Overview of the Russian railway market in March-April 2015
Freight turnover growth continued in March despite a decline in traffic volume
In March 2015, freight turnover grew by 0.9% year-on-year to 199.8 billion ton-km. This growth was mainly driven by an increase in loading of coal, ore and rolled steel against the backdrop of a decrease in building materials loading, the transportation distance of which is much shorter.
Traffic volume decreased by 1.2% year-on-year in March 2015 and totalled 103.0 million tons. Since March 2014, loading of the following materials increased: coal (+3.1%), ferrous metals (+3.2%), timber cargo (+2.6%), chemical and mineral fertilizers (+2.3%), non-ferrous ores (+6.3%), grain and grain mill products (+15.4%) and coke (+10.0%). Transportation of petroleum and petroleum products (-0.4%), construction materials (-20.3%) and cement (-12.0%) reduced since March 2014.
Coal: transportation keeps growing
In March, Russian Railways’ coal loading increased by 3.1% year-on-year to 26.8 million tons. 80.2 million tons of coal have been delivered by rail since the beginning of the year, which is an increase of 4.0% compared to the same period of 2014.
Export coal transportation increased by 2.1% year-on-year and domestic transportation expanded by 3.3% year-on-year.
The increase in domestic coal traffic was a result of higher levels of metal smelting in Russia. The coal consumption of the leading Russian steelmakers Mechel and NLMK increased by an average of 10%.
The structure of coal exports from Russia is changing. The following countries are actively upscaling imports: Japan (+ 8.1%), Korea (growth of 25 times), Spain (+32%), Germany (+76%) and Romania (a 6-fold increase). Exports of Russian coal have recently begun to France and Egypt.
In March, demand for Russian coal from the EU countries increased by almost 20%. This was mainly due to some EU countries refusing to use nuclear energy. For example, after the accident at the Fukushima nuclear power plant in Japan, Germany closed all its nuclear power plants and reduced the use of coal for generating electricity. Now nine of the country’s 17 nuclear power plants have been closed prematurely. It was assumed that renewable energy sources (RES) would compensate for the energy deficit (which stands at about 30%), but RES can only currently generate 20% of energy. The high cost of RES, as well as the output instability, both contribute to this.
European countries, which counted on windmills and solar panels, have the highest electricity price. Countries with a smaller GDP, such as Spain, have already begun to significantly limit the subsidies it offers for renewable power generation. As a result, a trend of returning to non-renewable sources of electric power is emerging in the European Union. In Germany, 23 new coal-fired power plants with a capacity of more than 24 ths MW are being designed and built. At the same time, 50 years ago Germany recognized coal extraction as an unprofitable sector, and the majority of mines in the Ruhr Valley were closed down, but there are still a lot of coal-fired power plants. Experts predict strong demand for coal in Germany in the coming 8-10 years.
Traffic growth to North Korea began to increase in November 2014 after the start of Russian coal deliveries to South Korea through Rajin, a North Korean port. The main consignees are three companies from South Korea: the steelmaker POSCO, the ship operator Hyundai Merchant Marine Co. and the transport corporation Korail Corp. Coal transportation by rail from Russia to North Korea’s Hasan station and then from Hasan station to South Korea by water reduces time and fuel costs by 10-15%. 40.5 ths tons of coal have been delivered as part of the first pilot project and 80-90 ths tons are due to be delivered during the second one.
Therefore, both domestic and external demand, particularly from the Asia-Pacific countries and the EU are supporting the potential for increased coal consumption. Coal transportation is forecast to remain at the current high level in the medium term and grow over the long term.
Petroleum and petroleum products: domestic transportation fell, the decline in exports slowed down
In March, Russian Railways’ loading of petroleum and petroleum products fell by 0.4% year-on-year to 22.7 million tons. 65.9 million tons of petroleum products have been delivered by rail since the beginning of 2015, which is 0.5% less compared to the same period of 2014.
In March, domestic petroleum and petroleum products traffic fell by 5.6% year-on-year, while export transportation rose by 1.4% year-on-year. There was export growth to Italy (+14.7%), the Netherlands (+4.5%), South Korea (+80.6%), Ukraine (+89.4%), Kyrgyzstan (+25.6%) and Uzbekistan (+92.9%).
The structure of petroleum products transportation shifted after the introduction of the tax maneuver. If in December 2014 domestic and export shipments were at the same level, in January 2015 the latter amounted to 55% of total transportation.
It is worth noting that the volume of crude oil exports keeps declining due to the implementation of a programme to modernize refineries despite an increase in production. The drop in export volumes was 18% compared to March 2014. Oil refining efficiency at Russian refineries should rise to 92% by 2020 (compared to 72% in 2014).
