Overview of the Russian Railway Market in April-May 2017
Stability of the positive dynamics
In April 2017, the positive trend emerged at the end of 2016 continued: loading amounted to 105.3 million tons (+3.9% against the same period last year), cargo turnover — 205.0 billion tons-km (+8.0%).
Key growth drivers were the same: coal transportation (+8.7%), oil (+4.9%), ferrous metals (+1.7%), timber freights (+2.4%), fertilizers (+9.3%), grain (+6.3%). Indices of transportation of construction materials (-5.5%), iron ore (-4.3%) and scrap of ferrous metals tell comparing to the past year (-7.1%).
Coal: Russian companies are exploring new export opportunities
The loading of coal in April 2017 set a monthly record and amounted to 28.8 million tons (+8.7% against April last year). In total, since the beginning of 2017, 119.9 million tons of coal were shipped by rail, which is by 9.2% higher than in the same period in 2016.
The positive trend of transportation is still provided by the increase in export shipments: the growth was 15% by April of last year. The main consumers, which increased the import of Russian coal, were China (+40%), Turkey (increase by 2 times), Poland (+70%), Japan (+7%), Great Britain (+5%) and Germany (increase by 3 times). As in the past, supplies to Ukraine were falling (-40%), while shipments to Cyprus-based companies increased.
In May, train station Dzerzhinskaya-Novaya of the Kaliningrad railway accommodated the first terminal in Russia for railway coal shipment along the track of 1435 mm. Heavy-lift routes equipped with new-generation wagons were organized to ensure the efficient operation of the terminal, and the deal was concluded with railways-transit administrations on granting tariff preferences for the transit of the entire volume of coal, which in 2017 may not be less than 300,000 tons, and it will increase to 1 million tons in the future.
Debby Hurricane forced the Japanese company JFE Holdings (the second largest steel producer in the country) considering diversifying coking coal imports to reduce dependence on supplies from Australia. According to JFE Holdings President, the company plans to purchase more coal in countries such as Mozambique, Russia and Canada.
The market still retains all the factors for further growth of the Russian coal export.
Oil and oil products: expected export growth
In April 2017 oil and oil products shipment increased by 5.0% comparing to the previous year and reached 19.3 million tons. In total, since the beginning of 2017, 80.5 million tons of oil and oil products were shipped by rail, which is 1% higher than the same period last year.
As the political climate is improving, export of oil and oil products is still growing in Belarus (1.5 times) and Turkey (almost no supplies last year).
We should praise the increase of crude oil shipment (+26%) and fuel oil shipment (+4.7%), due to the low indices of the same period of 2016.
Despite the positive dynamics, we cannot confirm the significant recovery in the volume of transportation of oil and oil products by rail.
Construction materials and cement: no predicted recovery
Volumes of construction cargo shipment in April 2017 amounted to 12.1 million tons (-5.5% compared to April of the previous year), cement — 2.3 million tons (the same level as in the previous year). In total, since the beginning of 2017, 40 million tons of construction materials and 6.9 million tons of cement were shipped by rail, which is 3.7% and 1.4%, respectively, less compared to the same period last year.
Construction industry activity tends to decline. According to the Federal State Statistics Service, in April 2017, 4.2 million housing buildings were finished, which is 11.4% less than the result of the same period last year. Since the beginning of the year, the indicator has fallen by 14.8%.
Construction of the federal highway "Tavrida" was launched in the Crimea on 12 May, which will become one of the most modern high-speed trails in the south of Russia and will connect the Kerch bridge, Simferopol and Sevastopol. The construction will be completed by 2020, and the first part — Kerch-Simferopol — is going to be put into operation together with the Crimean bridge in 2018. However, the project will not have a significant impact on transportation of building materials by rail; as the material is to be supplied from the Crimea fields, while need for additional supplies of crushed stone can arise only with a shortage of capacities in the region.
As of today, there are no factors providing recovery of construction materials export.
