old generation rolling stock for programming repair work or car life extension.
According to our estimates, the "service" yield rate of gondolas, suitable for planned and current repairs, as well as component overhaul and car unit replacement should be about 700 rub/day. Despite an increase in market rental rates for gondolas over the past six months, its current level of 550-600 rub/day is still below the "service" yield.
In 2015, the car withdrawing from service is supposed to grow with no yield enhancement in transportation. This may lead to possible shortages to certain types of rolling stock on the network.
Leysana Korobeynikova, Senior Analyst