Turnover growth by 2.3% against loading decline by 0.3%

In July 2015, transportation decline slowed down YOY: the loading totaled 102.8 million tons (-0.3%).

Transportation of coal (-0.4%), construction materials (-1.5%), ferrous metals (-1.7%) and cement (-11.4%) decreased. Loading of petroleum and petroleum products (+1.4%), iron and manganese ore (+3.4%), fertilizers (+ 10.0%), non-ferrous ores (+5.9%) and coke (+11.1 %) increased.

In July 2015 freight turnover amounted to 196.3 billion ton-kilometers (+2.3%), reaching its maximum value of the month in question over the last 10 years.

Coal: transportation at high level, reduction to 2014 level because of the effect of the high base

In July, coal loading at the network of Russian Railways slightly decreased by 0.4% YOY and amounted to 25.3 million tons. 180.9 million tons of coal have been delivered by rail since the beginning of 2015, which increased by 2.7% with regard to 2014.

In comparison with July 2014, domestic traffic decreased by 4.6%, while exports increased by 0.8%. South Korea (3.5 times), North Korea (2.5 times), Spain (+ 55%) and Poland (+20%) continue to increase exports.

Due to the reduction in coal demand from China and India, the US, Indonesian and Australian suppliers are losing export markets, while the price of coal reached its bottom.

In the US, the largest coal mining companies are suffering from serious problems because of low coal prices. Nationwide standards on greenhouse gas emissions taken by the government are also pushing the situation into complications, and they will affect coal power plants activity. So, one of the largest coal companies Alpha Natural Resources filed a petition in bankruptcy in late July. The main coal competitor in US power - gas - also reduced the price, and for the first time in the history of the US, the share of gas power generation has exceeded the share of the coal power generation. American Peabody Energy, the largest US coal producer, is planning to reduce coal sales volumes by 9 million tons in 2015, as well as to decrease metallurgical coal production by 3 million tons in the Australian division.

At the same time, recession in demand for Russian coal is not so strong. According to the Ministry of Energy, in July 2015 coal production increased by 2.7% to 2014 level. According to Rosstat, the growth totaled 4.8%.

It becomes important for Russia to keep its own market share in the current conditions, which is possible due to high production level. Asia-Pacific countries remain our sales markets, and in the long term, European markets join them because of the cheap coal power generation. In the medium term, coal transportation can remain at the current high level, among other things because of further devaluation of the ruble.

Petroleum and petroleum products: loading growth due to increased export transportation

In July, petroleum and petroleum products loading at the network of Russian Railways increased by 1.4% YOY and amounted to 21.1 million tons. 148 million tons of petroleum and petroleum products have been delivered by rail since the beginning of 2015, which is 0.6% less than in 2014.

In July, domestic transportation of oil and petroleum products decreased by 2% in comparison to July 2014, and exports increased by 3%. There is export increase to Italy (+17%), South Korea (2 times), Ukraine (2 times), Finland (2.5 times) and Kazakhstan (1.5 times).

According to the forecast of Ministry of Economic Development, in 2015 oil stream from Russia will reach 175 million tons (+5.8% to 2014). Taking into account the first half of 2015 trends, the refining output will be declining and supposed to reach the level of 290 million tons (-1.5% to 2014) which is explained by the growing attractiveness of oil exports in comparison with domestic market sales, as well as the influence of new fiscal and macroeconomic conditions (prime cost in rubles, high-flying dollar).

Russian oil exports duty is expected to reduce again in autumn: from $133.1/ton in August to $109.2/ton (i.e. -$23.9/ton) from September 1.

At the same time, according to the Ministry of Energy, in July crude oil production increased by 2.4% in comparison to 2014 and primary crude oil processing by 1.5%.

In the medium term, the volume of oil products transportation by rail is expected to remain high, and the flow of cargo may be redistributed from internal markets to export ones. However, crude oil transportation is predicted to decrease due to increase in pipeline transport share.

