Overview of the Russian Railway Market in 2018 – forecast for 2019

2018: loading is at its maximum for the last 9 years, freight turnover has set a new historical record for the Russia

Loading decreased by 1.1% in December 2018 as compared to last year and amounted to 109.0 million tons, and cargo turnover increased by 2.3% to reach 224.4 billion tariff t-km.

Loading in the RZD network amounted to a total of 1289.6 million tons in 2018. This is 2.2% higher than in the previous year and is the maximum level over the last nine years. In 2018 freight turnover set a new historical record for Russia and reached 2596.4 billion t-km (+4.2% as compared to 2017).

The growth drivers were: coal (+4.6%), oil (+0.4%), iron ore (+5.7%), ferrous metals (+7.0%), timber freights (+5.6%), fertilizers (+3.7%), grain (+22.6%), ferrous scrap (+1.4%) and coking coal (+0.8%). Transportation of construction cargo (-6.8%), cement (-6.5%) and non-ferrous metal ore (-2.8%) has decreased.

Coal: global market is stable, further growth of exports is forecast

Coal loading increased by 1.5% in December as compared to last year and amounted to 32.1 million tons. A total of 374.9 million tons of coal was shipped by rail in 2018, which is 4.6% higher than the value of 2017.

In 2018 the growth in export shipments was 6.4%, while the domestic shipments remained at the level of the previous year. The main importers of Russian coal in 2018 were Japan, the United Kingdom, China, Germany, Ukraine and Poland. At the same time, the largest increase in supplies in 2018 was to Germany (+7 million tons as compared to last year) and Poland (+5 million tons).

According to IEA forecasts, global demand for coal will remain stable during the upcoming five years. While in certain regions (EU and USA) the demand for coal is decreasing, it is growing in other regions (India and Southeast Asia). According to forecasts, in India the demand will grow by 4% per year and increase by 150 million tons in coal equivalent by 2023. The most rapid growth in demand for coal will be in Southeast Asia due to the construction of new coal power plants in Philippines and Vietnam. Growth in the region is expected to reach 5.7%. Further developments will depend on the implementation of the climate policy in the international arena.

According to Minister of Energy A. Novak, in 2018 coal production in Russia grew by 6% to 433.6 million tons in comparison with the value of 2017. Investments in the coal industry over the same period increased by 21% to 135 billion rubles.

The Russian Government is planning to achieve a 50% growth in exports to the eastern direction. In order to achieve this, the government is planning to increase the carrying capacity of the railway infrastructure in this direction to 210 million tons, including coal supplies to 195 million tons (2-fold as compared to the current level) by 2025. In addition, an increase in terminal capacities will be required. According to the estimates of the Institute of Natural Monopolies Research (IPEM), the capacity of coal terminals will increase by 59.2 million tons/year by 2030. The total capacity of all terminals engaged in coal transshipment will be 224.5 million tons/year.

Against the background of a favorable global market situation, coal loading by rail will grow along with the development of the transport infrastructure and the introduction of new capacities.

Crude oil and oil products: there will be no significant growth

Loading of crude oil and oil products decreased by 1.9% in December and amounted to 20.9 million tons. A total of 236.4 million tons of crude oil and oil products was shipped by rail in 2018, which is 0.4% higher than the value of 2017.

There was a variety of trends in the export (-1.5%) and domestic (+ 1.5%) freight traffic in 2018.

Annual loading increased due to the work completed by RZD in the field of attracting oil cargo to the railway. In addition, a tax maneuver for the upcoming 6 years came into effect on January 1, 2019. Significant changes in the calculation of the export customs duty and mineral extraction tax are planned to be introduced over this period. The tax maneuver is aimed to facilitate the exports of crude oil and petroleum products, but the competition with pipeline transportation continues to put pressure on the segment — about 4.5 thousand km of main oil pipelines have been commissioned over the last six years. The trend will continue in 2019 — according to IPEM, this year the effect from commissioning of the pipeline which connected Komsomolsk refinery and ESPO in 2018, will be noticeable.

