Overview of the Russian Railway Market in April-May 2018
April: traffic growth continues
In April 2018, the growth of freight traffic continued, with the freight handling having amounted to 108.9 million tonnes (+3.4% year-on-year), and the freight turnover having reached 215.5 billion tonne-kilometres (+5.0%).
The traffic is growing for coal (+8.7%), iron and manganese ores (+7.8%), ferrous metals (+9.8%), fertilizers (+6.4%), and grain (+58.8%). There was a decline in the shipments of construction freights (-6.6%) and timber freights (-2.4%), cement (-8.7%), and nonferrous ore (-5.9%).
Coal: ambitious plans
Coal loading in April went up by 8.7% year-on-year, amounting to 31.3 million tonnes and thus setting a record for this month during the last 15 years. Year-to-date, 125.6 million tonnes of coal have been shipped by rail, showing a 4.8% increase compared with the same period of 2017.
In April, both domestic and export shipments went up, having grown by 5% and by 8% respectively. The highest rise was registered in the exports of coal from Russia to Ukraine (2-fold), Poland (2-fold), Japan (+10%), and Romania (3-fold).
According to Mr Belozerov, Head of RZD, coal shipments by rail are expected to grow from 359 million tonnes in 2017 to 500 million tonnes in 2025. At the same time, there is a lack of infrastructure, not on the part of the railway, but rather on the part of the transshipment capacity at cargo ports. As a result, there is an expansion in the geography, with new transit shipments through Finland, Kaliningrad, and Poland. In addition, RZD counts on the development of the Murmansk port, as well as on the Northern Latitudinal Railway project. Shipments of certain coal volumes to Turkey through Azerbaijan and Georgia are possible.
All the market prospects for further growth of coal shipments by rail, mainly through increased exports, remain in place.
Crude oil and refinerd products: RZD continues struggle for freight base
Loading of oil and refined products in April remained at the level of the previous year and amounted to 19.3 million tonnes. Year-to-date, 79.5 million tonnes of oil and refined products have been shipped by rail, showing a 1.2% decrease compared with the same period of 2017.
RZD has extended the discounts applying to shipments of crude oil and refined products for the year 2018. For some routes (starting at Tomsk-1 and Asino stations), a 0.99 reduction factor has been established, against the prior factors of 0.7 and 0.6 respectively, with inputs from FAS (the Federal AntiMonopoly Service). At the same time, a higher discount applies at a number or other stations. Thus, a 0.793 reduction factor was introduced for diesel fuel, mazut, gasoline, kerosene and gasoil shipments from Khabarovsk-1.
In addition to that, a 0.658 reduction factor was introduced for shipments from Tyumen-Severnaya Station: there is as an oil refinery close to the station, where production of 92 RON and 95 RON Euro-5 standard gasoline will start in Q2 this year.
Today, there are no preconditions for rail shipment volume recovery due to the development of pipeline transportation, and the rate of reduction in freight handling will depend primarily on government control and RZD’s policy.
Construction freights and cement: drop in production due to weather despite industry revival
In April, the loading of construction freights was down 6.6% year-on-year to make 11.3 million tonnes, while cement loading decreased by 8.7% to reach 2.1 million tonnes. Year-to-date, 40.0 million tonnes of construction freights and 6.6 million tonnes of cement have been shipped by rail, showing a 0.1% and a 4.1% decrease respectively, compared with the same period of 2017.
Experts believe that the drop in production of construction materials and cement is a short-term phenomenon attributable to the unusually cold spring weather in 2018.
At the same time, construction of residential buildings show active growth: April 2018 saw commissioning of 4.5 million sq. m of housing in the Russian Federation, as reported by the Russian Federal State Statistics Service (Rosstat), 7.5% above the figures for April 2017, and a 16.7% growth year-to-date.
According to the head of Dom.rf, mortgage rates may fall to 8–8.5% by the end of the year, entailing a 1.5-fold rise in the in the volume of granted mortgage loans which will achieve about 2.8 trillion rubles. Industry experts believe that such growth in demand is also supposed to lead to a substantial increase in the volume of construction.
According to the executive order of the President of Russia issued in May, road construction will be intensified in the next 6 years. By 2024, 85% of roads in Russia must achieve a standard condition. 11 trillion rubles will be allocated to achieve this purpose.
In the medium term, the revival of the construction industry might stipulate an increase in shipments of construction freights and cement, and there still is a considerable potential for further growth in this segment.
Ferrous Metals: Manufacturers are Expanding Capacities
In April, loading of ferrous metals was 9.8% up year-on-year and totalled 6.7 million tonnes. Year-to-date, 26.5 million tonnes of ferrous metals have been shipped by rail, showing a 10.9% increase compared with the same period of 2017.