Ferrous metals: no predicted growth
Ferrous metals shipment in April 2017 amounted to 6.1 million tons (+1.7% compared to April last year). In total, 23.9 million tons of ferrous metals were shipped by rail from the beginning of the year, which is 0.1% higher than in the same period last year.
Domestic shipments decreased by 7% in April, while exports increased by 8%: to the USA (by 2.3 times), Indonesia (no supplies last year) and Turkey (+20%).
In early May, Gazprom commenced construction of the Turkish pipeline in the Black Sea, which can increase the transport of ferrous metals by rail. The project envisages constructing two gas pipelines with the capacity of 15.75 billion cubic meters per year each (total capacity is 31.5 billion cubic meters) with the possibility of expanding up to four pipelines per capacity of 63 billion cubic meters. Experts of Steel Industrial Company forecast an increase in welded pipes production output by 3-7%.
Despite the fact that the period May-July is considered to be peak for metal products consumption, according to experts, in 2017 it is expected to slow down by one month due to a surplus in most segments in the secondary market. Stock replenishment by trading companies is not planned until the summer. Export increase is unlikely as there is increased competition in foreign markets, therefore capacity of Russian producers will not exceed 65%.
Iron and manganese ore: reduced exports caused by Chinese demand decline
The ore shipment in April 2017 amounted to 9.0 million tons (-4.3% compared to April of the previous year). In total, 35.6 million tons of ore were supplied since the beginning of the year, which is 0.6% lower than the same period last year.
Domestic shipments increased by 4%, and exports decreased by a quarter comparing to the previous year. The main drop in exports was seen in China (by 50%). In addition, supplies to Ukraine almost stopped.
According to experts, demand for ore in China may decrease in summer due to the limited storage capacity in the ports, and due to implementation of the state program for reducing excess steelmaking capacity.
In the mid-run, further reduction of ore shipment by rail is expected.
Timber freights: expected renewal of growth
Shipment of timber products in April 2017 amounted to 4.2 million tons (+2.4% compared to April last year). Since the beginning of the year, 15 million tons of timber were shipped, 3.7% more comparing to the same period last year.
Domestic shipments increased by 5%, while exports — by 1.5%. The exports increase in still owes it to China: shipments there grew by 8% compared to last year.
Wooden housing construction still dominates the domestic market, which is one of the main priorities in the development program of the Timber Industry Complex of the Russian Federation until 2030, currently being developed by the Ministry of Industry and Trade.
The authorities in some regions are already supporting the trend of wooden housing construction. Thus, residents of Yamal will be able to receive a social payment from the state for the construction of a wooden house. For these purposes, 50 million rubles have been allocated from the budget of the Yamal-Nenets Autonomous District. The social payment will amount to 50% of the value of the house.
The timber holding company Segezha Group (part of AFK Sistema) plans to build a factory in Sokol, Vologda region to produce CLT panels for wooden house building. According to the company president, the project will help the enterprise to make a serious breakthrough, shifting from individual to mass wooden housing construction. The launch of the processing plant in Sokol is scheduled for 2019, and the investment in the project is estimated at 10-15 million euros.
In the medium term, timber shipments can grow moderately.
Grain and grinding products: under-shipment causes the surplus
Shipment of grain in April 2017 amounted to 1.7 million tons (+6.3% compared to April last year). Since the beginning of the year, 6.7 million tons of grain have been shipped by rail, which is 1.8% higher than the same period last year.
Domestic shipments decreased by 3%, while exports grew by more than 10%. Import of Russian grain was increased by Egypt (two times), Turkey (6 times) and Israel (5 times).
According to Igor Pavensky, Director of Strategic Marketing Department of Rusagrotrans CJSC, Egypt has not only retained leading position among Russian grain importers, but also hit a record in April comparing with other countries. This result was a due to the largest purchases of Russian wheat from the state-owned GASC which are still conducted despite the end of the season.
The growth of supplies to Turkey is due to the removal of the protective duty for Russian products in April of 130%.
