Overview of the Russian Railway Market in 2017
2017: freight handling at its peak over the past 5 years, freight turnover hit a new record high in the entire Russian history
December 2017 saw continued growth in transportation, freight handling amounting to 110.2 million tons (+4.8% year-on-year) and freight turnover reaching 219.0 billion t-km (+5.0%).
During 2017, the freight handling to the Russian Railways network totaled 1,261.3 million tons, 3.2% more than in the previous year and a record high in the past five years. In 2017, the freight turnover set a new record in the entire Russian history, having reached 2,491.4 billion t-km (+6.4% against 2016).
2017 saw an increase in shipments of coal (+9.1%), iron ore (+0.9%), ferrous metals (+2.8%), timber freights (+2.5%), fertilizers (+6.8%), cement (+0.6%), grain (+16.4%) and ferrous scrap (+4.8%).
A year-on-year decrease in shipments of crude oil and refined products (-0.2%), construction freights (-5.7%), nonferrous ore (-4.1%), and charred coal (-4.7%) was noted.
Coal: 2017 coal loading set a record in the entire Russian history
In December 2017, coal loading reached 32.6 million tons to hit another all-time high (+5.2% versus December of the previous year). Overall railway shipments in 2017 totaled 358.5 million tons of coal which is 9.1% above the 2016 level and an all-time record for Russia’s coal segment.
In 2017, export transportation accounted for most of the growth in shipments. Coal deliveries to other countries were up 17% versus the 2016 levels, whereas the domestic freight flow was only 1% up.
Soaring demand for Russian coal was caused by the favorable situation on foreign markets where global prices were recovering which gave coal companies an opportunity to quickly ramp up production and sales. In 2017, the country where Russian product consumption increased the most was China, its imports rising by a third compared to the previous year. The internal capacities of China’s coal industry were curtailed by 150 million tons at the expense of minor and low-performing mines which led to a rise in total coal imports into the country by 6.1% versus 2016. Poland took second place in terms of Russian coal consumption after it doubled Russian coal shipment due to depletion of its domestic deposits. Experts believe the status quo will remain in the medium term until nuclear power industry develops. That said, the construction of Poland’s first NPP will only be launched this year. Turkey ranked third, with Russian coal exports into the country increasing by 80% as the Turkish metal producers manufactured an unprecedented volume of steel. The production exceeded 36 million tons, as estimated by Fuat Tosyali, Chairman of Turkish Steel Producers Association.
Further noticeable growth in Russian coal exports is limited by port capacities, so works to remedy the situation is underway. From January 2018, Commercial Sea Port of Ust-Luga has stopped handling RORO cargoes and started coal transshipments at the Yug-2 terminal. The CSP plans to ship 4 million tons of coal this year and build a 15 m ton coal terminal in the future.
In the meantime, VostokCoal reached an agreement with OTEKO on making a hub at the port of Taman to export pulverized coal, comprised by a blend of non-coking coals and used in blast furnaces for cast iron smelting, allowing to curb consumption of high-priced charred coal. Coals shall be supplied from the Vostochny (anthracite, the reserves include 182 million tons) and Kiyzassky (coal ranks Т and ТС, 209 million tons) opencast coal mines. The deliveries will be launched as early as in summer starting from 500,000 tons monthly and may grow to 1–1.2 million tons per month. The terminal may reach its expected capacity by late 2019; it is planned that other coal producers will be able to use it as well.
If the global market environment is preserved, the Russian coal exports will continue to grow, but restrictions caused by transportation infrastructure are likely to reduce the increase in shipments from 9-12% (2017) to 3-4%.
Crude oil and refined products: railway freight handling held steady in 2017
In December 2017, the loading of crude oil and refined products fell by 0.9% year-on-year and totaled 21.3 million tons. From the beginning of 2017, the railway had shipped 235.5 million tons of crude oil and refined products which is slightly below the same period of 2016 (0.2% down).
Domestic shipment went 3.5% up in 2017, with a 6% decrease in exports. The structure of cargoes altered: fuel oil shipments reduced by 4.9 million tons (-10%), whereas transportation of light naphtha increased 1.5 times, by 4.6 million tons.
In 2018, transportation of oil cargoes will fall by at least 2% due to the launch of the Yug petroleum product pipeline, higher rates of refined products transportation via pipelines and further reduction in fuel oil output, according to Mikhail Burmistrov, Head of INFOLine-Analytics Agency.
