Overview of the Russian railway market in September-October 2015
Drop in freight turnover by 0.7%: updating after 2 months of growth
In September 2015 the loading amounted to 103.5 mn tons and that indicator is by 1.2% lower the level of September last year.
The loading of following freight decreased: coal (-1.5%), oil and oil products (-3.9%), ferrous metals (-1.7%), cement (-9.4%), scrap of ferrous metals (-12.5%), grain (-5.0%). The traffic of construction (+3.8%) and timber (+3.3%) freights, fertilizers (+2.6%), iron (+1.1%) and non-ferrous (+5.9%) ore increased.
Freight turnover in September 2015 decreased, compared to 2014, for the first time over the last 3 months and amounted to 192.1 bln tons*km (-0.7%).
Coal: continuing export growth
In September the loading of coal on the Russian Railways’ network decreased by 1.5% in comparison with the last year’s level and amounted to 26.9 mln tons. A total of 234.2 mln tons of coal was transported by railroad, and that figure is by 2.0% higher than the level of 2014.
In September 2015 the mining of coal was higher 6.2% (according to Russia’s Ministry of Energy) and by 6.6% (according to data of Federal State Statistics Service) than the last year’s level.
Domestic freight traffic decreased by 4.8%, while export traffic increased by 2.8% compared to September last year. South Korea (by 3.5 times), EU countries (on average +20%), China (+37%), Turkey (+11%), as well as India (which did not import Russian coal in September last year) were demonstrating growth of freight traffic.
The world market created favorable conditions for an increase in coal import from Russian Federation in the medium term. For instance, according to the forecast of rating agency Moody's the restoration of price environment of world coal market can start in the second half of the year 2016. In addition, up to 2020 according to October forecast of International Energy Agency (IEA), world’s demand for coal will be growing on average by 2.1% annually.
The Ministry of Economic Development of Russian Federation made a proposal to China to cancel duties on Russian coal, which had been established a year ago at the rate of 3-6%. If this happens, one can expect a significant increase in export of Russian coal.
The growth of coal transportation to India is caused by the decrease in rates of sea transportation and that made the import of Russian coal attractive. The first experimental shipment of vessel of Panamax class in February in Primorye took place, which belongs to the type of vessels, possessing maximum dimensions, allowing to pass through the locks of the Panama Canal. It was possible to execute the shipment after the works on deepening of quay wall and the modernization of pier and berthing facilities had been carried out at Terminal Astafiev. There are plans to increase the volumes of shipments, as well as dredging works regarding the fairway at the entrance of bay Nakhodka. Besides, a conveyor line of a closed type with a production capacity of 1.5 ths tons/hr had been purchased within the framework of the project for modernization of the enterprise. The works regarding the increase in loading capacity of public utility station Cape Astafiev will commence at the second stage of modernization project.
Therefore, the Russian coal will still be exported in significant quantities to the countries of the Asia-Pacific region and some European countries. In the medium term the transportation of coal can maintain at the current high level, and starting from the second half of the year 2016 – it can see growth.
Oil and oil products: the drop in loading compared to the last year’s level as a result of a high base effect
In September, the loading of oil and oil products on the Russian Railways’ network reduced by 3.9% relative to the last year’s level and amounted to 19.5 mln tons. The reduction is partially caused by a high base effect of September 2014.
In September 2015 domestic freight traffic of oil and oil products reduced by 12.7% as compared to September 2014, and export freight traffic grew by 6.3%. Export increased to such countries as Italy (+29%), Belarus (by 3.5 times), South Korea (+22%) and to China (+81%).
In September 2015 the oil extraction increased by 1.4% as compared to the last year’s level (according to Federal State Statistics Service) or by 1.0% (according to Russia’s Ministry of Energy). Primary oil refining was lower by 3.8%.
The drop in domestic freight traffic is partially caused by the launch of a pipeline branch going from Khabarovsk Oil Refining Plant to The Eastern Siberia–Pacific Ocean oil pipeline (ESPO pipeline) in September. The production capacity of the pipeline branch is 6 mln tons/annum, and about 4.5 mln tons/annum are expected to be transported already from 2016.
In 2015 China increased its purchases of oil for the replenishment of its strategic reserves amid low prices for primary material and an increase in its consumption by private Oil Refining Plants. The latter recently obtained quotas for import purchases: about 700 ths barrels of oil per day or about 10% of the current level of China’s import. Therefore, the export of oil to China grew by 1.4% as compared with September 2014 and by 8.8% over 9 months of 2015.
At the same time, European Oil Refining Plants reduced the purchases of Russian oil in favor of Saudi Arabia due to the low cost of the latter.
According to October forecast of Ministry of Economic development, the extraction of oil in this country in 2015 increased by 0.8% compared to the level of 2014, export of the Russian oil – by 6.2% at an annual rate.
