Overview of the Russian railway market in May-June 2015
Turnover fall by 1.1% against loading decline by 3.2%
In May 2015 transportation decreased by 3.2% YOY and amounted to 99.9 million tons. The loading of coal (4.5%), fertilizers (+ 5.0%), non-ferrous ores (+ 11.1%) increased. The transportation of construction materials (-15.8%) and cement (-15.2%), petroleum products (-2.4%) decreased.
In May 2015 freight turnover amounted to 189.6 billion ton-kilometers, which is by 1.1% less than in May 2014.
Coal: transportation set new growth records
In May coal loading at the network of Russian Railways increased by 4.5% with regard to 2014 and totaled 25.8 million tons. 131.5 million tons of coal have been delivered by rail since the beginning of 2015, which increased by 4.1% with regard to 2014.
In comparison with May 2014, export coal shipments declined by 3.4%, while domestic traffic increased by 11.5%. Exports to China (-61.7%), the UK (-21.4%) and Ukraine (-42.2%) fell. At the same time Japan (+ 9.4%), North Korea (8 times) and South Korea (+ 20.3%) increased their supplies from Russia. Coal transportation to these countries is expected to grow further.
For example, the Japanese energy government agency announced the further growth of coal supplies from Russia. According to preliminary estimates, the Japanese coal procurement from Russia's largest producer - SUEK Corporation - will grow by 7% in 2014. Russian companies have the goods on the Australian competitors - the convenience of coal delivery to Japan. For example, marine transportation from Russia takes only 3 days, while it takes two weeks to supply coal from Australia.
According to the forecast of the International Energy Agency (IEA), in the midterm the rate of growth in world demand for thermal coal will slow down. So, if in 2010-2013 the average annual rate increased by 3.3% per year, demand until 2020 will grow annually by an average of 2.1%. Experts explain the slowdown in coal demand by renewable energy sources’ challenge. However, despite the fact that wind power (and in some cases, solar energy) competes favourably at price with gas power energy, renewable energy sources are still losing out to coal.
In May, the average price of steam coal has reached bottom of the last six years - $63/t. Many Indonesian coal mines are in financial difficulty because of low prices. Ministry of Energy and Mineral Resources of Indonesia has announced 19% drop in coal production in January-May 2015 compared to the same period in 2014.
Despite a slight drop in export shipments in May, consumption potential of coal demand will be supported by Asia-Pacific countries (primarily Japan) and the EU. In the medium term coal transportation may remain at the current high level.
Petroleum and petroleum products: domestic transportation increased, exports decreased
In May petroleum and petroleum products loading at the network of Russian Railways decreased by 2.4% YOY and amounted to 20.3 million tons. 106.8 million tons of petroleum and petroleum products have been delivered by rail since the beginning of 2015, which is 0.7% less than in 2014.
In May, domestic transportation of oil and petroleum products decreased by 5.4% and export transportation by 1.6% compared to May 2014. Transportation to South Korea (-61.5%), the UK (-63.2%) and Turkey (-30.3%) strongly declined.
In May, Russia ranked first in the world oil production — output volume amounted to about 45 million tons, plus 1.6% to output volume for the same period in 2014. At the same time, Deputy Prime Minister Arkady Dvorkovich said that the Russian authorities did not intend to make decisions on the artificial reduction of oil production.
In the medium term transportation of oil products by rail is expected to remain high and traffic flow is supposed to be redistributed of from the domestic directions to export ones. However, transportation of crude oil will decline due to the share increase in pipeline transport in exports.
Construction materials and cement: traffic recovery not earlier than 2016
In May loading of construction materials and cement at the network of Russian Railways fell by 15.8% and by 15.2% YOY and amounted to 11.2 million tons and 2.8 million tons respectively. 45.4 million tons of construction materials and 10.4 million tons of cement have been shipped by rail since the beginning of the year, which declined by 20.5% and 14.0% to 2014 respectively.
In May, the transportation of construction materials and cement kept falling in most regions of Russia. Transportation to Krasnodar Krai (+28.3%), the Udmurt Republic (+66.3%), Voronezh Region (+74.7%) and Amur Region (+ 20.8%) became an exception.
The growth reason for construction materials transportation to Krasnodar Krai results from the start for an active construction phase of a 19 km-long bridge across the Kerch Strait. Russian government introduced an emergency procedure for conciliation for reduction of project terms. They hope to start the vehicular traffic along the bridge across the Kerch Strait in December 2018. Thus, construction materials transportation to Krasnodar Krai will remain at a high level till the end of the bridge construction. The gas pipeline project Kuban-Moscow at the cost of 20 billion rubles will become an additional growth factor for construction materials transportation. The work on it is scheduled to start in mid-2016.