To date, more than 30 processing plants have been updated, with plants equipped with advanced technologies for deeper conversion of crude oil. Oil refining efficiency is also expected to become significantly higher than 80% over the course of the ongoing tax maneuver.
Therefore, in the medium term, oil transportation by rail is expected to remain high, and traffic will continue to redistribute from domestic destinations to exports. However, crude oil transportation will decline while the share of pipeline transportation will increase in exports.
Construction materials and cement: traffic recovery not until 2016
In March, Russian Railways’ loading of construction materials and cement fell by 20.3% and by 12% year-on-year and amounted to 9.8 million tons and 2.2 million tons, respectively. 23.9 million tons of construction materials and 5.3 million tons of cement have been shipped by rail since the beginning of the year, which represents a year-on-year reduction of 22.1% and 8.6%, respectively.
Construction materials transportation to the Khanty-Mansi Autonomous Area, Tyumen and Samara regions declined by almost 40%. There was, however, a considerable increase in demand for construction materials in the Krasnodar region (+61.1%). This growth can be explained by the fact that construction has got underway on Kerch Strait Bridge, which will connect the road and railway systems of the Crimea and continental Russia.
In early April, the Russian government announced its intention to reduce the level of planned hotel construction ahead of the FIFA World Cup 2018 by 40%, which will result in investment declining from RUB 65.5 billion to RUB 39.5 billion.
The construction industry is therefore not expected to recover before 2016.
Iron and manganese ore: changes to the export structure
In March, Russian Railways’ ore loading was the level of the previous year and totalled 9.1 million tons. 26.6 million tons of ore have been shipped by rail since the beginning of the year, which is 0.8% higher than in the same period of 2014.
Domestic transportation increased by 2.5%, while exports decreased by 15.1%. The structure of ore exports continues to change. Russian exports to the following countries increased: Turkey (+77.7%), Slovakia (+44.5%), the Czech Republic (+61.9%) and also Italy, which did not import Russian iron ore last year. Exports to Finland, Japan and Ukraine fell.
In March, Andrew Forrest, the founder of the largest Australian mining company Fortescue, called on the world's leading manufacturers to cap production in order to increase ore prices. His suggestion was rejected. However, as iron ore prices fell again and hit a record low, some Brazilian and Australian producers decided to cut their production output in any case. For example, Australia's Atlas Iron, which extracted 2.7 million tons of iron ore last year, will stop iron ore production and export from April 2015. The largest mining company Vale also announced that it will shut ferroalloys production factories in the Brazilian state of Minas Gerais.
Since April 1, 2015, new rental rates for iron ore production have been put into effect in Ukraine, which have risen by 6-7 times in UAH equivalent compared to the first quarter 2014. Such a tax increase will have a significant impact on the Ukrainian mining and metallurgical sector and will lead to Ukrainian metallurgists withdrawing from the world market.
Under such circumstances, it is worth noting that Russia's position on the foreign markets is more stable compared to other exporters due to the devaluation of the ruble against the US dollar. Therefore, in the medium term, iron ore exports from Russia are forecast to remain high.
Ferrous metals: strong export growth against the fall of the ruble
In March, Russian Railways’ loading of ferrous metals grew by 3.2% year-on-year to 6.4 million tons. 18.7 million tons of ferrous metals have been shipped by rail since the beginning of the year, which is a 7.5 % increase compared to 2014 level.
Exports continued to grow in March: Turkey (+24.2%), Taiwan (+44.1%), Belgium (+51.3%) and Italy (+72.1%).
One of the reasons for increased demand for Russian metal is the need to substitute the production volumes of the Ukrainian manufacturers that withdrew from the market due to the crisis in the Ukrainian mining and metallurgical industry.
The slowdown in the construction and engineering industries could lead to a reduction in domestic consumption. At the same time, the devaluation of the ruble has strengthened Russia's position in the world market, which will contribute to the further growth of export transportation.
Grain and grain mill products: export loading decreased due to imposition of wheat export duties
In March, Russian Railways’ loading of grain and grain mill products grew by 15.4% year-on-year to 1.5 million tons. 4.6 million tons of grain have been shipped by rail since the beginning of 2015, which is 27.8% higher than in 2014.
The main growth driver was domestic grain transportation, which grew by 27.8% year-on-year. Export transportation grew by 8.3% compared to the same period in 2014.
