Overview of the Russian Railway market in August-September 2015
The increase in freight turnover by 1.0% amid the decrease in loading by 0.6%
In August 2015 the decrease in rail freight traffic volumes compared to last year’s level slowed: the loading amounted to 105.2 mn tons (-0.6%).
The loading of the following freights declined: oil and oil products (-0.5%), construction materials (-0.7%), ferrous metals (-1.6%), cement (-8.8%), ferrous steel scrap (-17.6%), grain (-5.6%). The transportation of coal (+0.8%), fertilizers (+4.9%) and non-ferrous ore (+12.5%) increased.
Freight turnover in August 2015 amounted to 193.6 bn tons-km (+1.0%), having reached the maximum value for this month for the last 10 years.
Coal: traffic updates the 12 years’ records
In August the loading of coal on the Russian Railways’ network increased by 0.8% as compared with the previous year’s level and amounted to 26.4 mn tons, having set a new record for the freight traffic over the last 12 years. A total of 207.3 mn tons were transported via the railroad from the beginning of 2015, exceeding the level of 2014.
According to Russia’s Ministry of Energy, the mining of coal in August 2015 turned out to be higher by 4.6% than the level of such mining last year. According to the data of Rosstat, the increase was 3.1%.
In comparison with August of last year, domestic rail freight traffic decreased by 1.3%, while the export rail freight traffic increased by 1.4%. South Korea (double growth), Japan (+6%), Spain (1.5 times growth), as well as Taiwan and North Korea (these two countries did not import the Russian coal in August last year) continue to accelerate their export.
Japan, which share is estimated as one fourth of the Russian export flow of coal intends to further cooperate with Russia. For example, in the beginning of September “Mechel” and one of the largest Asian steelmakers Japan Future Enterprise Steel (JFE Steel) signed the contract for the supply of coal till August 2018. Experts consider Japan to be one of the most promising consumer of coal in the world, considering the programme of replacement of nuclear power plants with the coal-fired power stations. The share of coal electrical power generation is now about 25% in Japan, while in some countries it exceeds 70%.
The increase in coal transportation to Spain is reasoned by the fact that Spain leaves the race for the replacement of the traditional power sources with the renewable ones.
In 2010 Spain was the first place in the EU with regard to the commissioning of new capacities – 1.5 gigawatt, but next year Spain commissioned just 27 megawatt.
The Russian sales markets are still Asia-Pacific Region countries as well as some European countries, which refuse to develop the renewable sources of energy due to the low cost of coal generation. In the midterm the transportation of coal may maintain at the current high level.
Oil and oil products: the increase in loading thanks to the growth in export rail freight traffic
In August the loading of oil and oil products on the Russian Railways’ network increased by 0,5% compared to last year’s level and amounted to 21.3 mn tons.
In August 2015 the domestic rail freight traffic of oil and oil products decreased by 5.4% compared to August 2014, and export rail freight traffic increased by 4.8%. Export increased to Italy (+27%), Belorussia (by 2.5 times), Finland (by 2 times), South Korea (+25%), to the Ukraine (by one third) and to Kazakhstan (+21%).
According to Russia’s Ministry of energy, offshore production in the Russian Federation in 2015 will be 17 mn tons of oil, of which 14 mn tons will be obtained from Far Eastern shelf, 2 mn tons – from South Sea shelf and 1 mn tons – from the Arctic. As of today offshore production in the Arctic is carried out only in one area – the Prirazlomny deposit. In 2020, Russia will get 23 mn tons of oil from the shelf, of which 14 mn tons will still be received from the Far Eastern shelf, 6 mn and 3 mn tons – from shelves of the South Seas and the Arctic, respectively.
According to Russia’s Ministry of Energy, crude oil production in August 2015 was higher than last year by 1.3% and primary processing of crude oil was lower by 1.5%.
It is forecasted that over the medium term the current volumes of shipment of oil and oil products will be maintained. Having said that, in September the decrease in loading is very likely, compared to last year’s level, due to the low base effect of September 2014.
Construction materials and cement: rail freight traffic has reached its bottom
In August the fall in loading of construction materials and cement on the Russian Railways’ network slowed: -0.7% and -8.8% compared to last year’s level respectively (13.4 mn tons and 3.1 mn tons). A total of 83.5 mn tons of construction materials and 19.7 mn tons of cement were transported by railroad from the beginning of 2015, and that figure is by 13.7% and 12.8% lower than the level of 2014.
The growth in rail freight traffic of construction materials in seen in the Krasnodar Territory (by 1.5 times), in the Novgorod region (by 2 times), in the Kaluga region (by 3 times) in the Saratov region (by 1.5 times), as well as in the Altai territory (by 2.8 times). The positive trend of the rail freight traffic of construction materials in these regions is conditioned by the implementation of huge infrastructure facilities in the first place, being carried out thanks to state backing.
