Overview of the Russian railway market in January 2015
In January 2015, traffic volume grew by 0.3% year-on-year, and freight turnover fell by 1.5%
In January 2015, traffic volume increased by 0.3% year-on-year to 96.6 million tons.
By January 2014, there was an increase in loading of coal (+3.7%), petroleum and petroleum products (+0.4%), iron ore and manganese ore (+3.4%), ferrous metals (+12.3%), timber cargo (+10.7%) and grain and grain mill products (+60.8%). Transportation of the following decreased during the same period: construction materials (-26.1%), cement (-6.7%), ferrous metal scrap (-1.5%) and coke (-3.9%).
In January 2015, freight turnover fell by 1.5% year-on-year to 188.2 billion ton-km. This downward movement resulted from a reduction in export cargo traffic, which fell by 3.0% year-on-year. Compared to January 2014, export volumes of the following products decreased: coal (-7.0%), petroleum and petroleum products (-5.2%) and chemical and mineral fertilizers (-12.0%). There was a reduction in exports to the following countries: the Netherlands (-10.2%), Ukraine (-32.7%), China (-12.6%), Finland (-30.7%) and Poland (-29.9%).
Coal: export transportation still decreased, despite the devaluation of the ruble
In January 2015, Russian Railways’ coal loading increased by 3.7% year-on-year to 27.9 million tons.
The structure of cargo traffic has changed. Export coal transportation fell by 7.0% compared to January 2014, while domestic coal transportation increased by 8.8%.
There was a year-on-year reduction in deliveries of Russian coal to China (-47.0%), Ukraine (-48.2%), Poland (-50.0%), the Netherlands (-67.0%) and Korea (-45.9%). Nevertheless, the following countries increased their coal imports from Russia: Japan (+ 12.4%), Turkey (+ 30.3%), Slovakia (+ 141.5%) and Korea (+ 100%). Coal deliveries to EU countries continued to increase from 7% growth in January 2014 to 10% growth in January 2015.
It should be noted that Chinese companies continue to reduce their global imports of coal. Despite the drop in world coal prices after the devaluation of major exporting countries’ currencies, coal consumption is still being reduced across the Chinese economy as companies switch to other energy sources.
In addition, exports of Russian coal to Ukraine and Poland continue to decline.
The largest consumer of Russian coal is Japan, which imports about one-third of Russia’s total coal exports. Moreover, Japanese companies are planning to further increase imports from Russia. Therefore, in February 2015, the largest Japanese steelmaker JFE Holdings Corporation entered into agreements with the Russian authorities to conduct an analysis of the status of coal mining projects in Siberia and the Far East for subsequent export to the Asia-Pacific countries.
The capacity for Russian coal exports is rapidly increasing in the Far East. Construction of the Inaglinsky mining and processing works will be completed in 2015, which will have a capacity of 1.9 million tons of coke concentrate per year. At the same time, construction has started on the ‘North’ general transshipment terminal in Primorye, which will have an annual processing capacity of 20 million tons of coal. In the same region, Sukhodol, a project included in the Federal Target Programme, received environmental approval for the construction of a specialized coal handling port with a turnover of 20 million tons. Construction is due to begin in 2015. Finally, RT Global Resources (“RT-GR”), a subsidiary of Rostec, continues to develop its cooperation with the China Shenhua Energy Company and the Korean company KOWEPO. By July 2015, RT-GR is expected to sign the final agreement with a partner (or a consortium of partners) that offers the most favorable terms for the joint implementation of the coal terminal project in the Vera port, which has a capacity of 20 million tons.
Turkey continues to increase its consumption of Russian coal and it intends to expand the use of coal across the economy. There are plans to invest approximately US $ 10 billion in coal-fired power stations in Turkey. Experts predict that Turkey will increase its annual coal consumption by 7 million tons over the next 5-6 years. As a result of this trend, Kuzbassrazresugol (KRU) is planning to build a terminal for 10 million tons of coal in Taman.
There is still great potential for growth in coal consumption in countries such as Japan and Turkey and this will help to partially offset the reduction in exports to China. However, in the medium term, Russian companies will have to look for additional markets.