At the same time, experts are convinced that the decrease in the loading of crude oil will be compensated by an increase in the loading of other cargoes in this segment, particularly power gases. Their transportation in 2018 remained at the level of the previous year. In addition, commissioning of ZapSibNeftekhim industrial complex is planned in Tobolsk in May 2019, which will consume about 3 million tons of liquefied hydrocarbon gases which are on sale today, and this will result in a correction of exports. At the same time, the output can increase to 21 million tons by 2020-2021 as a result of the implementation of projects designed to increase production capacities.

According to preliminary data from the Ministry of Energy, oil refining in Russia reached 286.6 million tons (+ 2.4%), and the refinery yield reached 83.1%. Fuel oil output decreased by 4.4% and amounted to 49.2 million tons. The same trend is observed in rail transportation — loading of fuel oil in the RZD network decreased by 4.6% in 2018 as compared to last year. According to the results of the year, diesel fuel production increased by 0.8% and reached 77.5 million tons, however, its loading by rail decreased by 7.1%.

The decrease in oil cargo loading by rail transport will continue to be hampered due to the establishment of attractive conditions by RZD for shippers, but it is currently unclear whether a substantial recovery of the segment will occur with the commissioning of new pipeline capacities.

Construction cargo and cement: recovery of industry is postponed

Loading of construction cargo decreased by 7.4% in December as compared to the same period of last year and amounted to 8.7 million tons, and loading of cement decreased by 7.1% to 1.3 million tons. A total of 123.8 million tons of construction cargo and 25.1 million tons of cement was shipped by rail in 2018, which is 6.8% and 6.5% lower than the values of the same period of 2017.

According to preliminary results, the housing construction in Russia decreased by 5% in 2018 and amounted to 75.3 million m². At the same time, according to Deputy Prime Minister of the RF Government Vitaly Mutko, the volumes of housing construction in 2019 will be comparable to the volumes of 2018. A growth in volumes is expected after the adaptation of the market to project financing and escrow accounts (to be introduced since July 1, 2019), which will require about two years.

According to the experts of INFOLine, stagnation and preservation of the current volumes of commissioning are most likely to occur in the segment of non-residential construction in 2017-2019. At the same time, the main driver is the implementation of projects in the agricultural sector due to the ongoing state support. As for industrial construction, its development is hampered against the background of a negative investment climate.

The implementation of infrastructure projects by RZD will play a significant role in the transportation of construction materials. RZD will allocate 1.7 trillion rubles as part of the Comprehensive Plan for the modernization and expansion of trunk infrastructure for the period up to 2024 (Master plan). The most important projects and the increase in traffic capacity and carrying capacity to reach a 4-fold growth of container traffic, and the modernization of BAM and Transsib.

Against the background of the negative dynamics of construction indicators, it is likely that the recovery of construction cargo by rail will be postponed until the industry adapts to the new conditions of operation. However, the current decline will be partially compensated by projects on the development of the country’s transport infrastructure.

Ferrous metals: a record over the last 9 years

Loading of ferrous metals decreased by 4.2% in December as compared to the level of last year and amounted to 6.9 million tons. A total of 78.1 million tons of ferrous metals was shipped by rail in 2018, which is 7% higher than in 2017 and is a record value over the last nine years.

At the same time, the growth in domestic traffic was more than 12% in 2018, while the exports grew by 7% and decreased by 10% in December as compared to the previous year. Exports of ferrous metals to Turkey, Italy and the USA increased in 2018. In addition to these countries, the Top 5 consumers of Russian metal products included Mexico and Taiwan.

According to experts, a reduction in the consumption of metal products is likely to occur in the domestic market in 2019. This is due to the new conditions of the operation of developers of the residential construction segment, an unfavorable investment climate for industrial construction, as well as the plans of automobile makers to reduce production in 2019. Thus, KAMAZ has already announced a decline in car sales by 9.5% to 39 thousand units, and Ford is exploring the options for leaving Russia, despite the presence of three joint plants with Sollers with a total capacity of 360 thousand cars per year. However, according to the most favorable scenario, an increase of 3% could be achieved in 2019 as compared to the values of 2018. It can be driven by the investment projects of RZD. However, experts are convinced that it will not be enough to drastically change the situation.