Due to the imposition of export duties, wheat transportation fell by three times compared to March 2014, while the transportation of barley grew by 10 times (mainly to Saudi Arabia). Russia’s Ministry of Agriculture sees no rationale for extending export duty on wheat after July 1, 2015, but the final decision is likely to be taken in May-June, when there is more clarity around the condition of the winter crops and when the grain harvest forecast has been updated.
The International Grains Council (IGC) raised their forecast for Russia’s grain harvest next season to 85.8 million tons from 83.4 million tons, including wheat, the forecast harvest of which has been increased to 52.0 million tons from 51.4 million tons. In the current cropping season, Russia harvested 101.5 million tons of grain, including 59.7 million tons of wheat.
There may be a reduction in grain transportation from Russia to CIS countries in the medium term.
Chemical and mineral fertilizers: transportation declined due to a drop in exports
In March, Russian Railways’ loading of mineral fertilizers increased by 2.3% year-on-year to 4.5 million tons. 12.9 million tons of fertilizers have been shipped by rail since the beginning of 2015, which is 0.8% less than the same period in 2014.
Exports have decreased by 3.8% compared to March 2014, while domestic transportation has risen by 1.3% year-on-year.
Uralkali announced that its subsidiary Uralkali Trading and a buying consortium, which includes Sinochem, CNAMPGC, and CNOOC, have signed a contract for supplying 850,000 tons of potash to China in 2015 at a price of US$ 315 per ton. The terms of delivery are between April 2015 and December 2015. This year Uralkali’s production output will decrease by 16% to 10.2 million tons due to the flooding of the Solikamsk-2 mine.
The Federal Antimonopoly Service (FAS) has proposed to offer discounts on raw materials for fertilizer producers in order to compensate for their income shortfall due to the discounts that they have given to farmers. This refers to sulphur (the main supplier being Gazprom Sera), potassium (Uralkali), apatite (Apatit and Acron) and ammonia (URALCHEM and TogliattiAzot). The discount calculation takes into account the share of raw materials in the cost of polynutrient fertilizers, the volume of their sales in Russia and the size of the discount for the Russian agricultural industry compared with the export price. The discount for raw materials will be provided as the premium to fertilizer manufacturers, who sold their products to buyers on the Russian market in the previous month with a discount.
Therefore, domestic transportation of fertilizers may remain at a stable level until the end of the year due to introducing discounts for farmers. At the same time, export transportation may decrease year-on-year. Total traffic may be reduced in direct proportion to the amount of lost output resulting from the incident at the Solikamsk-2 mine.
Plants are abandoning old generation railcar manufacturing
The data on the rolling stock sales made by plants in the CIS is taken from ’Rolling Stock Market’ magazine.
In March 2015, railcar producers in the CIS sold 2.9 ths railcars (an increase of 15.6% on the previous month and a reduction of 55.5% compared to March 2014).
In April, the Novokuznetsk Car Building Plant intends to make large scale redundancies. There are approximately 1,000 people currently working at the company.
Uralvagonzavod’s technical upgrade programme was approved in 2015. The company’s own funds, as well as money allocated as part of the Federal Target Programme, will be used to implement the programme. The railcar assembly factory, the mechanical assembly production line, the metallurgical and other plants will all be modernized as part of the programme. In particular, there are plans purchase equipment for manufacturing special-purpose machinery and innovative rolling stock (including the 12-196-01 gondola model and the 18-194-1 bogie).
The railcar plants are starting to move away from manufacturing railcars with standard 18-100 bogies due to the fact that there is now only demand for innovative railcars. For example, SUEK is planning to spend approximately RUB 20 billion on 10,000 railcars in 2015-2017 (7,000 solid-bottom gondolas and 3,000 drop bottom gondolas).
Operators are starting to extensively write off old rolling stock
In March, the non-serviceable rolling stock on Russian Railways’ network remained at the level of February at approximately 130 ths railcars, 59 ths of which are gondolas. The railcar disposal rate of the Russian Federation’s fleet has grown by 61%, from 4,400 railcars in February to 7,100 railcars in March.
The increase in write-offs has taken place after the Russian Prime Minister Dmitry Medvedev asked the Federal Traffic Service (FTS) in March to explore the issue of a 48% tariff increase for empty runs of railcars with an expired service life. However, in late April, it was reported that neither the FTS, the Ministry of Economic Development nor the Ministry of Transport supported this suggestion.
Measures to improve rail transport efficiency and institutionalize all participants’ responsibility in the rail freight market came into force on April 1. As a result, charges for wagon demurrage on the public rails and disposal of idle cars are expected to increase.
Leysana Korobeynikova, Senior Analyst