The high rate of activity in the Udmurt Republic construction industry is due to plan realization of the Federal special purpose programme for the construction of rural roads: the road bed construction of 17 rural roads, mainly gravel ones, in about 100 km length is planned in 2015. In addition, there are active construction works of the Kama bridge at the cost of 12 billion rubles in Udmurtia now, the completion of which is planned for 2016, and the project on bridge construction across the River Bui has 90% availability, the vehicular traffic of which is scheduled to start in September.
Road metal shipments to the Amur Region have been increased due to large-scale track repair work for Trans-Baikal Railway since April 2015.
According to the Federal State Statistics Service, in January-May 2015, cement production decreased by 9%, concrete products and structures production by 15.0%, aggregates production by 16.2% YOY, and the amount of work performed by the "Construction" business activity fell by 6.1% to 2014.
Ministry of Industry and Trade offered to introduce 6-month import road metal and gravel licensing in August 2015, because of the market appearance of artificially knock-down prices for import road metal and gravel, as well as because of the growth of counterfeit construction materials and weakening of producers’ responsibility. Major Russian manufacturers’ stock balance is more than 50 million tons at the moment, with average monthly RF production of 10 million tons, while shipments have been steadily declining. Domestic traffic is supposed to increase and to make compensation for lost volumes, and import cargo of building materials and cement is expected to reduce in the case of imposition of the duty. At present time import transportation amounts to about 10% of all construction materials and cement shipments.
The programme of mortgage state support launched in April 2015 through the subsidy assistance of credit rates for housing has brought its results. The Central Bank has revised its estimate of the construction market: the YOY slowdown is less than 50% predicted earlier. Banks have already granted applications for 200 billion rubles during two months of the programme action, i.e. half of its volume. Sberbank and the Saint Petersburg bank have already applied to the Ministry of Finance for lending limit increase. Currently, the Government is discussing the possibility of programme limit increase up to 700 billion rubles.
Under the forecast of Ministry of Economic Development of Russia, published in May 2015, construction materials production will decline in 2015, not least because "Construction" business activity is expected to decrease, as well as due to funding constraints of construction work in general. Annual average growth rate of non-metallic mineral products manufacture during the period of 2015-2018 can vary from -2.8% in the baseline scenario to +3% in the best case one. At that cement production will grow by 3% in the base case to 6% in the best case scenario during this period. Precast concrete unit production and structures production will drop by 4% in the baseline scenario and will remain unchanged in the best case scenario. Construction brick production will decrease by 1% according to the baseline variant construction and will remain unchanged in the best case scenario.
Thus, there are preconditions of construction industry recovery, but significant changes are expected not earlier than in 2016.
Iron and manganese ore: exports fall due to diminution in demand from China
In May, ore loading at the network of Russian Railways fell by 2.2% YOY and amounted to 8.9 million tons. 45.3 million tons of ore have been shipped by rail since the beginning of the year, which increased by 1.8% in comparison to 2014.
In May, domestic transportation rose by 0.2%, YOY, while exports traffic reduced by 23.1%, mainly due to the twofold exports fall to China, which had previously made up about 20% of the Russian export ore transportation.
The reason for diminution in Chinese steelmakers’ demand for Russian ore is in reduction of steel production: in May 2015 metallurgical enterprises of China smelted 70 million tons of steel, which is by 1.7% less than in May 2014. In January-May 2015 steel production in China reached 340 million tons, which is by 1.6% less year on year.
The Chinese iron and steel industry is going through an acute crisis. Domestic demand for rolled products keeps declining, especially in the construction industry. At the same time, besides chronic problems caused by new projects underinvestment, there appeared seasonal decline. Most steel mills are forced to maintain the same production output hoping they will manage to sell it at any price to get cash for making up of current assets and payment of bank loans which usually include credit payments periods in the middle of the year.
In early June prices for iron ore jumped to its maximum since February against stock in storage in seaports of China, which indicates an increase in demand for low-cost imported raw materials and domestic production reduction. However, iron ore prices may fall below $50/ t again due to increased shipments from Australia and Brazil, as well as because of steel cost reduction that diminishes steel companies’ profits.
Production of iron ore in Russia fell by 4.5% in May YOY. It has been produced by 0.4% less since the beginning of 2015 in comparison to the same period in 2014.
In the short term, domestic transportation of iron ore will decline due to reduction of steel production by Russian companies. Export transportation may recover in case of new contract signing instead of Chinese contracts.
Ferrous metals: strong exports growth and domestic transportation decline
In May, ferrous metals loading at the Russian Railways network reached the level of the previous year and amounted to 6.0 million tons. 30.5 million tons of ferrous metals have been shipped by rail since the beginning of the year, which is +3.7% to 2014 level.