Petroleum and petroleum products: domestic transportation remained at a high level, exports fell
In January 2015, Russian Railways’ petroleum and petroleum products loading increased by 0.4% year-on-year to 22.6 million tons.
The so-called tax maneuver came into force in the oil industry on 1 January 2015. As a result, export duties on petroleum and petroleum products will gradually reduce over a three-year period while the mineral extraction tax (MET) rate will increase.
Rosneft wrote to Russian President Vladimir Putin arguing that these innovations will lead to systemic risk, with the price for petroleum products significantly increasing on the domestic market and Russian companies being forced to abandon plans to modernize oil refineries due to limited access to finance.
According to Minister of Energy Alexander Novak, the cost of gasoline will rise by 10% in 2015 due to the introduction of the tax maneuver.
In turn, Russian Prime Minister Dmitry Medvedev instructed the Federal Anti-Monopoly Service (FAS) to prepare adjustments of export duties on petroleum and petroleum products in the event of having to impact on pricing.
The changes in the tax laws have not yet had time to have a significant impact on the transport structure. In January 2015, domestic transportation of petroleum products was 2% higher than in January 2014. In the future, there may be a substantial redistribution of petroleum products from the domestic market to export destinations.
Construction materials and cement: the current traffic low volume remains
In January 2015, Russian Railways’ building materials loading fell by 26.1% year-on-year to 6.5 million tons, with the loading of cement decreasing by 6.7% year-on-year to 1.4 million tons.
Due to the highly inert nature of the construction industry, the effects of the worsening economic conditions have not yet been fully reflected in building volumes, but the investment situation remains fairly challenging, with some regions already significantly reducing their use of building materials. Transportation of building materials to Moscow and the Moscow region fell by a third and deliveries to St. Petersburg, the Leningrad region, the Novosibirsk region and the Khanty-Mansiysk Autonomous Okrug halved.
According to the Ministry of Construction, house building may fall by 10-15% this year. House building currently accounts for 70% of total building construction in Russia. Mortgage lending also may be halved to RUB 800 billion. Approximately half of all housing building in Russia is carried out using people’s own or borrowed funds. According to Rosstat, in January 2015, Russians’ real disposable household income fell by 0.8% year-on-year, after declining by 6.2% in December and 3.9% in November.
Construction costs are expected to increase by an average of 10-20% due to the devaluation of the ruble. Therefore, the costs of imported materials and rolled stock have increased in rubles on the domestic market; the latter has resulted in prices for sandwich panels and other frameworks using metal increasing.
Increasing labour costs may also play a role. Migrant workers are either are seeking better pay in dollar terms, or to leave Russia. Russian citizens provide an alternative source of labour, although their costs are usually 1.5 times higher.
As for road construction, more than 10,000 km of public highways are due to be constructed by 2016. In particular, in 2015, there are plans to complete the reconstruction of large sections of the ’Sortavala’ route, to put the by-pass highways in Pyatigorsk and Nizhny Novgorod and the approach roads to Murmansk into operation, and to complete construction of the bridge across the Yenisei in Krasnoyarsk. There is a possibility that the Russian government will cut spending on the construction and reconditioning of federal roads by 25%. In this case, the reduced budget is likely to mean that new projects will not go ahead.
Therefore, the key drivers of building materials transportation in 2015 are likely to be the construction of sports venues for the FIFA World Cup 2018, the construction of federal facilities, the development of transport infrastructure and the reconstruction of BAM (Baikal-Amur Mainline). If the current economic situation remains unchanged, the crisis of the construction industry is expected to exacerbate in the third quarter of 2015.
Ore mineral: traffic volumes have started to grow
After declining in the second half of 2014, ore loading began to increase in January, growing 3.4% year-on-year to 9.2 million tons. Domestic transportation increased by 1.6% year-on-year and exports by 5.1% year-on-year.
In January 2015, there were year-on-year increases in transportation to countries such as China (+ 23.9%), Turkey (+ 341.4%), Slovakia (+ 30.2%) and Poland (+ 125.1%). At the same time, the United Kingdom, which started importing ore from Russia last February, rose to 4th place in terms of consumption in January 2015. In addition, Italy began exporting Russian mineral ore in January.