However, such decline could be adjusted if RZD offers more beneficial terms to shippers. Specifically, Belarus would continue refined products transportation via Russian ports (commenced in December 2017) if it remained economically viable, stated Andrey Rybakov, Deputy Chairman of Belneftekhim Concern.
Construction freights and cement: freight flow recovery expected in 2018
In December 2017, construction freights handling was 9.4 million tons with is 11.9% up year-on-year, with cement rising 7.7%, to 1.4 million tons. From the beginning of 2017, the railway dispatched 132.9 million tons of construction freights (-5.7% versus the same period of 2016) and 26.8 million tons of cement (+0.6%). The variety of trends in shipments of construction materials and cement is caused by shortage of all-purpose rolling stock that switched to coal transportation.
In 2017 the volume of new housing commissioned in Russia slightly declined (by 2%) versus 2016, but still reached the high figure of 78.6 million m2. Evaluating the current situation, Mikhail Men, Head of the Russian Ministry of Construction (Rosstroy), commented that the consistent demand for housing was primarily caused by the affordability of home loans whose rates slumped to a minimum – down to 9.8% for new housing and to 10% on the existing housing market. As reported by the Agency for Housing Mortgage Lending, in 2017 people received some 1.1 million mortgage loans amounting nearly to RUB 2 trillion, 40% more than in the previous year. Apart from that, President Vladimir Putin ordered the Council for Strategic Development at the RF Government to ensure affordability of residential mortgage loans for at least 50% of Russian families by 2025.
As early as by the middle of 2018, the Russian construction sector would escape the slump to change for growth as the mortgage interest rates declined, NRU HSE experts said. Toward the end of the year, the business confidence index related to construction ‒ the key indicator of investors’ thoughts ‒ will be 11 points up, reaching -4%. As a result, in the foreseeable future the index may turn positive for the first time since 2008.
Cement production volumes showed a slight decline in 2017, by 0.3%, the Federal State Statistics Service (Rosstat) reported. According to Guillermo Brusco, CEO LafargeHolcim Russia, in the next three years the cement demand will grow by some 5%, but this will enable LafargeHolcim to load its Russian facilities by just 85% (the current level is 65-70%). Apart from the revival of the housing construction sector, the cement demand will spur on the construction of concrete roads (that are 5-6 times more durable than asphalt roads) due to the increasing load on the infrastructure, experts believe.
Improved investment environment in construction, development of the housing sector due to more affordable housing mortgage lending and rolling stock availability for the shippers will revive shipments of construction loads and cement already in this year.
Ferrous metals: companies pin hopes on 2018
December 2017 saw ferrous metals loading go up by 14.3% year-on-year to reach 7.2 million tons. During the year, the railway dispatched 73.0 million tons of ferrous metals, 2.8% more than in 2016.
As reported by Rosstat, in 2017 the rise in output totaled 0.7% for the rolled stock, 0.5% for cast iron, 4.8% for pipes, and 7.9% for structures made of ferrous metals. The market players believe a ramp-up in production was caused by higher demand in the construction, mechanical engineering and automotive industries, as well as boosted exports. The biggest gain in 2017 shipment was recorded in the U.S. — the deliveries increased by 800,000 tons (+40%).
Severstal experts think the global steel prices will continue growing in Q1 2018, primarily due to reduced exports by China, and the domestic market demand will be up some 3−4%.
Domestic demand growth and high export prices will stimulate a moderate increase in shipments of ferrous metals in 2018.
Ore: domestic market to drive growth in 2018
Ore loading in December 2017 totaled 9.8 million tons, 8.9% above the previous year’s level. From the beginning of the year, the ore shipments amounted to 110.5 million tons, 0.9% more than in the same period of 2016.
As the output of metal products grew, the demand from Russian metallurgy plants became higher, so in 2017 domestic ore shipments increased by 4%. Meanwhile, export shipments dropped by 11%, since China curtailed consumption of Russia-made products by 20% after shutting down its redundant foundry capacities. Besides, Ukraine curbed consumption by 85% due to a slump in smelting volumes by Ukrainian metallurgical companies.
Higher output of metal products by Russian companies and new sales markets will drive the growth of iron ore shipments in 2018.
Timber freights: moderate growth expected in 2018
In December 2017, the loading of timber freights remained unchanged compared to the previous year and totaled 3.7 million tons. The overall shipments from the beginning of the year amounted to 43.3 million tons of timber freights, 2.5% above the same period of 2016.
In 2017, domestic transportation of timber freights went up 1.7%, whereas exports increased by 5.3%, mainly to China (+13%) and Kazakhstan (+40%).