In the mid-term, the current freight traffic volumes of oil and oil products are expected to be retained, and that will allow keeping the market share. Having said that, it will not be possible to have the structure unchanged: a part of volumes passed from railroad to pipeline transportation.
Construction materials and cement: multidirectional dynamics in September
In September the loading of construction materials on the Russian Railways’ network grew by 3.8% as compared to the last year’s level and amounted to 13.5 mln tons. At the same time, the loading of cement was lower by 9.4% (2.9 mn tons) than the last year’s level. A total of 97 mln tons of construction materials and 22.6 mln tons of cement were transported by railroad, and that is by 11.6% and 12.4% accordingly, lower than the level of 2014.
The transportation of construction materials to the regions: Novgorodskaya Oblast (by 2 times), to Krasnodarsky Krai (by 1.3 times), to Novosibirskaya (by 1.5 times) and to Kaluzhskaya (by 2 times) Oblasts, to Moscow (by +20%) increased.
In case of cancellation of the existing mechanism of taking part in participatory construction the traffic of construction materials and cement can significantly reduce. It bears reminding that it is proposed to exclude, starting from 2016, the possibility of direct conclusion between the buyers of housing and builders of participatory interest agreements. The activity of the builders will actually be controlled by large banks through special accounts, on which the means obtained from buyers of housing under construction will be coming. And by 2020 it will be possible to completely reject participatory interest in favor of sale of only ready housing. This measure is aimed at elimination of new cases involving cheated homebuyers in Russia, which number in October amounted to 83.5 ths people from 790 troubled sites. Experts predict a considerable increase in the cost of housing, as well as the decline in construction volumes subject to adoption of the discussed measures.
The implementation of major projects for the construction of railways can have a positive impact on the traffic of construction freight. For instance, in September, a construction of the second section of railway bypassing the Ukraine began in September. The new railway will pass across the territory of the Voronezhskaya Oblast and into the Rostovskaya Oblast. Until the end of 2017 military railroad workers should lay 122.5 km of rails and railway sleepers on the sections of South Eastern and North Caucasian Railways.
Besides, in September, the President of Russia instructed to provide for the financing of the project “Complex reconstruction of the stretch between Maxim Gorky - Kotelnikovo - Tikhoretskaya – Krimskaya bypassing the Krasnodar hub”, ensuring a gain of railway infrastructure capacity in 2020 in the amount of 59.8 mln tons per annum. The project presupposes the construction of a new double-track electrified railway line 65 km long with an intermediate station Kirpili, two passing stations and a railway substation. The construction is scheduled to be completed in 2018 using means from the Federal budget.
Furthermore Arkhangelskaya Oblast and the Chinese company Poly Technologies, Inc in September agreed on a joint construction of a railway line “Belkomur” (from Solikamsk through Syktyvkar to Arkhangelsk). The total length of the line will be 1,161 km, of which 449 km – the reconstruction of existing sections, 712 km – the construction of new tracks. The signed agreement presupposes the participation of Poly Technologies, Inc as a general contractor of the project.
According to the Deputy of the State Duma Dmitry Ushakov a significant recovery of the construction industry can be expected by 2018-2019. He named the unavailability of bank loans for the builders and the low solvency of the population as the reasons for such a forecast. Taking into account forecasts of the Ministry of Finance, incomes of the population will be decreasing at the same rates as in 2015, i.e. at least by 13%.
In addition, the government came to the final decision on the introduction of levy for driving trucks weighing more than 12 tons on federal highways of general use at the level of 3.06 rubles per kilometer. The introduction of a new levy is scheduled in November this year; therefore, it is possible to expect partial return of freight from motor transport and to the railroad.
In the current conditions the traffic of construction freight and cement are kept due to the stimulation of the end demand from the state. Having said that, the situation can become worse after the cancellation of preferential mortgage rates in March 2016, as well as probable elimination of existing schemes of participatory construction. The erection of large facilities backed by the state and the introduction of levy charged from trucks will have a positive impact on the freight traffic volumes. However, an essential restoration of the field is expected not earlier than 2018.
Iron and manganese ore: rail freight traffic is higher than the last year’s level despite falling world market
In September the loading of ore on the Russian Railways’ network increased relative to the last year’s level and amounted to 9.2 mln tons. A total of 81.4 mln tons of ore were transported by rail, and that is by 0.7% higher than the level of 2014.
In September the domestic rail freight traffic increased by 6% compared to the last year’s level, and export rail freight traffic decreased by 24%. China (by 20%), Poland (by 50%), as well as Romania and the Netherlands saw the main decline in export traffic. The deliveries to the Netherlands practically stopped. The export traffic to Turkey (by 2.7 times), to Japan (by 4 times) and to Great Britain (by 1.5 times) increased.
