Car loadings and freight turnover demonstrated multidirectional trends

Following a three-year increase in car loadings on the RZD network, rail freight volumes decreased by 0.9% in 2019 and amounted to 1,278.1 million t. Export shipments dipped by -0.8%, and domestic shipments were down by 1.2%. At the same time, freight turnover grew by 0.2% from the previous year, setting a new record of 2,601.3 billion t-km.

Railcar building industry passes another peak

Last year was a record year for Russian railcar builders: 78.5 thousand freight cars were sold, which is 14% higher than the production results of 2018. The decrease in car loadings by 0.9% in 2019 along with the maximum sales of rolling stock led to an increase in fleet surplus.

The medium-term outlook envisages a decrease in acquisitions of new rolling stock and a shift in the demand from multi-purpose cars to specialized cars are expected. The car-building enterprises capable of offering a product with improved technical and economic parameters will have an advantage in these market conditions.

New generation cars engaged more actively for coal shipments

Coal loadings decreased by -0.8% in 2019 from the previous year amidst a sharp decline in export prices. A number of countries of the European Union have actively reduced their use of coal for power generation in line with their climate policy, turning to liquefied natural gas instead, as an alternative option. This process caused a decrease in coal demand in some national markets, which reduced the competitiveness of this resource.

World coal prices in 2019 surpassed their peak values observed in 2018 standing at $70 and $50 per tonne for the eastern (FOB East) and western (FOB Riga) directions, respectively. This reduced the margin of coal companies to minimum values and raised the share of railcars in the export price structure. In these conditions, railway operators are staking more on the efficiency of their fleet, which brought along with it a predominance of new generation gondola cars in the sales pattern over rolling stock mounted on 18-100 bogies (Figure 1).

Figure 1. Sales of gondola cars in Russia, thousand units, according to Rynok Podvizhnogo Sostava (Rolling Stock Market) journal

Coal shipments on the network continued to grow in 2019 despite a sharp decline in car loadings, which reflects a further increase in the average length of transportation distance as freight flows are becoming reoriented to the east. However, the area was not fully prepared to handle such volumes due to infrastructure restrictions, which led to longer turnaround times of gondola cars, slowed down the traffic, and contributed to a larger surplus of the fleet.

In December 2019, the average turnover of cars on the RZD network increased to 16.7 days, i.e. grew by 7.7% compared to the same period of 2018. While the beginning of the year saw a reasonable fleet surplus at a level of 2%, which was necessary to handle exports during the peak demand periods, closer to the end of 2019, the surplus of gondola cars exceeded this reference value by 10-15 thousand units, according to estimates by United Wagon Company. The oversaturation of the network with gondola cars, in its turn, drew down their rent prices.

Grain: exporters waiting for global prices to rise

Grain loadings decreased by as much as 20% as compared to last year. Such a major decrease was triggered by low global prices of grain, which prompted domestic farmers to postpone the shipment of cereals until the market conditions improve. Grain exports fell by 27%. Egypt, the largest importer of Russian grain, reduced the amount of wheat purchased from Russia by 36%, while increasing the volume of cheaper grain purchased from Ukraine and Romania. Shipments of Russian grain to Iran (-10%), Israel (-9%), Turkey (-30%) and Bangladesh (-71%) also decreased. However, car loadings to Azerbaijan soared by +72% and to China they were up 28%. An important trend in the Russian grain sector, likely to produce a significant impact on the market, was the consolidation of trading assets, infrastructure and operators’ grain assets within the VTB Group. As noted by market experts, the emergence of the financial group in the grain sector has already intensified competition among ports and terminals, which can decrease the shipment costs of domestic grain render the latter more attractive for international customers.

Fertilizers reoriented towards domestic market

Russian manufacturers of mineral fertilizers are reorienting their products to the domestic market, where their shipments increased by 6%. Exports remained at the level of last year. This reorientation to domestic consumers is associated with the development of Russian agriculture. The government’s International Cooperation and Exports national project envisages to make exports of agricultural products grow to $45 billion by 2024. According to estimates by Andrey Guryev, President of the Russian Association of Mineral Fertilizers, the consumption of mineral fertilizers in 2019 in Russia increased by 14.5% to 9.5 million t, with the growth to continue by 5–10 percentage points in 2020. Cargo base is likely to increase further thanks to investment projects of Russian producers of mineral fertilizers aiming to raise the production of fertilizers by way of launching new plants.