Construction materials and cement: expectation of cargo return from road transport to rail

In July, the fall in loading of construction materials and cement at the network of Russian Railways slowed down: -1.5% and -11.4% YOY respectively (13.1 million tons and 3.1 million tons). 70.1 million tons of building materials and 16.6 million tons of cement have been shipped by rail since the beginning of the year, which declined by 1.5% and 13.5% to 2014.

The transportation in the Kaluga Oblast (2.3 times), the Krasnodar Territory (1.2 times), Novgorod Oblast (1.6 times), the Irkutsk Oblast (1.3 times) and the Republic of Mordovia (1 5 times) became growth areas. The positive dynamics of consrtuction materials transportation to these regions results, first, from the construction of major infrastructure facilities carried out with government support.

Imposition of fees from drivers of trucks over 12 tons since November 2015 may influence seriously broken stone transportation by rail.

Despite the fact that the Siberian Association of Road Carriers (SAAP) has required the road tolls reconsideration, the Federal Road Agency (Rosavtodor) sees no rationale for reforming the prescribed procedure for tolls.

Thus, in the short term, construction materials transportation by rail is supposed to remain at the present low level, but it may increase since November. Federally funded projects can also be drivers of growth, but significant changes should be expected no earlier than in 2016.

Iron and manganese ore: transportation increase YOY against the global market decline

In July, ore loading at the network of Russian Railways increased by 3.4% YOY and amounted to 9.1 million tons. 63.1 million tons of ore have been shipped by rail since the beginning of the year, which increased by 0.8% in comparison to 2014.

In July, domestic transportation rose by 4% YOY, while exports traffic reduced by 5%. The exports transportation mainly declined in Ukraine (-36%), the UK (-57%) and Japan (-57%). At the same time, Russia started to supply iron ore in Kazakhstan.

For the first seven months extraction of Russian iron ore amounted to 42.2 million tons (+ 0.2% YOY). In July ore production rose by 4.5% to July 2014, and by 16.1% to June 2015.

According to the Goldman Sachs Group, supply and demand imbalance will aggravate in favor of the supply. In spite of difficulties at the iron ore market due to yuan devaluation and the recent disruptions of supply, iron ore supply is expected to increase in the near future.

The world's largest companies go on increasing ore production and supply to China, trying to expand their market share. In the first 7 months of 2015 shipments from Australia to China rose by 13% to 347 million tons, and from Brazil - by 6.5% to 101 million tons. Statistics show that Australia and Brazil are trying to maintain and expand its market share in China even against the economy weakening and falling demand for steel. BHP Billiton Ltd., Rio Tinto Group and Vale SA increased low-cost supplies in hopes that more supplies will level the drop in iron ore prices.

While some countries are increasing ore production in the world market, the others are announcing exports reduction. So the Deputy Minister of Industry, Mines and Trade Mehdi Karbasiyan said that Iran has plans to stop crude iron ore exports. Currently, a number of projects for production of iron ore concentrate and for iron-ore pellet production are being actively implemented in the country, which will help to abandon the raw materials exports in 2016.

At the same time, ore exports from the US are decreasing: exports of iron ore decreased by 45.4% in June 2015 to June 2014.

In the short term, ore transportation will remain high due to the high competition in the global market, as well as the further devaluation of the ruble.

Ferrous metals: a slowdown in export growth against increased competition in the world market

In July, ferrous metals loading at the Russian Railways network decreased by 1.7% YOY and amounted to 5.8 million tons. 42 million tons of ferrous metals have been shipped by rail since the beginning of the year, which is +1.9% to 2014 level.

The USA (-22%), South Korea (-86%) and Iran (2 times) reduced shipments from Russia in July 2015 compared to the previous year. There is exports growth to Turkey (+20%) and Kazakhstan (+22%). The supplies to EU countries reduced by a mean of 25% to June 2015.