The state programme of subsidizing mortgage rates on the purchase of items of immovable property in the primary market, being in effect till March 2016, backed the construction industry – the rates of decline of mortgage lending lowered after the launch of the programme. However, Ministry of Finance of the Russian Federation has no plans to prolong the programme, but it can extend it for secondary housing, if purchase of this type of housing will be connected with the purchase of primary housing. In addition, Ministry of Finance is considering an opportunity to increase the maximum amount of the loan under the programme of preferential mortgage – from 3 mn up to 4 mn rubles for all regions, except for Moscow, the Moscow region, St. Petersburg and the Leningrad region (for these regions it will be increased from 8 mn to 10 mn rubles).
At the same time, a further decline in the construction volumes is expected. In this regard, Ministry of Labor and Social Protection of the Russian Federation introduced an initiative, which was approved of by The Ministry of Construction, to limit the allowable share of foreign workers engaged in the construction to 65%. In the agencies they believe that the reduction of investments in construction, from industrial facilities and to public buildings will soon lower the need of industry for foreign workers.
The state stimulates the appearance of new housing projects. According to Minister of Construction, Housing and Utilities of the Russian Federation Mr. Men’ Mikhail the first stage of the designed Federal strategy of industry development until 2018 will be the improvement of the law and the reduction of administrative barriers in construction.
In the current conditions the transportation of construction materials is maintained by the stimulation of end demand for housing from the state. Still the situation may become worse after the cancellation of preferential mortgage rates in March 2016. Additional measures of state support planned to be implemented may have a positive impact on the volume of rail freight traffic. The introduction of fees to be charged from truck drivers may be one more stimulus of growth in rail freight traffic of construction materials, and that will lead to a partial return of freight from motor transport on the railroad.
Iron and manganese ore: rail freight traffic at last year’s level amid falling world market
In August the loading of ore on the Russian Railways’ network remained at last year’s level and amounted to 9.1 mn tons. A total of 72.2 mn tons of ore were transported by rail from the beginning of 2015, which is by 0.7% higher than the level of 2014.
In August the domestic rail freight traffic increased by 5% compared to last year’s level, and export rail freight traffic decreased by 22%. Main drop in export was indicated in China (drop by one third), in Japan (by 4 times) and in Poland (by 3 times). The increase in the production of exported rolled metal led to an increase in the domestic consumption of ore due to high cost of scrap metal.
Mining of Russian iron ore amounted to 48.5 mn tons in the first eight months (+0,2% compared to the same time-period last year). In comparison with August 2014 mining of ore increased by 0.2%, in comparison with July 2015 it decreased by 0.4%.
The analytics of Atlas Iron Ltd. assume that iron ore prices may rise till the end of the current year amid the decline in the manufacturers’ supplies accompanied by high costs and slowing down of sustaining of these raw materials in China. The experts believe that there is high probability of shutting down of new mines and the increase in the purchase of ore before the end of 2015. Iron ore reserves in China continue to decrease: so, in ports of People’s Republic of China they continued to decline four weeks in a row and fell down to the minimum level – 80.1 mn tons, which the data of Shanghai Steelhome Information Technology Co. shows.
The largest world iron ore exporter – Brazil – decreased by 4% the export of iron ore in August 2015 as compared to August 2014.
At the same time the powers of Russia are gaining momentum: the first phase of Sutarskiy GOK was put into operation in the end of August in the Obluchenskiy district of the Jewish Autonomous Oblast. At the first stage the production capacities of GOK will amount to 3.2 mn tons of iron ore concentrate per annum.
In the current market conditions the volumes of rail freight traffic will maintain, but the situation can be become destabilized by the protective measures taken towards Russian steel products.
Ferrous metals: fall of load caused by tougher competition in the world market
In August, the loading of ferrous metals on the Russian Railways’ network declined relative to last year's level by 1.6% and amounted to 6.1 mn tons. A total of 48.1 mn tons of ferrous metals were transported by rail since the beginning of 2015, which is by 1.5 % higher than the level of 2014.
Belgium (-38%), Iran (-72%), the Republic of Korea (by 2 times) and Taiwan (-20%) shrunk the purchase from Russia in August 2015 compared to last year’s level. At the same time the deliveries to Turkey (+40%), Mexico (by 1.6 times) and the Netherlands (by 3 times) increased.