In January 2015, the price for iron ore fell by 13%, decreasing for the third straight month and hitting the low of 2009. Due to the US dollar strengthening against the currencies of exporting countries, mining companies are not only continuing their projects, but they are also starting new ones, since the difference in exchange rates significantly offsets the drop in dollar prices. The US dollar has risen by 5% against the Australian dollar since the start of the year, and by 7% against the Canadian dollar and the Brazilian real.
As a result, shipments will continue growing. But the devaluation of the ruble against the US dollar was stronger than that of other exporting countries, meaning that Russia’s position in foreign markets is more stable and that a high level of ore traffic from Russia can be maintained.
Ferrous metals: export deliveries increased as the ruble fell
In January 2015, Russian Railways’ ferrous metals loading grew by 12.3% year-on-year to 6.4 million tons. The growth of domestic traffic in January amounted to 8.8%.
Furthermore, the following countries continued to increase their export shipments: Turkey (+22.7%), Switzerland (+53.7%), Spain (+202.4%), Mexico (+56.3%) and Taiwan (+7.0 %).
The ruble devaluation led to price increases in the domestic rolled steel market, which dissatisfied national buyers. The government has reacted to their concerns and has held a number of meetings on metal pricing. The end of March 2015 was set as the deadline to solve the problem and to reach a price compromise with the buyers. However, in mid-February, the FAS wrote to steel companies to warn them about the imposition of metals export duties. This decision spurred steelmakers to agree on the prices of their products for the next six months with car manufacturers. However, the matter is not yet settled with defense contractors and car-building works.
At the same time, there is excess capacity for ferrous metals production in the world market, which has led to a considerable volume of cheap rolled stock. Some Russian consumers admit the possibility of importing ferrous metals, if they are unable to settle on prices with Russian steelmakers. However, such a solution is unlikely since the delivery cost would absorb the price margin. Domestic rolled stock consumption is expected to decline due to low activity in the construction and engineering industries, as well as a slowdown in the development of pipeline transport. At the same time, the devaluation of the ruble has strengthened Russia’s position in the global market, which will contribute to the further growth of export cargo traffic.
Grain: export loading was rapidly developing before the imposition of duties
In January 2015, Russian Railways’ loading of grain and grain mill products grew by 60% year-on-year to 1.6 million tons.
Export grain transportation, which almost doubled year-on-year, was the main growth driver. According to the Ministry of Agriculture, the volume of exported grain reached a five-year high.
With duties on grain exports being introduced from February, in January manufacturers focused on wheat supplies, leaving exports of the duty-free types of grain for February.
In January, there were large increases in grain exports to countries such as Azerbaijan (fifteen times), Egypt (by half), Saudi Arabia (tripled) and Kazakhstan (six times). Deliveries to Israel and Yemen remained high.
Due to a poor harvest, Kazakhstan began actively importing Russian grain. Export duties do not apply to Kazakhstan, and the depreciation of the ruble against the tenge promoted the growth of exports. At the end of the season, Kazakhstan is expected to become a major importer of grain from Russia.
The Egyptian authorities are working towards abolishing grain duty for their country, as Russia remains one of their key wheat suppliers, strategically important for the state’s food security. However, the Russian authorities were barely able to stop increases in domestic grain prices, and have no intention in meeting their requirements.
A further increase in traffic of crops exempt from duties and strengthening export cargo traffic to Kazakhstan is expected in February.
Mineral fertilizers: transportation remained high despite a fall in exports
In January, Russian Railways’ mineral fertilizers loading remained at the same level as the previous year and amounted to 4.4 million tons.
At the same time, there was a redistribution of cargo flows. Export transportation fell by 6% year-on-year, while domestic transportation rose by 11% year-on-year.
Export transportation decreased to China (-13.2%), Ukraine (-40.0%), the USA (-14.5%) and Lithuania (-23.3%). The reason for reduced transportation to China is the fact that Chinese companies have created considerable potassium reserves. According to experts, these reserves may be around 4.5 million tons, which makes it difficult to agree new potash contracts between Russia and China. As a rule, the cost of potassium for China serves as a price guide for the whole market. Therefore, the absence of deals with China affects the sales of Russian fertilizers to other countries.
