Overview of the Russian Railway Market in August-September 2016
Loading keeps growing for 7 months in a row
In August 2016, loading firmed by 0.7% YoY to 105.9 million tons.
Loading growth rate is mostly slowed down because of lack of gondolas in Kuzbass due to decrease of fleet suitable for commercial transportation. Consequently, coal loading dipped by 0.4% YoY. Besides, traffic of oil and oil products decreased by 5.6%, traffic of ferrous metals by 3.3%, traffic of scrap metal by 7.1%, traffic of cement by 6.5% and traffic of grain by 5.9%. However, traffic of construction cargoes increased by 8.2%, traffic of iron and manganese ore by 2.2%, traffic of wood products by 12.9%, traffic of coke by 22.2% and traffic of nonferrous metal ore by 5.6%.
Freight turnover rose by 2.1% YoY to 198 billion ton-km in August 2016, once again establishing a record for this month for the past 15 years.
Increase of export shipping (3.4% above a year before) contributed to growth of freight turnover. These four months they were at maximum high level for the past three years.
Coal: record-breaking coal extraction in August not backed up by growth of loading due to lack of freight cars
In August, loading of coal within Russian Railways network edged down by 0.4% YoY to 26.3 million tons. A total of 214 million tons of coal, 3.2% above a year before, have been shipped by railway since the beginning of 2016.
In August, coal extraction reached a record-breaking value for this month and was up 10.3% on a year before according to Russia’s Ministry of Energy and up 13.8% according to Rosstat.
Variety of trends of loading and extraction of coal was preconditioned by decrease of fleet suitable for commercial transportation. The same situation was observed in 2008 and 2012 which brought about a significant boost of lease rates for gondolas.
In August, internal traffic decreased by 9% YoY whereas exports increased by 9%. Decrease of internal shipping was preconditioned by a higher profitability of exported coal sales with lack of fleet. At the same time, exports of coal were at its maximum posted for the past three years.
Export freight turnover advanced by 15% to Great Britain, by 40% to China, by 25% to Ukraine, and by 5% to Japan.
Deficit of electrical power within the territory of Great Britain caused increase of exports to the country. As there was lack of wind power generation due to weather conditions and several mines in Great Britain were closed, additional demand for coal to be used in HPP arose. It is forecast that exports of coal to Great Britain will still grow but by 2025 will stop because it is planned to retire coal HPPs.
Exports of coal to China rose because of natural calamities. In Shaanxi province, flood destroyed the railroad which was used for transportation of 20% of import coal from Mongolia to China. Flood also stopped supplies in Australia. In September, the same circumstances led to increase of prices for metallurgical coal to more than USD 200/ton.
The situation with coal suppliers is complicated in Ukraine as well. According to Ukraine’s Ministry of Energy and Coal Industry, coal reserves amount to 961,000 tons, which is 50% less than in September 2015 and by 27% less than planned volumes. At the same time, lack of coal totals at least 1.1 – 1.3 million tons.
In the short-run, transportation of Russian coal may go down because of local deficit of gondolas despite record-breaking extraction and high demand in the global market.
Oil and oil products: loading to keep falling
In August, loading of oil and oil products within Russian Railways network contracted by 5.6% YoY to 20.1 million tons. A total of 156.6 million tons of oil cargoes, a 7.5% below a year before, have been dispatched by railway since early 2016.
In August, oil extraction was up 0.1% on a year before according to Russia’s Ministry of Energy and down 0.3% on a year before according to Rosstat. At the same time, primary crude oil processing fell by 0.3%.
Exports dropped by 18% to the Netherlands, four-fold to South Korea, 3.5-fold to Turkey, and by 20% to Ukraine. Exports to China were still high growing two-fold compared with a year before.
According to July forecast of Russia’s Ministry of Energy, oil extraction will go up by 1.3-2.1 % YoY to 540-544 million tons in 2016, and exports by 4.8% whereas oil processing will drop by 3.3% to 272.5 million tons. In 2017 oil extraction is forecast to be around 525-545 million tons (from -2.8% to +0.9% to estimated volume for 2016) and oil processing to remain at the level of 2016, i.e. 272.5 million tons.
Therefore, as experts estimate, until the end of this year, railway traffic of oil and oil products will remain low and in 2017 traffic may go down because of probable decrease of extraction. At the same time, contraction of oil processing will also lead to increase of pipeline transportation and decrease of demand for freight cars.
Construction cargoes and cement: recovery still ongoing thanks to infrastructure projects
In August, loading of construction cargoes within Russian Railways network mounted by 8.2% YoY to 14.5 million tons. Meanwhile, loading of cement declined by 6.5% to 2.9 million tons. A total of 97.9 million tons of construction cargoes and 18.6 million tons of cement, up 17.2% and down 5.3% on a year before respectively, have been dispatched by railway since early 2016.