The US Agriculture Ministry has published a new forecast for world wheat exports, which says Russia is on the second position after the US. The USA can supply 28.17 million tons of wheat to the world market, while Russia — 28 million tons (the Ministry of Agriculture forecasts even lower level — 27 million tons).
According to RZS President A. Zlochevsky, exporters found themselves in a difficult situation. Due to ruble strengthening, as well as periodic restrictions on the part of importing countries, a record export potential of about 40 million tons of grain was not sold. As a result, stocks at the end of the 2016/17 season may grow to 21 million tons, which is 1.9 times more than last season.
New grain crop in Russia is also expected to be high — 110 million tons, threatening to fall domestic prices. The risks of significant losses of grain stored are great, Zlochevsky says. Therefore, the grain industry is extremely interested in finding the importers as soon as possible, which will be ready to replace the traditional buyers of Russian grain, including Turkey in the shortest time. Considering alternative sales markets, one can expect an increase in grain transportation by rail.
Chemical and mineral fertilizers: Ukraine introduced taxes on Russian carbamide
Fertilizers shipment in April 2017 amounted to 4.7 million tons (+9.3% compared to April last year). In total, 19 million tons of fertilizers were shipped by rail from the beginning of the year, which is 4.7% higher than in the same period last year.
Growth in exports comparing to the previous year amounted to 6%: Russian fertilizer exports increased by 2.3 times in Ukraine, in China (+9%), in Brazil (+15%) and in Turkey (no supplies last year).
In mid-May, Ukraine introduced anti-dumping taxes on fertilizers from Russia. The taxes of 31.84% will apply to all producers of carbamide and CAM (carbamide-ammonium mixture) from the Russian Federation. The representative of the main supplier of carbamide to Ukraine, EuroChem, announced its intention to challenge these taxes in court. The company, which owns a trading network in Ukraine, considers this measure illegal and intends to take legal action.
Supplies of Russian products are planned to be replaced by imports into the distribution network of EuroChem from other regions of the world, as all Ukrainian enterprises producing fertilizers for the domestic market currently stopped, and there are no decisions on their launch. While the Ukraine agrarian market, which grew by 30% last year, requires the supply of a large number of fertilizers.
According to the representative of Eurochem, a relatively small amount of carbamide supplied to Ukraine before can be redistributed to other markets, including the US, which in December 2016 canceled similar taxes for Russia. However, the US market is not attractive yet as great number of new nitrogen plants in the country in recent years has caused overproduction in the local market, which leads to intense competition and lower prices.
In the short term, the export of mineral fertilizers is likely to be reduced, but it can be improves with as importers enhancing.
With increased demand, prices go up
Data on rolling stock sales and rental rates is provided the magazine Rynok Podvizhnogo Sostava ("The Rolling Stock Market").
In April 2017, the sales of wagons by the CIS plants amounted to 4,8 thousand units. (3,3 thousand units — gondola cars), which is 2.3 times higher than the results of April 2016 (2.1 thousand units), but lower by 17% the level of the previous month.
Demand for gondola cars corresponds to write-off level: 3,3 thousand units were wrote off in April. In total, 5,5 thousand units rolling stock units were written off.
Rolling stock suitable for commercial transportation amounts to 987 thousand units. At the beginning of May, the defective fleet is 74.3 thousand units, the surplus is 64 thousand units (among them gondola cars — only 2 thousand units).
In May, the lower limit of prices for gondola cars on a bogie 18-100 and its analogues increased by 150 rubles: 1,300 — 1,400 rubles per day. Most market participants try to conclude only short-term leases (on average for three months) and explain it by the frequent revision of prices for gondola cars. Owners minimize the volume of the park, provided by long-term (year-long) contracts, as they see fixing current rates unprofitable. In the following months, the majority of respondents predict an increase in the cost of short-term leasing by about 50-100 rubles per day.
Leysana Korobeynikova, Senior Analyst