The mining of the Russian iron ore amounted to 54.7 mln tons (+0.7% compared to the same period last year) over the first 9 months 2015. The mining of ore increased by 5.2% in comparison with the level of September 2014.
Australia, the world’s leader in terms of export of iron ore, predicts, that in 2016 the market of this primary product will reach the bottom, and from 2017 the prices will start to rise.
Citigroup analysts predict further drop in world’s prices for iron ore, lower the mark of $40 for a ton in the H1 2016, due to the new deliveries of the mine Roy Hill, which are scheduled from October. The volume of deliveries can amount to 55 mln tons per annum.
Therefore, in the short-term, the volumes of ore traffic will maintain at the current high level, but the situation can be destabilized by the decline of world prices for ore after the commissioning of new capacities in Australia.
Ferrous metals: fall of load amid tougher competition in the world market
In September the loading of ferrous metals on the Russian Railways’ network declined by 1.7% relative to the last year’s level and amounted to 5.8 mln tons. A total of 53.9 mln tons of ferrous metals were transported by rail since the beginning of 2015, and that is by 1.1% higher than the level of 2014.
Spain, Iran (by 2 times) and Kazakhstan (by 1.7 times) reduced purchases from Russia in September 2015 relative to the last year’s level. Deliveries to Spain almost stopped. At the same time the deliveries to the US (by 2.3 times), to Turkey (by 1.3 times) and Belgium (by 1.2 times) increased.
According to Federal State Statistics Service, the metallurgical enterprises of the Russian Federation decreased production volumes from January to September 2015: 52.5 mln tons (-0.8% compared to the last year’s level) of steel and 45.5 mn tons (-0.6%) of finished rolled ferrous metal products. At the same time, the output of steel products has been growing since the beginning of the year: for the first 9 months, iron smelting increased by 4.4% up to 39.8 mln tons, and the production of steel pipes – by 5.7% up to 8.6 mln tons.
Increasing the import of the Russian metallurgical products, the US is cutting the output of its own production and is reducing production capacities. For instance, the American corporation U.S. Steel made a statement of a high probability of stoppage of the operation of the metallurgical plant situated in Granite City (Illinois). The plant’s capacity is about 2.5 mln tons of steel per annum. According to World Steel Association (WSA), the production of steel reduced in the country by 8.5% over the first eight months of the current year compared to the same period of 2014.
Meanwhile the production of steel in China remains at the high level. According to WSA in September its volume was only by 3.0% lower the same indicators of the last year. However many experts predict a fast stop of the production of the Chinese steelmakers due to a record drop in prices for rolled products. Moreover, Mr. Xu Le Jiang, the Chairman of the board of the Chinese company Baosteel shares their fears. He declared that during inevitable restructuring of the field the smelting of steel in the country might reduce by 20%.
The reduction of steel products is probable due to the following unfavorable conditions in the global market: low prices for rolled metal products, obstructing measures for the Russian products taken from other countries, as well as due to the crisis in the construction field of the Russian Federation. The situation can improve if large unprofitable metallurgical enterprises are closed.
Grain and milled grain products: high export potential amid good harvest
In September the loading of grain and milled grain products on the Russian Railways’ network decreased by 5% compared to the last year’s level and amounted to 1.9 mln tons. A total of 12.5 mln tons of grain were transported by rail from the beginning of the year 2015 and that is by 5.9% higher than the level of 2014.
Meanwhile in September 2015 domestic traffic turned out to be higher by 11% than the last year’s level, and export traffic decreased by 22%. Deliveries to Egypt dropped by 20%, to Israel – by 40%, to Turkey – by half, deliveries to Jordan stopped completely. At the same time deliveries of grain-crops to Yemen, Tunisia and Nigeria significantly increased. There are traffic growth expectations with regard to Syria.
In October the President of the Russian grain union Arkady Zlockevsky advised that, this year the grain harvest in net weight in the Russian Federation will amount to 102-103 mln tons, and in the coming years the volumes might increase.
According to experts, there will be no problems with regard to the sale of grain: 175 ths tons were the share of the Russian grain from the 235 ths tons proposed at the Egyptian tender on 3 October. Russia had the largest proposal volume: 525 ths tons.
Due to the alteration of the export duty from October, 1st (50% of the customs cost minus 6.5 ths rubles, but not less than 1 or 10 rubles per ton) a part of grain-crop freight, scheduled for shipment in September, is detained till October.
A 10.6% discount of the Russian Railways’ on export traffic in the direction of port stations of North Caucasian Railways (up to 600 km and of the volume starting from 4.1 mln tons) will have a positive impact on grain-crops’ traffic. The discount will be introduced from October and it will be in effect until the end of the first half of 2016.
Therefore, it is expected that the current high level of grain-crops’ traffic and high export potential will maintain due to favorable conditions for the Russian producers on the world market.