Thus, the loading record of 2018 is unlikely to be broken in 2019, given that the loading of metal products for export is complicated by external barriers, which will remain in the future, considering the excess of global capacities.

Ore: record loading over the last 15 years

Ore loading increased by 5.1% in December as compared to the previous year and amounted to 10.3 million tons, setting a transportation record for this month. A total of 116.7 million tons of ore was shipped by rail in 2018, which is 5.7% higher than the values of the same period of 2017 and is a record value over the last 15 years.

The 2018 increase in loading was achieved due to an increase in domestic shipments (+10%), while the exports decreased by 15% due to a decrease in freight traffic to Poland and China by 1.5 million tons each, and a termination of supplies to the Czech Republic and Serbia. At the same time, supplies of Russian ore to Italy, France and Egypt have increased.

Ore transportation by rail will depend on the conditions of both domestic and global markets of ferrous metals. If there is a high demand for Russian metal products, ore will be supplied to the domestic metallurgists, otherwise the ore surplus can be exported.

Timber freights: increase in loading following industry development

Loading of timber freights increased by 2.7% in December as compared with the level of the previous year and amounted to 3.8 million tons. A total of 45.7 million tons of timber freights was shipped by rail in 2018, which is 5.6% higher than the value of 2017.

Timber freight loading increased in 2018 both due to an increase in domestic shipments (+15%) and export traffic (+4%), mainly due to an increase in supplies to Kazakhstan (+30% as compared to 2017).

The growth in domestic demand is due to the development of wood processing in the country. According to the Russian Federal State Statistics Service, the production of timber (+3.6%), plywood (+6.9%), fiberboard (+8.6%) and chipboard (+6.5%), cellulose (+3.1%), paper and cardboard (+4.0%) increased in 2018.

Timber freight transportation by rail will continue to grow along with the development of RF timber industry, and an increase in the exports of processed timber products is also possible.

Grain and milling products: record loading over the last 10 years

Grain loading amounted to 2.4 million tons in December (-4.0% as compared to December of last year). A total of 27.1 million tons of grain was shipped by rail in 2018, which is 22.6% higher than the value of 2017 and is the maximum value over the last 10 years.

The loading increase of 2018 was due to an increase in transportation both in domestic (+5%) and export (+35%) directions, mainly to Egypt. At the same time, exports began to decrease starting with September 2018. The reason for this change is the record harvest of 2017, which allowed to export grain surplus and created high carryover stocks, as well as in the moderate harvest of 2018.

In accordance with the “Export of Agricultural Products” project of the Ministry of Agriculture, grain yield in Russia could reach 114.3 million tons in 2019, 118.1 million tons in 2020, 120.1 million tons in 2021, 124.6 million tons in 2022, 131.1 million tons in 2023 and 137.5 million tons in 2024. In order to achieve these indicators, the document provides for an annual involvement in the turnover of previously withdrawn agricultural lands for cultivation of export-oriented agricultural products: soybeans, corn, rapeseed and rice.

In 2019, the trends of the end of last year are expected to continue — a decrease in loading, especially given the high base of the previous year, although transportation is currently at a high level. However, the situation may change in the second half of the year, which will be determined by the new season’s yield.

Chemical and mineral fertilizers: loading has set a historical record for the RF

Fertilizer loading amounted to 5.3 million tons in December (+1.9% as compared to December of last year). A total of almost 59.2 million tons of fertilizers was shipped by rail in 2018, which is 3.7% higher than the value of 2017.

Domestic shipments increased by 8% in 2018, while the exports remained at the level of the previous year. The largest increase in supplies was to Brazil (+1 million tons) and the United States (+0.8 million tons), and the largest decrease was to Ukraine (-2 million tons) and China (-0.4 million tons).

According to Andrey Guryev, Director General of PhosAgro, the volume of the company's investment program in 2019 will be about 33-34 billion rubles, and the production growth for the year is expected to be 6-10%. In 2018 PhosAgro produced 9.1 million tons of all fertilizers including fodder additives. It is expected that the first quarter of 2019 will be one of the best for the company, given that the production has already increased by 10% in gross volume.