In August, traffic of construction materials grew 2.2-fold to the Leningrad Region compared with the same period a year before, by 42% to the Tyumen Region, 1.5-fold to the Volgograd Region and by 30% to the Krasnodar Region.
In the reporting period 5.6 million m2 of new housing, up 6.5% on a year before, were built. A total of 42.8 million m2 of new housing, a 5.8% below a year before, were built in January-August. As Russia’s Minister of Construction, Housing and Utilities Mikhail Men reported, the government is planning to end its program regarding mortgage interest rate subsidization in 2017, though a new support mechanism will be offered.
As INFOLine experts estimate, Russia is keeping establishing new large-scale (with total area more than 50,000 m2) housing construction projects with significant investments. The Northwestern, the Central, and the Ural Federal Regions occupy top positions. Thus, for example, construction of the housing complexes Symbol and Presnya City with residential area of 850,000 m2 and 200,000 m2 respectively began in Moscow, construction of Odintsovo-1 development with residential area of 480,000 m2 in the Moscow Region, Sovremennik housing complex with residential area of 230,000 m2 in the Sverdlovsk Region, the housing complex within the territory of Selmash plant with residential area of 203,000 m2 in Voronezh.
Russia’s Ministry of Finance plans to allocate fundings in the budget for 2017-2019 for construction of Tavrida federal highway in the Crimea. The project is estimated at RUB 139 billion and must be finalized by late March 2017, its technical and economic feasibility and financial audit by early December 2017. The length of the new four-lane highway from Kerch to Sevastopol will amount to about 300 km, its traffic capacity to 43,000 cars per day.
Russia’s government increased federal expenses on construction and modernization of sports facilities for 2018 Football World Cup by RUB 1.4 billion. After correction, about RUB 6 billion will be allocated for these purposes instead of RUB 4.6 billion.
Traffic of construction cargoes is still mainly boosted by infrastructure projects, though residential development also tends to recover. Lack of gondolas may affect traffic of construction materials for a short period of time as profitability of transportation of crushed stone and sand is much lower than that of coal.
Ferrous metals: exports still boosting traffic
In August, loading of ferrous metals within Russian Railways network eased up by 3.3% YoY to 5.9 million tons. A total of 47.3 million tons of ferrous metals, down 1.8% on a year before, have been dispatched by railway since early 2016.
In August, internal freight traffic contracted by 15% YoY despite the fact that Russian Railways raised discount for dispatch of ferrous metals to domestic consumers from Beloretsk station (Kuibyshev Railways), Izhevsk (Gorky Railways), Metallurgicheskaya and Chebarkul (South Ural Railways) and Guryevsk (West Siberian Railways). Until December 31, 2016, tariff coefficient will amount to 0.877 instead of 0.904.
Exports of ferrous metals increased by 7%. Traffic still posted growth to Italy (7.5-fold), Taiwan (by 40%) and Iran (four-fold). Freight traffic to Turkey is gradually recovering rising by 20% compared with July 2016.
According to Rosstat, steel production crept down by 1.9% in August, cast iron production by 3.7%, and rolled ferrous metal production by 2.5%.
Gazprom is planning to build inter-settlement gas pipelines with total length of about 944 km and four gas distribution stations within the territory of the Leningrad Region. The regional government will in its turn ensure construction of 456 km of inter-settlement networks. Total investments which the parties will allocate for implementation of the program are estimated at RUB 21 billion. In the mid-run, construction of gas pipelines will require significant amount of pipes.
The global market still have some duty barriers on Russian ferrous metals. Thus, for example, duties on hot-rolled steel are still remaining despite the fact that the USA acknowledged that cold-rolled flat steel from Russia did not affect American interests.
Mexico also prolonged compensation duties on thick steel plate from Russia, Romania, and Ukraine for the next five-year period. The decision was made by Mexico’s Ministry of Economy and was based on results of the second investigation performed in accordance with WTO regulations.
It is forecast that, in spite of growing global prices for steel, further increase of export traffic of ferrous metals from Russia will be hindered because of existing and planned restrictions imposed by the EU and other countries.
Iron and manganese ore: freight traffic to Turkey recovering
In August, loading of ore within Russian Railways network rose by 2.2% YoY to 9.3 million tons. A total of 73.2 million tons of ore, up 1.3% on a year before, have been dispatched by railway since early 2016.
According to Rosstat, ore extraction in August contracted by 3.2%. In total, extraction since the beginning of 2016 firmed by 0.4% YoY.
Meanwhile, internal transportation went down by 2% and exports escalated by 15%.