Chemical and mineral fertilizers: a rail freight traffic record has been set again
In September the loading of fertilizers on the Russian Railways’ network increased by 2.6% compared to the last year’s level and amounted to 4.0 mln tons, having set a new record in fertilizers’ traffic in September over the last 10 years. A total of 38.1 mln tons of fertilizers were transported by rail from the beginning of 2015, and that is higher by 2.4% than the level of this traffic last year.
The growth in loading is due to the increase by 7% of domestic traffic relative to September last year and due to the maintenance of export traffic at the last year’s level. The Ukraine (by 1.5 times), Lithuania (by 1.7 times), Finland (by 3 times), China (+4%), as well as Ireland increased the deliveries of fertilizers from Russia. Last year there were no deliveries to Ireland.
The President of Russia Vladimir Putin instructed the government to implement the mechanism of suppression of prices for mineral fertilizers by March 1st, 2016. In anticipation of a new sowing campaign, the growth of prices for mineral fertilizers will be discussed at the meetings of interdepartmental commission. It will be composed of representatives of the Ministry of agriculture, Ministry of industry and trade, the Federal antimonopoly service, the State Duma, as well as branch unions and associations. The position of the Federal antimonopoly service is that there is no need for the introduction of an export duty on mineral fertilizers in the Russian Federation.
According to experts, export of the Russian fertilizers will face diminution in the demand due the devaluation of national currencies of largest importers of fertilizers: India, Brazil, Turkey and Thailand.
The USA and Western Europe focus their efforts on the enhancement of fertilizers’ application efficiency that, finally, should lead to the decrease in the need for them. The Chinese authorities seek to limit the growth of fertilizers’ consumption up to 1% per annum during 2015-2020, to stabilize the consumption.
The commissioning of new capacities is expected in different parts of the world before 2017. The projects in China, Algeria, in the Middle East will be focused on export deliveries, and manufacturing enterprises in the USA, India and Brazil will concentrate on import substitution. In general, the rate of capacities’ growth will outstrip the dynamics of increase in demand for fertilizers. Therefore, one expects a drop in capacities’ utilization rate down to minimum (over last ten years) values in 2015-2016.
Starting from 2017 – 2018 the rate of increase in capacities will decline, and that will let capacities’ utilization grow and by 2020 it will ensure the recovery of prices and demand for fertilizers for a period of two-three years.
The devaluation of the ruble provided a stable position of the Russian companies on the global market that will contribute to maintenance of export freight turnover. Domestic consumption will remain accompanied by the state’s control on price regulation.
The growth of rates for rolling stock
The source of data on disposal of and write-off of rolling stock – the magazine “Rolling Stock Market”.
In September 2015 the sale of railcars made by plants of the CIS countries amounted to 2,705 units, and it is by 46% higher the figures of August 2015 and by 43% lower the data of September 2014.
By September 2014 the fall in sales in the segment of standard railcars operating on bogies 18-100 and on its analogues amounted to 56% while in the segment of innovative rolling stock the drop in sales added up to only by 11%.
The write-off of an outdated rolling stock is gaining momentum: following the results of 9 months of 2015 this number was about 80 ths units, and that is more than the scopes of the write-off for the whole of 2014. It is still expected that a total of 100 ths of railcars will be written-off for 2015.
The placement of railcars in faulty rolling stock fleet amounted to 119.6 ths units as of the end of September. The rolling stock commercially suitable to be utilized on the Russian Railways’ network is about 1.05 mln railcars, the real surplus of the fleet reduced to 90 ths units.
Operational use of new generation railcars still demonstrates high efficiency of traffic. According to statistics, the operational use of the fleet applying Barber bogie contributed to about 433 ths tons*km of average freight turnover per one railcar with increased axle load, while per 1 standard type railcar this figure was 231 ths tons*km.
Five out of 18 railcar building plants, operating as of the beginning of the year: Armavir Heavy Machine-Building Plant, Promtractor-Vagon, Lyudinovo engineering plant — branch of Kaluga Plant Remputmash, Orsk Railway Car Building Plant, Kuzbass car manufacturing company — branch of Altaivagon stopped or kept to a minimum the production of railcars in the third quarter of 2015. Novokuznetsk Railway Car Building Plant stopped production and was declared bankrupt earlier this year.
In the opinion of the Institute of Natural Monopolies Research (IPEM) first of all the growth of rental rates for rolling stock may help stabilize the situation. According to market experts, the rates have already begun to grow. For instance, the rental rate for a gondola increased not less than by 15-30% over the past two months depending on the directions of transportations and freight. A further growth of rates is expected to continue up until the end of the current year. The rates are expected to stabilize in January-March 2016 and see the subsequent growth by September 2016 with not less than 50-70% increase relative to the level of 2015. Therefore, the activity in freight railcars procurement market can be expected by spring of next year, during the next peak of transportations.
Leysana Korobeynikova, Senior Analyst