According to the results of 2018, Uralchem increased the total sales to the Russian market and CIS countries by 20% to 2.6 million tons as compared to 2017. At the same time, sales of mineral fertilizers in the Russian market grew by 50% and exceeded 1 million tons. The most significant growth of the indicator was observed in the western regions of Russia, as well as in the sector of sales to large agricultural holdings.

In January, Uralchem and Uralkali informed about their plans to build a terminal for transshipment of their products in Leningrad Region. The site is planned to be selected by April 2019. This will be the first terminal for potash fertilizer processing in the region. Capacities of the new terminal and the amount of project investments have not yet been disclosed.

A further growth of fertilizer transportation by rail is expected due to a high global demand for Russian products and along with the progress of planned commissioning of production facilities in the RF.

Record sale of cars by Russian plants over the last 5 years

The source of data on rolling stock sales and rental rates is Rynok Podvizhnogo Sostava (The Rolling Stock Market) journal.

The commercially usable fleet is 1050 thousand units, while the defective fleet remains at a low level of about 49.3 thousand units as of the beginning of January. As a result, the surplus of the fleet was 54.1 thousand units.

In December 2018, the sales of cars by the CIS plants amounted to 7.7 thousand units, which is 3% higher than the results of December 2017. (7.5 thousand units). At the same time, decommission of cars amounted to about 1.8 thousand units.

In 2018, sales of cars by CIS plants amounted to 83.2 thousand units, which is 24% higher than the results of 2017, and Russian plants produced 68.8 thousand units (42.3 thousand of which were gondola cars), which is almost 20% higher than the values of last year and is the highest result over the last five years. A total of about 29.4 thousand cars were decommissioned in 2018.

A total of 3.8 thousand gondola cars were sold in Russia in December, which significantly exceeds the amount of their decommissioning (0.3 thousand units). The rental rates for standard gondola cars remained at the level of December 2018 and amounted to 2000 rubles/day, and there is still no surplus in the segment.

In 2018 the average speed of freight trains decreased by 5.6%, the turnover of gondola cars increased to 15.27 days for the first time since 2014, and 10–20 thousand gondola cars were added to the required park.

This was promoted by a wide range of factors. Firstly, a shortage of traction was accounted for by an increase in the number of cars in the RZD network to 1112 million units against the background of a necessity to upgrade the fleet of locomotives and reorientation of the main freight traffic directions. In addition, the increase in export shipments on the background of domestic traffic reduction increased the pressure on the locomotive fleet, primarily on shunting locomotives. According to Head of INFOLine Mikhail Burmistrov, the situation with the availability of locomotive traction will aggravate in 2019, when due to the new technical regulations, a total of 2.2 thousand shunting locomotives entitled to shift from non-public railway lines to public lines, will no longer have this option.

Secondly, 5730 km of railways were repaired in 2018, which is 7.6% higher than in the previous year. It was heavy repair which requires a long-term closure of the infrastructure (reconstruction, overhaul, continuous relaying of rails).

Thirdly, the turnover was affected by a shortage of spare parts due to protective duties and ousting of Ukrainian Interpipe from the market against the background of a shortage of supplies from the Russian OMK and Evraz. This resulted in increased repair downtimes due to the periods of waiting for heavy castings and solid-rolled wheels. According to Mikhail Burmistrov, solid-rolled wheels were actually unavailable in the Russian market in the fourth quarter of 2018, although their prices doubled over the year and amounted to 40–45 thousand rubles.

The increase in the tariff for empty mileage of gondola cars by 6% since 2019 can affect cargo delivery speed. The measure is aimed to reduce empty mileage in the RZD network caused by delays due to cars waiting for chance loading.

The high export price of coal promotes interest in gondola cars, which keeps the market from lowering the rate. Since the beginning of 2017, the margin share in the structure of coal prices has reached a stable high level. Moreover, an additional demand for gondola cars is created by the plans of the Russian Government to increase coal exports