In May, domestic transportation of ferrous metals decreased by 8.4% compared to May 2014, while exports kept growing: + 20.4%. Turkey (+ 59.0%), the USA (2.7 times), Belgium (2 times), Mexico (+ 74.9%) and Germany (+ 20.5%) increased deliveries of ferrous metals from Russia.
In May 2015 crude steel production decreased by 1.5% compared to 2015, but increased by 1.7% to April 2015. The production volume of rolled ferrous metals decreased to May 2014 (-7.7%), and to the previous month (-2.2%).
According to the Ministry of Economic Development of Russia, despite the expected production decline in 2015 (to -3.6%), exports of rolled metal products are expected to increase by 7%, not least because of the devaluation of the ruble.
In May, the European Commission started an antidumping probe against Russian and Chinese cold-rolled coil producers because of the crisis in the European iron and steel industry. The first results are expected to appear in September. European steel association Eurofer speaks out in favor of more radical restriction of the European steel imports, offering to simplify the antidumping complaints procedure and to accelerate time for their consideration. EU has imported 7.24 million tons of steel products (without including semi-fabricated products) in the first four months of this year, which exceeds by 25% the same period of 2014, while steelmaking in the EU amounted to 73.2 million tons in January-May, -0.1% to the same period in 2014.
One of the reasons for Eurofer concern against imports is the high prime cost of European companies’ steel products that exceeds not only Russian export prices, but China’s and Turkey’s prices as well. The situation may become worse soon because European institutions are going to intensify the fight against global warming. A new international climate change agreement is expected to be adopted in December 2015 in Paris, and it has an objective to limit and to reduce carbon dioxide emissions in the electric power industry and the production sector. But regardless of its outcome in autumn 2015 the European Commission intents to approve a regional programme that among other things provides for fixing of industry-based limits on greenhouse gas emissions and increasing fees for of carbon dioxide emissions from 7,5€/t to 20€/t to 2020.
Thus, in case of additional restrictions on Russian steel products imports to the EU, export transportation to European countries may fall by 30%, but in the future it is expected to recover in case of new export logistics to other countries.
The construction project of Kuban-Crimea gas pipeline will become one of the growth drivers in domestic ferrous metals shipments, its building start is expected in early 2016. The cost of the pipe that will run across the Kerch Strait bed, and further across the Crimean peninsula through Simferopol to Sevastopol is worth 14.3 bln.
In the short term, domestic ferrous metals transportation may reduce following the decline in construction and engineering industries’ activity in the country and the revaluation of the ruble, but the export transportation will remain at the same level.
Grain and grain milling products: export traffic recovery after the abolition of wheat duty
In May loading of grain and grain mill products at the network of Russian Railways decreased by 9.1% YOY and amounted to 1.0 million tons. 6.8 million tons of grain have been delivered by rail since the beginning of 2015, +9,7% to 2014 level.
In May, domestic grain transportation declined YOY (- 11.7%), while exports rose (+9.0%). Egypt (+76.9%), Yemen (1.8 times), Azerbaijan (1.6 times) and Uzbekistan (7.4 times) increased exports in comparison with May 2014.
Exports growth resulted from the abolition of wheat duties in mid-May. A new mechanism of export duty which will be calculated in rubles will come into force on July 1st. The duty will come into operation if the contract price exceeds 11 thousand rub/ton, in such case the size of duty will be calculated as half-price minus 5,5 thousand rub. If the price is equal or less than 11 thousand rub/ton, there will be a nominal duty of 1 ruble/ton. Such approach will allow keeping the price in the domestic market in case of the sudden devaluation of the ruble. However, it is worth noting that the new duty will have less impact on wheat exports than the previous one.
At the May meeting of the RF Ministry of Agriculture and the Ministry of Agriculture of the Republic of Ecuador, Ecuador's representatives showed interest in importing Russian wheat to replace supplies from Canada to diversify imports. Quantity of imports to Ecuador is about 400 thousand tons of wheat per year.
The Russian government has announced the first official crop forecast in 2015 after the harvesting start and estimated it up to 100 million tons of grain, exports at 25-27 million tons. The largest grain operator Rusagrotrans gives the same prognosis: gross yield of grain may reach 99-100 million tons, including 57.3 million tons of wheat. The forecast of ProZerno analytical agency for this year is more optimistic: 104.4 million tons of grain, including 60.8 million tons of wheat. Current estimates of the Institute for Agricultural market studies (IKAR) are about 96-103 million tons and 55-59 million tons, respectively. However, due to the drought in some districts of the Volga region and the Central Region these figures may be adjusted to the lower side.
In the short term grain transportation from Russia to CIS countries is expected to increase.
Chemical and mineral fertilizers: transportation increase results from exports
In May, ferrous metals loading at the Russian Railways network increased by 5.0% YOY and amounted to 4.2 million tons, showing a record level of fertilizers shipments in May in the last ten years. 21.3 million tons of fertilizers have been shipped by rail since the beginning of the year, equal to 2014 transportation level.