Oil shipments tends to stabilize

Loadings of crude oil and oil products on the RZD network decreased by 1.9% in 2019. At the same time, the shipment structure is changing: shipments of light oil products are increasing all over the network. Industrial enterprises, as well as those of transport sector, primarily aviation and marine transport companies, will contribute to maintaining stable demand for light oil products in the upcoming years. Despite a continuing negative dynamic in oil rail shipments, there appeared circumstances indicating a trend towards stabilization of the market. Thus, after a long-term failure to replace the railcars written off, the segment of oil and gasoline tank cars came to stability. In 2019, the rental rate for oil and gasoline tank cars doubled over the year: from RUB 600/day in 2018 to RUB 1200 /day. As early as at the end of 2019 the market players, anticipating a possible deficit in the segment, began to replenish their fleet: for the first time since 2015, car building plants were producing and selling oil and gasoline tank cars. Consolidation of the fleet of oil and gasoline tanks in the Russian Federation was another important achievement of the year. Almost 50% of the cars are rented by three operators: Transoil, RAILGO and NefteTransService.

LPG exports expand to China

LPG transportation by rail decreased by 2.5% last year as compared to 2018, a result comparable to the average of annual freight shipments in 2015-2017. A most important result of the year was the commencement of LPG exports to China: Irkutsk Oil Company began transporting LPG by rail to Manchuria in August of 2019. As the Asian market is attractive to Russian producers of LPG, so the development of export projects is likely to continue, not only to China, but also to other countries of the region. However, the projected demand for rolling stock arising due to an increase of transportation distances in the eastern and southeastern directions, can fall after the opening of SIBUR’s ZapSibNeftekhim, the largest petrochemical unit.

Chemicals: shipments growing with containerization slowing down

The chemicals transportation market continued to grow. Shipments of ammonia increased by 16%, and those of methanol were up by 4%. Importantly, containerization of shipments of chemicals was slowing down: while it was growing in 2013-2018 at an average annual rate exceeding +20%, in 2019 transportation in tank containers grew only by +13.8%. These dynamics suggest that operating tank cars to transport chemicals is more convenient. While tank cars are compatible with the infrastructure of all participants of the transportation process, the operation of containers implies the need for specialized equipment (reach stackers, forklifts, etc.) for reloading and moving containers within storage areas. It is also important to note that present-day tank cars are much better suited for the transportation of cargoes that tend to solidify and require the use of heating and insulation systems.

Containers: transportation growth will continue despite reduced subsidies

In 2019, over 5 million TEU containers were transported on the RZD network, up 12.6% from 2018. The number of loaded containers dispatched by all modes of transport increased by 13.1% totalling 3.4 million TEU with 47.6 million t of freight transported, up 13.6%. The highest increase is observed in the segment of timber cargoes (+32.9%) that is caused by the gradual transition from exports of round wood to woodworking within the country with finished products subsequently exported with a high added value. The situation with Chinese subsidies for container transportation by land remains unclear: while the market expects a reduction in subsidies for transportation on current routes, introduction of subsidies for new routes is likely, in particular for those running through the Eastern operating area. The competitiveness of land routes is also fostered by new requirements for sulfur content in marine fuel, which came into force in 2020. This led to a significant increase in freight rates for container shipments from China to European ports.

Decline in timber cargoes

The overall increase in prices in the global timber market seen for the last two years, has come to a halt. This was caused by a downward trend in timber consumption in China and Europe which decreased the demand. The key potential factors to drive up the consumption of timber freights include the growth of the world’s population, environment protection priorities and the emergence of new high-capacity markets, such as India and Australia.

In the domestic market, loadings of timber cargoes fell by 7% in 2019 compared to 2018, entailing a decrease in the demand for flat cars for timber. At the same time, the situation is aggravated by the accumulated surplus of gondola cars, which threatens with lowering their rental rates and re-engagement of gondola cars for transporting timber. This being said, the market can now see an intense containerization of timber freights. In 2019, container shipments of timber grew by 72% from the previous year, with TEU shipments up 33%, which was the main driver for growth of traffic of loaded containers (Figure 2).

Figure 2. Container shipments in Russia in 2019 compared with 2018, thousand TEUs, according to United Wagon Company