In December 2014, fertilizer producers agreed on a 10-15% discount from the minimum export rate for Russian companies. In January, the discount rate increased to 15-20%. In February, Russia’s Ministry of Agriculture and fertilizer producers worked out their final position: fertilizer prices will be fixed at the level of January 2015 for farmers from the 49 regions that are unfavorable for agricultural production, and for farmers in the remaining regions, prices will remain at the level of February 2015. A discount of 15-20% is provided from these levels depending on the state of the region’s agriculture industry, the necessity for fertilizers, manufacturers’ position and their supply of raw materials and so on. This agreement will help to support a stable level of domestic fertilizer transportation.
Railcar production in the CIS halved
The data on the rolling stock sales made by plants in the CIS is taken from ’Rolling Stock Market’ magazine.
In January 2015, railcar producers in the CIS sold 1.9 ths railcars, which is a 54.3% reduction on the previous month and a year-on-year drop of 65.3%.
In effect, the only plants that were in operation were those manufacturing innovative rolling stock (TVSZ, Uralvagonzavod and Altaivagon). The share of railcars fitted with bogies with an axial load of 25 tf in the overall sales structure grew to 46.5% in January 2015.
However, Altaivagon was out of action until January 19, 2015. The plant switched employees over to a four-day working week in October 2014 and intended to reduce headcount by 34% in 2014.
In plants that manufacture old generation cars, there has been a mass suspension of production.
For example, the Stakhanov Railway Car Building Works ceased production activities due to damaged infrastructure and having to evacuate personnel from the premises. Experts estimate that the losses caused by the plant being inactive will amount to approximately US$ 1.2 million per month.
From February 4, the Bryansk Engineering Plant sent 50% of its staff on unplanned leave for two months due to financial difficulties.
Manufacturing was suspended at Promtractor Wagon in January. More than 1,000 employees are working there part-time. 31% of the workforce is threatened with the prospect of being dismissed.
The property of Ruzkhimmash was seized by the Mordovian Office of the Federal Bailiff Service for defaulting on payments of RUB 170 million to the republic’s pension fund and a number of suppliers. The management of Ruzkhimmash previously had plans to switch employees over to a four-day working week from April 1 and to reduce headcount by 31% in 2015.
Rental rates growth in 2015-2016 against the backdrop of a narrower railcar surplus
In January, the non-serviceable rolling stock on Russian Railways’ network continued to grow and totalled 123.4 ths cars, 56.4 ths of which were gondolas. However, a considerable part of the railcars not currently in operation can be written off in the near future due to the cost of car detention on the railroad infrastructure increasing after April 1, 2015.
Against the backdrop of a seasonal increase in the gondola surplus, lease rates for these cars decreased to RUB 500-550/day in January 2015, compared to RUB 550-600/day at the end of 2014.
According to INFOLine Rail Russia Top for 2014, lease rates for innovative gondolas with an increased axle load and tariff allowance on empty mileage are an average of RUB 300-350/day higher than for gondolas equipped with the 18-100 bogie.
According to research, the higher lease rates result from the increased rates of return of innovative gondolas, which exceed gondolas equipped with the 18-100 bogie by RUB 400-500/day (this varies depending on the railcar model and type of cargo). The economic viability of innovative gondolas on loaded runs is higher due to their increased load capacity (for coal transportation an average gondola’s operating profitability with an axial load of 25 ton exceeds that of a gondola with an axial load of 23.5 ton by RUB 250/day). The profitability of innovative gondolas on empty runs is higher due to tariff allowances (the saving is up to RUB 250/day per railcar for coal transportation and a full empty return for TVSZ gondolas equipped with Barber bogies).
If there is a mass disposal of gondolas, lease rates may rise by up to RUB 550-600 for old generation gondolas in the second half of 2015; on some routes where there is a shortage of rolling stock, lease rate growth may be up to RUB 650/day. If the disposal of rolling stock continues into the second half of 2016 and gondola production remains at a low level, lease rates for gondolas could increase to RUB 700-750/day.
Leysana Korobeynikova, Senior Analyst