It should be noted that the increase of shipments in April was registered mainly on domestic routes (+25%), while exports remained on the level of previous year. The Russian market has shown growing consumption of sheet steel (+25%), railway track skeleton (2-fold), and cast iron (4-fold).
The industry players take a positive view of the demand, and are planning an increase of their capacities. For example, a special contract was signed in May between Tulachermet-Stal (Tula Ferrous Metals and Steel), the Ministry of Industry and Trade of the Russian Federation, and Tula Oblast, under which an integrated casting and rolling facility with the capacity of 1.5 to 1.8 million tonnes of rolled steelper year will be established.
At the same time, NLMK group launched a project to upgrade its continuous casting line at its Lipetsk production site, which will enable an 80% boost in the capacity of the line (to 1.8 million tonnes per annum), along with production of ‘heavy’ slabs up to 400 mm thick and up to 2,800 mm wide.
Moreover, EVRAZ Nizhny Tagil Metallurgical Plant is expanding its sales geography and strengthening its positions on the export market, having signed a contract for delivery of 1,000 rail wheels to ZOS Trnava, a Slovakian company.
The current conditions lead to anticipation of an increase in domestic shipments of ferrous metals by rail, taking into account the growing demand for domestic products and, as a consequence, the steel manufacturers increasing their capacities.
Ore: redirecting towards the domestic market goes on
In April, ore loading amounted to 9.7 million tonnes, which is 7.8% above the previous year levels. Year-to-date, 36.9 million tonnes of ore have been shipped by rail, showing a 3.6% increase compared with the same period of 2017.
Multi-directional shipping trends are still being observed. The shipments went up by almost 10% in the domestic routes and reduced by 8% in the export routes. Again, the decrease is mainly cause by China (almost 2-fold) and Poland (shipments dropped to a minimum level). Italy, Germany and France all demonstrated a growth of consumption of Russian ore. Export growth went up by 100–150 thousand tonnes compared to last year.
Currently, there are no prerequisites for significant changes in the current market dynamics. Due to a growing domestic demand for steel products, export of ore is going down.
Timber freights: moderate growth of domestic shipments
In April, loading of timber freights was 2.4% down year-on-year and totalled 4.1 million tonnes.Year-to-date, 15.5 million tonnes of timber freights have been shipped by rail, showing a 3.2% increase compared with the same period of 2017.
Domestic shipments have grown by 5%, whereas exports decreased by 3.5% for the first time this year, because of a 7% reduction in shipments to China.
Minpromtorg (Ministry of Industry and Trade of the Russian Federation) gives a high rating to the potential of Russia's timber industry. According to forecasts, shipments of timber freights to external consumers will grow 1.5-fold and achieve $17 billion by 2024. The greatest prospects are associated with the implementation of a number of major projects in the pulp and paper sector: demand for Russian pulp might double by 2030.
The plan to double the share of wooden house construction products in the total volume of housing construction from 10% to 20% should also be noted.Pilot projects of wooden multi-storey environmentally friendly neighbourhoods will be implemented in Moscow and Moscow Region in the nearest future.
Moreover, a triple growth in production of pellets, which have considerable export potential, is expected in the coming years. In the past few years, pellet exports have been growing some 30% annually, making Russia the world's largest exporter of this biofuel. For example, a multilateral agreement was reached in May between the Russian Direct Investment Fund, JBICIG Partners, RFP Group in the Far East, and the Japanese company ProspectCo to implement a joint project that envisages construction of fuel pellets manufacturing facilities with the total capacity of 135 thousand tonnes per year.
Loading of timber freights by rail is expected to show moderate growth in the context of development of the timber industry complex in Russia.
Grain and grain mill products: the highest loading figures in 15 years
In April, the grain loading amounted to 2.7 million tonnes (+58.8% as compared to April 2017), setting a 15-years' record for this month. Year-to-date, 9.8 million tonnes of grain have been shipped by rail, showing a 45.6% increase compared with the same period of 2017.
Domestic shipments have gone up 15% and exports have doubled as a result of increased shipments to Egypt (2-fold) and Bangladesh (6-fold), as well as to Mongolia (hardly any shipments made last year).
Analysts have cut their forecasts for next season's harvest. For example, SovEkon analytical centre has adjusted its estimate of wheat harvest in Russia, which went downwards by 1.2 million tonnes, from 78.2 to 77 million tonnes. The adjustment is caused by late sowing of spring cereals in Siberia. The initial forecast for grain crops (126.2 million tonnes) was generally below last season's figures (135.4 million tonnes), but was further adjusted downwards to 124.9 million tonnes. However, according to analytical centre of Rusagrotrans, grain export capabilities may achieve 50–51 million tonnes in the coming season, taking carryover stocks into account, while in the current season grain exports are forecasted at 53.2 million tonnes. At the same time, the volume of rail shipments will increase for the first time in the current season and achieve 18.6 million tonnes, showing a 1.7-fold growth compared to last season.