According to Rosstat in January-August 2015 the metallurgic plants of the Russian Federation produced 46.8 mn tons (-1.1% compared to last year’s level) of steel and manufactured 40.4 mn tons (-1.0%) of finished rolled steel. At the same time the production of other metal products has been growing from the beginning of the year: in the first 8 months iron smelting increased by 2.7% up to 34.9 mn tons, and the production of steel pipes – by 2.9% up to 7.6 mn tons.
For the second half of August four anti-dumping investigations were launched in the world market of steel, and Chinese suppliers were mentioned in all the cases.
The ministry of trade of the People's Republic of China considers all dumping accusations, aimed at the Chinese producers of steel, groundless, as the low cost of Chinese rolled products is preconditioned, above all, by almost double reduction of prices for imported iron ore for the last one and a half years. Along with it, the Chinese metallurgic association CISA warned its members that the increase in the number of foreign trading conflicts makes bigger the dependence of the branch from export deliveries, reducing its stability. CISA urged the Chinese metallurgists to abstain from sale of steel products abroad at cut prices.
A number of WTO countries (Indonesia, South Africa and other) took advantage of the right to introduce protective duties on some goods, at an average rate not higher than 10% and for an unlimited period of time. However, and this more measure may give certain backing to national metallurgists. At the end of August this very 10% duty for rolled products was introduced in South Africa, where the import from China sharply increased over the last year. The government of Indonesia have approved 14.5%-tariff for wire rod with the subsequent reduction to 10% from August 18th 2016, and to 5.5% - once again in a year. Meanwhile, the conditions were drawn up in such a way, that the limitations affected only the suppliers from China, Japan and Malaysia, the share of which in 2013 accounted for about 90% of the national import of these products.
Due to the introduction by the US, the EU and WTO countries of barriers the reduction of rail freight traffic of rolled metal products from the Russian Federation is likely to happen, despite the favorable conditions of the Russian export of ferrous metals because of the devaluation of the Russian ruble. The situation may improve in the event of entry into alternative markets, for example, Turkey and Mexico.
Grain and milled grain products: expectations of export growth due to unreported amounts of prior periods
The loading of grain and milled grain products on the Russian Railways’ network decreased by 5.6% as compared to last year’s level and amounted to 1.7 mn tons in August 2015. A total of 10.6 mn tons of grain were transported by rail from the beginning of 2015, which is by 8.2% higher than the level of the year 2014.
Meanwhile domestic rail freight traffic turned out to be higher by 7.5% than last year’s level and export transportations decreased by 13.2%. Deliveries to Egypt fell by a third, to Azerbaijan – by 2 times, the shipments to Jordan stopped completely. At the same time, the deliveries of grain to Yemen, Mozambique and Syria increased considerably.
According to the official forecast of the Ministry of Agriculture, gross grain harvest in Russia this year could reach 102.9 mn tons. Last year 105.3 mn tons were harvested.
High yield and the devaluation of the Russian ruble led to the situation when the export price of domestic wheat fell to a five-year minimum. The attractiveness of the Russian proposal significantly increased the competitiveness of domestic suppliers in the world market. For example, last week Egypt’s state grain buyer General Authority for Supply Commodities (GASC) bought 170 ths. tons of the Russian grain for 178.6–178.8 $/ton.
The Ministry of Agriculture of the Russian Federation prepared and forwarded to the government proposals to change the existing procedure for calculating export duties on wheat, which rate is at the level of 50% of the customs value in rubles minus 6.5 ths. rubles per 1 ton. In the new draft decree it is proposed to remove the minimum rate (50 rubles/ton). The necessity to adjust duties is explained by grain manufacturers’ impossibility to compensate for the rise in prices for petroleum, oil and lubricants and plant protection products and labor costs due to sales to exporters at the current prices even taking into account the latest round of the devaluation of the Russian ruble.
According to analysts of CJSC “Rusagrotrans”, export of Russian grain in September 2015 will be significantly higher than the actual supplies’ volume in the current month due to the unrecorded export for the last months. Currently the official forecast for export in September is 4.5 mn tons, and that figure by 28% higher than an indicator of similar month of last year. In reality the supplies will be equal to 3.5 mn tons, including 2.9 mn tons of wheat. Similar situation is explained by delays in registration of customs declarations due to the introduction in Russia of export duty on wheat.
The new oil-extracting plant was launched in the Laishevsky district of Tatarstan. The new plant is capable of processing sunflower – 1.9 ths. tons per day, rape plant – 1.3 ths. tons per day. Prior to the launch of the new production the capacity of processing of raw material by the Group of Companies “Nefis” in the existing Kazanskiy oil-extraction plant was 330 ths. tons of oilseeds per annum. The plant produced up to 150 ths. tons of not refined vegetable oil and up to 175 ths. tons of oilseed meal per annum. Owing to the commissioning of the new plat the Group of Companies “Nefis” will be able to process up to 1 mn ton of oilseeds per annum.