According to the Federal State Statistics Service, in January-July 2015 Russian metallurgical enterprises smelted 40.9 million tons (-0.8% YOY) steel and produced 35.2 million tons (-0.7%) finished rolled ferrous metal products. At the same time, steel production decreased by 2.8% in July 2015 to 2014, but it increased by 7.1% to the previous month. Ferrous metals production output declined by 2.8% to July 2014, but increased by 5.9% to June 2015.

At the same time, output of other metal products has been increasing since the beginning of the year: in the first 7 months cast iron smelting increased by 5.3% and totaled 31 million tons, while steel pipe production grew by 8.3% to 6.6 million tons. In July, pipe mills increased their output by 1.3% compared to June.

The main problem in the world market has appeared due to the reduction in ferrous metals domestic consumption by China, which led to oversupply of Chinese production and lowering in world oil prices.

As a result, some countries, unable to meet the competition, are leaving the global market. For example, one of the world's largest steel corporation United States Steel Corporation (US Steel) is planning to decrease production at the plant in Fairfield, Alabama, shutting down the shops for heat of steel and finishing work.

Analysts point out Chinese manufacturers’ influence on Indian steelmakers as well. According to Credit Analysis & Research Ltd (CARE Ratings)’ experts, even if the Indian steel plants operate at 90%-performance level, there are about 14-15% of inoperative resources left. Although Indian metal exporters are suffering from Chinese demand fall, there is more disturbing suggestion of dumping cheap steel from China and Russia to India, resulting in inevitable drop of domestic prices.

Russia has also felt the increased competition from China. According to NP Russian Steel through the Kaliningrad special economic zone rolled steel products are imported in the territory of the Russian Federation with VAT exemption (18%), with no customs value (5%) and anti-dumping duty (20.2%). In late July, Russian metallurgists requested the government of the Russian Federation to impose anti-dumping measures in respect of polymer-coated rolled steel products, which China imports through the Kaliningrad special economic zone.

Low domestic demand and further devaluation of the ruble create conditions for strengthening of ferrous metals exports. However, the sanctions of the European Union and the United States are raising barriers for significant volumes of metal exports. Thus, the export cargo is predicted to remain at the current level and it may increase only in case of entry into alternative markets. In the short term, domestic transportation of ferrous metals may decrease due to domestic activity decline in construction and engineering industries. At the same time, pipe transportation is expected to remain at the same level.

Grain and grain milling products: export loading decreased due to the growth of wheat export duties as a result of devaluation of the ruble

In July, loading of grain and grain mill products at the network of Russian Railways decreased by 8.3% YOY and amounted to 1.1 million tons. 8.9 million tons of grain have been delivered by rail since the beginning of 2015, + 11, 3% to 2014 level.

In July 2015 domestic transportation increased by 2% YOY, while exports decreased by 24%. There was twofold supply drop in Egypt and Azerbaijan. At the same time, there is a significant growth of grain transportation to Saudi Arabia and Yemen.

The reduction of export transportation results from the entry of new protective duties into force, which totaled about 100 rub/ton of wheat in early August. According to Arkady Dvorkovich, the introduced mechanism of duties suits the government and there will be no additional export restrictions. The Ministry of Agriculture expects grain harvest of 100 million tons, so export volumes will be rather modest (about 25-27 million tons in the 2015-2016 crop year), and they may be exported without any risk. In the middle of August, the RF Ministry of Agriculture reported that they are ready to improve the grain harvest forecast.

Rosselkhoznadzor executed decision of banning, starting since October 1, 2015, shipments of soybean meal to Russia by rail through point of passage across the State Border of the Russian Federation, located on the southwest, west and northwest areas. At the same time, Russian production of soybean meal is expected to increase. So, Amur oil-extracting factory, included into the state-run program of investment project support, is going to process 240 thousand tons of soybeans a year. Today, the market for soy protein isolate production is fully occupied by foreign manufacturers, but the plant is expecting to occupy 25% of the Russian market after the second construction phase.