The shipments could have been higher but for unfavorable weather: the unusually warm onset of winter prevented the converted wood from being moved as the dispatch station was inaccessible due to impassable roads. The experts claimed that shortage of gondolas, previously hardly affecting the segment, was another reason.
A moderate growth in volumes of timber freights transportation is expected in 2018 as the shippers have more rolling stock available and the timber industry programme is being implemented.
Grain and grain mill products: growth to continue in 2018
In December 2017, grain loading totaled 2.5 million tons (+19% versus December of the previous year). Overall railway shipments from the beginning of the year amounted to 22.1 million tons of grain which is by 16.4% more than in the same period of 2016.
In 2017, domestic shipments dropped by 3%. Most of the Russian regions were able to satisfy their demand using solely internal crops due to the bountiful harvest, so no need arose for deliveries from traditionally fertile lands.
Exports soared by some 40%, primarily due to doubled deliveries to Egypt (by more than 3 million tons).
The RF Ministry of Agriculture (Minselkhoz) upgraded its grain export forecast for the 2017-2018 farming year to 45-47 million tons. From the start of the season the exports totaled 28 million tons, 35% more than in the previous year (21 million tons), Minister of Agriculture Alexander Tkachev said. Weather conditions in other leading agricultural countries made an impact, too. Low temperatures and absence of snow in some U.S. states endanger the USA’s harvest of winter wheat which accounts for some 80% in the wheat production structure. Apart from that, a drought caused a decline in crops harvest in Australia. Low grain yield is also anticipated in Brazil.
The planned state support to shippers and high export potential of the Russian Federation may lead to further growth of grain transportation in 2018.
Chemical and mineral fertilizers: 2018 to translate into new records
In December 2017, the loading of fertilizers amounted to 5.2 million tons (+4.0% versus December of the previous year). From the beginning of the year, the railway shipped 57.1 million tons of fertilizers, 6.8% more than in 2016.
2017 saw a rise in shipments both in the domestic (+4.5%), and export routes (+9%). The biggest gains occurred in deliveries to China (+10%), Brazil (+15%) and Ukraine (+30%).
The fertilizer exports will keep growing, Acron Group experts believe. For instance, in late 2017 China suspended carbamide production at most of the gas-using factories due to shortage of fuel that was utilized to achieve more prioritized goals. As a result, the capacity utilization plummeted below 50%. Furthermore, the Chinese government announced its plans to increase the carbamide stock in the country by 5.5 million tons to reach 10 million tons.
Expected demand from U.S. buyers who will be purchasing to satisfy the seasonal demand may additionally bolster the export of Russian carbamide.
PhosAgro announced its plans to open in 2018 a sales company in Argentina whose market potential is high. In the coming years this Latin American country intends to double the existing level of fertilizer consumption (which is 3.6 million tons).
Further growth of mineral fertilizer shipments by railway is expected in 2018 if the agriculture continues to develop and the export potential trend holds.
Leasing rates: a car fleet balance may occur in summer 2018
The rolling stock sales and leasing rates data are sourced from the Rynok Podvizhnogo Sostava (Rolling Stock Market) journal.
In December 2017, railcar sales by CIS factories totaled 7,500 units (5,000 of them being gondolas) which is 42% above December 2016 results (5,302 units) and 5% above November 2017. Overall, in 2017 the CIS railcar producers sold 66,800 units (43,200 of them gondolas) — 70% more than in 2016. The RZD net appeared to face a drastic increase in new-generation railcars whose fleet exceeded 95,000 units by late 2017.
The demand is far beyond the current level of disposal. In 2017, the overall disposal rates in Russia totaled 47,800 units of the rolling stock (17,400 of gondolas).
By the year end, the commercially feasible fleet grew to 1,017,000 units whereas by the beginning of January 2018 the unserviceable fleet reduced to 50,000 units (the lowest figure from 2014). As a result, the fleet surplus totaled 53,000 units, and the surplus of gondolas is once again close to zero.
In January 2018 the standard gondola leasing rate remained the same as in the previous month – some RUB 1,600/day. The situation with the rolling stock availability is expected to improve, given the existing railcar production levels. The fleet balance will rely on alteration of the freight stock, the speed of construction industry recovery and coal export growth. As per approximate estimations, a car fleet balance with rate adjustment to some RUB 1,000-1,200/day may occur as early as in summer 2018.
Leysana Korobeynikova, Senior Analyst