In May both domestic (+13.4%) and exports (+1.0%) fertilizers transportation increased. Turkey (+62.1%), Peru (2.9 times), India (2 times) and Bulgaria (4 times) have increased fertilizer deliveries from Russia.
Fertilizer production 2015 increased in May both to the 2014 level (+2.7%) and to the previous month (+ 4.7%).
In May, Phosagro unfroze prices for phosphoric fertilizers in Russia, frozen for Russian consumers in January-March 2015. Now the company restarted domestic market sales at prices oriented to the world prices.
Thus, fertilizer transportation may shift from domestic to export destinations. State programme of agriculture may become one of the support drivers for domestic fertilizers demand. In any case, fertilizer transportation will remain at a high level till the end of the year.
Drop in sales and rates of old generation cars and transportation decline
The data on the rolling stock sales by plants of the CIS are taken from the magazine «Rynok podvizhnogo sostava» («Rolling stock market»).
Car checking reached a record level in May — over 11 thousand cars (7.0 thousand of them are gondola cars). However, in May the car fleet surplus remained at a high level due to transportation load decrease (about 126 thousand cars). The out-of-operation fleet totaled 126 thousand cars, 53 thousand of which are gondolas.
In May 2015, CIS car-building works ‘sales remained at the same low level — 2 thousand cars, which is 7.3% less than in April 2015 and 64% less than in May 2014.
Altaivagon branch (SDS) — Kuzbass Wagon Company — announced the layoff of freight cars due to the difficult economic situation in car-building industry. The company is going to focus on chemical equipment production.
Besides, SDS sold Novotrans Company to Konstantin Goncharov, Argo operator’s owner. In early 2015, SDS owned rolling-stock fleet and in financial leasing included about 25 thousand cars, but 16 thousand cars have been signed over to Federal Freight during the last three months. Argo has sold about 9.3 thousand cars, the transaction value is about 6.5 billion rubles. According to preliminary data, the new owner has not received the contract for SDS holding’ freights transportation.
More than 40.5 thousand workers have part-time employment in Sverdlovsk and Chelyabinsk regions. A large share is accounted for by industrial enterprises. According to the Ministry of Labour, 7.6 thousand persons have been put on forced leave, 255.4 thousand persons have part-time employment, and 65.4 thousand Russians have dead time.
Federal Freight keeps consolidating cars that may have lease-payment problems: in May 2015 the company took another 11 thousand wagons (in addition to 4 thousand cars in April 2015) that had been in financial leasing at NOVOTRANS (Alfa-Bank, VTB, Vnesheconombank, Sberbank). Before that, Federal Freight had these cars in operation, and now they are in financial leasing.
Despite the reduction of commercially usable fleet, rental rents for rolling stock did not grow in May and June show no growth: at the level of 450-500 rubles/day for gondola car on a standard bogie. This fact resulted from the release of a large number of cars previously transporting cheap construction materials (gravel, sand). Transportation yield of these cars was below the average one (300-350 rub/day), so operators are willing to deliver them at low rates.
In addition, the market still has a significant number of older cars with expensive imputed operating costs (current repairs, paid by an operator, as a rule). These cars are broken twice or three times oftener than new types of cars. It results in operators’ additional costs at the rate of 150-200 rub/day that is why old cars are available for rent with an appropriate discount in comparison with the new fleet.
Innovative rolling stock: high demand due to excellent economic performance
In May, the demand for innovative rolling stock remained at a high level: car-building works of the CIS sold 1.1 thousand of new generation cars (gondolas) — about 60% of total sales.
The Russian fleet of innovative cars increased up to 27 thousand cars, 2.3% of the whole RF fleet. About 80% of innovative rolling stock is operated in coal transportation, 5% in rolled stock transportation, 4% in ore transportation, 4% in mineral fertilizer transportation.
Operational efficiency (car turnover per month) amounted to about 403 thousand ton-kilometer per car in May 2015, which exceeds an average indicator by 93% (209 thousand ton-kilometer/ wagon), and exceeds an average gondola indicator by 53% (264 thousand ton-kilometer/ wagon).
Such dynamics results from the following factors:
- An innovative car moves faster because of the higher routing rate: 61% for a weight loaded innovative gondola compared with 40% for an old generation gondola.
- An innovative car has less idle waiting for loading and unloading per month on average: both due to duration reduction of loading and unloading operations (1.9 days for an innovative gondola compared to 2.8 days for a standard one), and due to quantity reduction of operations due longer runs services (3.0 thousand km for an innovative car compared to 1.6 thousand km for a standard one).
Leysana Korobeynikova, Senior Analyst