In May, Rif trade house entered into a cooperation agreement with the United Grain Company, according to which a specialized grain terminal with a capacity of up to 12.5 million tonnes and a grain depot allowing for simultaneous storage of up to 300 thousand tonnes will be built in Novorossiysk seaport. The Head of Rusagrotrans analytical centre estimates the potential growth of transshipment capacities of Russian ports at nearly 30 million tonnes, up to 84 million tonnes in the next 5 years. In addition to Novorossiysk, plans to build new and expand the existing infrastructure are being developed the ports of Taman, Ust-Luga Azov, Primorsk, and Zarubino.
In the medium term, grain shipments by rail will grow due to significant carryover stocks of the current season, high prospects for the future harvest, zero export duties, and an increased infrastructure capacity in the ports.
Chemical and mineral fertilizers: loss of the Ukrainian market is offset by increased shipments to other countries
In April, the loading of fertilizers amounted to 5.0 million tonnes (+6.4% year-on-year), setting yet another record for this month. Year-to-date, nearly 20.3 million tonnes of fertilizers have been shipped by rail, showing a 6.6% increase compared with the same period of 2017.
The shipments went up by 10% in the domestic routes and by 4% in the export routes. The most noticeable export growth was noted for China (+10%), Brazil (+22%), and the USA (+ 35%). Shipments to Syria continue growing (last year it did not purchase fertilizers from Russia): in April, shipment to Syria reached 80 thousand tonnes.
Thus, the manufacturers were able to offset the loss of the Ukrainian market after the Ukrainian government imposed a complete embargo on Russian products in March 2018. In view of such restrictive measures, EuroChem, a largest manufacturer of fertilizers, decided to sell its subsidiary in Ukraine and to leave the market.
Russian producers give an upbeat assessment of the demand this year. In the opinion of Uralkali, the demand for potash fertilizers will remain high in 2018 and may reach 67–68 million tonnes. In view of this, Uralkali plans to enter another contract with Chinese consumers at a price that will be at least 10% higher than in 2017.
As for the nitrogen fertilizers market, URALCHEM CEO Dmitry Konyaev believes that 2018 results will show a 5–10% increase in demand, amid low figures in Q1 due to a lengthy winter.
In view of the increased demand, Phosagro has planned construction of a new facility to manufacture components for fertilizers (1 million tonnes of Monoammonium phosphate and 1 million tonnes of phosphate rock per year) next to its existing Metachem plant in the Volkhov district of Leningrad Region. Investment in the project will amount to 20 billion rubles.
In the medium term, a growth of shipments by rail is expected, attributable to the rising demand on the global market, as well as to commissioning of new production facilities by Russian manufacturers.
Surplus of gondolas and hopper cars at its minimum
The rolling stock sales and leasing rates data are sourced from the Rynok Podvizhnogo Sostava (Rolling Stock Market) journal.
In early May 2018, the commercially feasible fleet was 1,023 thousand units, whereas the unserviceable fleet remained at a low level — some 54 thousand units. As a result, the fleet surplus totaled 52 thousand units, though in the segments of gondolas and hopper cars it was close to zero.
In April, car sales by CIS factories totaled 6.8 thousand units, which is 35% above April 2017 results (5.0 thousand units).At the same time, only 2.5 thousand railcars were disposed.
As of the beginning of May, the fleet of new-generation cars supplied by different manufacturers has exceeded 104 thousand cars.
Gondola cars: market far from saturated
The registered fleet of gondola cars on the RZD network has reached 498 thousand units, exceeding the figures of last April by 4%.
It should be mentioned that the manufacturing exceeds the disposal by far. In April, gondola car sales by CIS manufacturers totaled 4.2 thousand units, whereas only 0.4 thousand gondola cars were disposed.
In May, the standard gondola leasing rates grew slightly to about RUB 1,725 per day: the fleet is fully involved in operation, owing to the 10% growth of coal shipments in gondola cars.
Hopper cars: no surplus in the segment
The registered fleet of grain cars has grown by as little as 4% year-on-year, while the freight turnover involving grain cars has increased 1.5-fold, mainly due to a doubled grain freight turnover.
Despite the increased loading of mineral fertilizers, the freight turnover in April remained the same as last year. This result was achieved through usage of the available fleet of cement hoppers. Against a backdrop of positive market trends, purchase of mineral hoppers in April amounted to 500 cars.
Leysana Korobeynikova, Head of Analysis