A growth in export freight traffic of grain-crops is expected due to unaccounted volumes of previous periods. Besides, a growth of domestic freight traffic of oilseeds and oilseed meal is predicted.
Chemical and mineral fertilizers: a new freight traffic record has been set
In August the loading of fertilizers on the Russian Railways’ network increased by 4.9% compared to last year’s level, and amounted to 4.3 mn tons, setting a new record of rail freight traffic of fertilizers in August for the past 10 years. A total of 34.1 mn tons of fertilizers were transported by rail since the beginning of 2015, which is by 2.4% above the level of rail freight traffic last year.
The growth in loading is conditioned by the increase in domestic traffic compared to July of last year by 9% and export traffic by 1.4%. The Ukraine (by 1.5 times), Lithuania (by 2 times), China (+6%) increased the deliveries of fertilizers from Russia, and the UAE, which was not supplied with fertilizers last year, increased the deliveries of fertilizers from Russia as well.
Producers of mineral fertilizers made the promise not to raise the price for landowners until the end of the year. According to the Ministry of Agriculture from January 1st to September 15th 2015 landowners in Russia bought 2 mn tons of mineral fertilizers: it is by 2% more than for the similar period of last year. Taking into account saved-up resources it is 2.23 mn tons of fertilizers. So far the average purchase level is more than 600 ths. tons of mineral fertilizers in a quarter, it is possible to say that fertilizer manufacturers are fulfilling their commitments to meet the needs for raw materials declared by landowners.
The growth of deliveries to the Ukraine is conditioned by the stoppage of two of the largest enterprises of the Ukrainian chemical industry “Stirol” and JSC “Severodonetsk Azot Association” — the Ukrainian farmers lacked about one-third of ammonium nitrate due to this stoppage.
The Ministry of Trade of the USA declared revision of anti-dumping duty on the Russian nitrogenous fertilizers. These duties were as well imposed against the USSR as a protective measure, then they were repeatedly extended. A prohibitive duty of 254% for ammonium nitrate import from the Russian Federation is in effect from August 10th, 2011 to August 9th, 2016.
Further growth of export freight traffic is expected due to favorable conditions for the Russian mineral fertilizers in the world market. The volume of domestic rail freight traffic will remain at the current level due to fixed prices.
The growth of rates for rolling stock
The source of data on the sale and decommissioning of rolling stock — the magazine "Rolling Stock Market".
In August 2015 the sale of railcars by the CIS plants amounted to 1,852 units, which is by 31% lower than in July 2015 and by 61% lower than in August 2014.
The fall in the sale in the segment of standard railcars on bogies 18-100 and its analogs by July, 2014 amounted to 66%, while in the segment of innovative rolling stock — 48% which is caused by a scheduled technological break at Tikhvin Freight Car Building Plant.
There is a growing outflow of old rolling stock: following the results of 8 months of the year 2015, it is about 70 ths. units, and that figure is more than the volumes of outflow for the entire year 2014. It is still expected that overall figure of the written-off cars for the year 2015 will be about 100 ths.
The number of faulty cars amounted to 119.2 ths. units at the end of August. The rolling stock, commercially suitable for rail freight traffic in August — about 1.05 mn cars (at the level of July), and surplus of stock reduced to 96 ths. units.
The new generation railcars in service continue to demonstrate high efficiency of rail freight traffic. According to statistics on Barber bogie stock performance indicators: in August the average turnover per 1 car with increased axle load was approximately 443 ths. tons*km, while per 1 standard type car - 231 ths. tons*km.
It is worth noting that the Freight One announced in August about the deficit of cars, and, according to the Company, the situation could worsen in September and October due to the seasonal increase in rail freight traffic of thermal coal and the loading of the winter stock of ore, coal, dolomite, pellets, and etc. raw materials in steel enterprises.
Growth in demand for rolling stock made it possible for UVZ-Logistic to raise rates by 1.5-2 times for the provision of gondola for the construction materials. Corporate Transportation Service (CTS), obtained the Federal Fright cars to be used, increased the rate for September by 10%. As a result, rental rates for typical gondolas rose up to 450-500 rubles per car/day in the 3rd quarter of 2015.
Such situation is caused by a set of several factors: the considerable amount of written-off cars of the old rolling stock, earlier provided in accordance with dumping “survival rates”, the increased need for gondolas for heating season’s preparations, and also by the transfer of a universal rolling stock of Federal Freight to be managed by Corporate Transportation Service (CTS) JSC “Russian Railways”.
Leysana Korobeynikova, Senior Analyst