Export grain transportation is expected to reduce because of export duty increase due to the devaluation of the ruble. In addition, since October the import of soybean meal will decrease, and there is possibility in domestic shipments growth to meet demand.

Chemical and mineral fertilizers: transportation updated 2014 record again

In July, mineral fertilizers loading at the network of Russian Railways increased by 10.0% YOY and amounted to 4.4 million tons, setting a new record of fertilizers transportation in June over the past 10 years. 29.8 million tons of fertilizers have been shipped by rail since the beginning of 2015, which is by 2.1% more to such period in 2014.

The main reason for loading growth is in domestic transportation increase by 17% to July 2014. US (1.2 times), Ukraine (1.4 times), Peru (5 times) and Latvia (10 times) increased fertilizer loadings from Russia.

Despite the fact that the devaluation of the ruble corresponds to its February level, farmers have no intention to ask for price freezing, because their stocks of fertilizers are aimed for the autumn sowing time. According to the Ministry of Agriculture these stocks has increased by 82% up to 1.8 million tons during the year.

According to Eurochem, by the end of the year the devaluation of the yuan may negatively affect world prices for nitrogen and phosphate fertilizers. However, the efforts of the Chinese Association of nitrogen fertilizers producers oriented to exports restrictions of production at cost price brought positive effects. The expected impact of the devaluation of the yuan may be pushed into the background.

Analysts agree that the situation in the world market is more favorable for Russian fertilizer producers than for their foreign colleagues. Russia produces 22 million tons of fertilizers per year, 70% of production, or 12.8 million tons go for export. It provides about 13.5% of world fertilizer exports according to value and about 15% tonnage-wise. The main markets for Russian producers of mineral fertilizers are Brazil (19.3%), China (12.3%), USA (10.5%), Ukraine (5.6%) and India (3.3%).

Thus, transportation of fertilizers is expected to remain at high level till the end of the year.

Demand for new generation rolling stock at the stable high level

The data on the sales and disposal of the rolling stock by plants of the CIS are taken from the magazine «Rynok podvizhnogo sostava» («Rolling stock market»).

The sales of the rolling stock in Russia in July totaled about 2.7 thousand cars that is by 35.6% more to June 2015 and by 52.6% less to July 2014.  Sales of cars equipped with 18-100 bogies and its analogs dropped by 64.5% to July 2014, while sales of innovative rolling stock decreased only by 22.5%.

The write-off of the old rolling stock at the network of Russian Railways keeps growing: the disposal amounted to about 65 thousand cars according to the results of 7 months of 2015 that exceeds the indicator of the whole previous year. About 100 thousand cars are expected to be written off during 2015.

Alongside the disposal, there has been growth of bad-order car dismissal in the out-of-operation fleet (127.6 thousand cars in late July). This led to the reduction of commercially usable fleet up to 1054 thousand cars in July, and the surplus of the fleet up to 100 thousand cars.

It is worth noting that the share of innovative rolling stock in the sales structure of car-building works of CIS remains at about 50%, due to high operational and economic efficiency of new generation cars. These data are confirmed by the statistics of car fleet operation under RPC UWC control: an average cargo turnover per one new generation car amounted to about 452 thousand t*km in July, while a cargo turnover per one standard car is 234 thousand tons * km.

We can see the confirmation of the market experts’ forecast about the growth of operating profitability of rolling stock until the end of the year: market participants are affirming the demand growth for all-purpose rolling stock, especially for gondolas, and they are announcing the beginning of increase in operating yield rate. This situation resulted from the combination of several factors: the considerable amount of disposal, the increased demand for gondola cars to prepare for the heating season, as well as the transfer of Federal Freight all-purpose rolling stock under CFTS Russian Railways control.

Leysana Korobeynikova, Senior Analyst