Exports mainly dropped to Ukraine (by 75%) where lack of coal for foundries is observed. Exports grew to Italy, which did not import last year, to Finland (2.5-fold) and to Poland (2.5-fold). In the reporting period, exports to Turkey skyrocketed six-fold as compared with July 2016, which made it the second consumer of Russian ore following China.
Therefore, freight traffic is mainly boosted thanks to growth of export freight flow. The situation may change if new export logistics of ferrous metals is established or restrictions imposed on Russian metal products are cancelled. In this case, ore transportation within the country may improve.
Grain and milled products: export duties may be abolished
In August, loading of grain and milled products within Russian Railways network declined by 5.9% YoY to 1.6 million tons. A total of 11.1 million tons of grain, up 5.4% on a year before, have been shipped by railway since early 2016.
In August, internal transportation increased by 21% YoY and exports fell by 22%. Exports almost stopped to Yemen and contracted two-fold to Saudi Arabia. It should be mentioned that exports to Azerbaijan (1.5-fold) and Tunis (supplies were practically null last year) climbed significantly.
Russia’s Ministry of Agriculture requested Iran to lift a ban on imports of wheat effective from March 2016. According to the ministry, the ban is affecting growth of circulation of agricultural and food products between the countries. Last year Iran remained the third consumer of Russian grain but purchases dropped by 23% from 2.9 million tons to 2.2 million tons.
In August, Egypt’s Ministry of Agriculture issued a decree banning imports of wheat containing any amount of ergot fungus, which led to boycott by traders. While the ban was in force, three tenders for purchase of wheat were cancelled and no ships with grain cargoes were accepted. But Egypt decided to omit its claims regarding zero spur fungus already in late September.
Abolition of duties on Russian wheat planned in late September may have a favorable impact on export shipment. As Russia’s Ministry of Agriculture estimates, the new harvest will allow not only to satisfy the needs of the country but also to ensure a significant export potential (up to 35-40 million tons). Despite the fact that the existing duty does not serve as a regulator in the existing conditions, its existence hinders signing of long-term contracts.
Until the end of 2016, OJSC Russian Railways zeroed export surcharge for grain transportation (to 13.4%) for the distance of up to 600 km which it introduced in late 2014. Due to additional preferences and expected record-breaking harvest experts forecast a significant growth of grain shipped by railway.
In the short-run, export deliveries of grain may contract because of Egyptian factor. However, record-breaking harvest, abolition of export duty on grain and zeroing of export surcharge will allow the traffic to recover.
Chemical and mineral fertilizers: transportation attains maximum
In August, loading of fertilizers within Russian Railways network grew by 2.3% YoY to 4.4 million tons. A total of 35 million tons of fertilizers, up 2.7% on a year before, have been dispatched by railway since the beginning of 2016.
In August, internal transportation rose by 9% YoY while exports dried up by 1%.
Exports mainly dropped to China (by 7%) and Syria (two-fold). Brazil boosted imports of Russian fertilizers by one-third, the USA 1.5-fold, and Thailand 3.5-fold.
The USA abolished antidumping duties on ammonium nitrate August 20, which allowed to supply about 30,000 tons of Russian fertilizers to the US market in the same month. However, Ukrainian producers of fertilizers are still lobbying duties on Russian products.
Significant export potential of Russian fertilizers may be decreased because of introduction of duties by Ukraine’s government which, however, may be recovered by growth of exports to the USA. In the mid-run, traffic of mineral fertilizers may remain at the existing high level thanks to consistent demand both in the national and export markets. Traffic may also rise as new facilities are introduced.
While fleet brought into state of equilibrium, rates keeping escalating
Data regarding sales of rolling stock are taken from Rolling Stock Market magazine.
In August 2016, the CIS plants sold 3,802 freight cars, which exceeded two-fold the amount posted a year before and 1.5-fold the amount posted a month before.
Sales dropped by 8% YoY among type freight cars fitted with 18-100 bogie or its equivalents and climbed four-fold among new generation freight cars.
Efficiency of usage (average monthly freight turnover) of UWC innovation freight cars totaled 511,000 ton-km, which is by 108% more than efficiency of type freight cars.
Discarding in August was still high amounting to 8,500 freight cars where gondolas accounted for 4,900. Total discarding for first eight months of 2016 advanced by 16% YoY to 80,700 freight cars.
Rolling stock suitable for commercial transportation within Russian Railways network dropped to 987,000 pcs. Defective fleet contracted to 93,000 pcs. An actual surplus of fleet totaled 75,000 pcs where gondolas accounted for 3,000 pcs.
The existing situation may lead to decrease of loading because of lack of freight cars. Contracted supply of gondolas in the market made the relevant rates mount. Therefore, lease rate for gondola with type bogie was up to RUB 800/day in September.
Leysana Korobeynikova, Senior Analyst