Overview of the Russian Railway Market in August-September 2017
Volumes of main cargoes continue to grow
Growth of shipment volumes continued in August 2017: loading volumes were 106.2 million tons (+0.4% year-on-year), and cargo turnover was 208.2 billion ton-km (+4.9%).
There was year-on-year growth in transportation of coal (+7.6%), iron ore (+2.2%), ferrous metals (+3.4%), fertilizers (+9.1%), grain (+18.8%), cement (+6.9%) and ferrous scrap (+7.7%). There was a decrease in transportation of crude oil and petroleum products (-4.5%), construction materials (-13.8%), non-ferrous ore (-5.3%) and coke (9.1%).
Further growth in load volumes of main cargoes is expected in the short term, with the exception of construction materials.
Coal: growth was mainly driven by exports to China, Turkey and Poland
Loading of coal in August 2017 set a record for this month of the year, reaching a level of 28.3 million tons (+7.6% against August last year). A total 234.4 million tons of coal have been shipped by rail since the beginning of 2017, which is 9.5% more than in the same period of 2016.
The main growth in coal shipment was on export routes (+13% against August 2016). The biggest increases were in supplies to China (up by 1.5 times), Turkey (by 2.5 times) and Poland (doubling of supplies). Total coal exports to these countries were up by 400-500,000 tons compared with August 2016. Coal shipments to Romania and India are also at a high level: these two countries increased their consumption of Russian coal by about 200,000 tons.
Experts believe that supplies to Poland will continue to grow, as the country is experiencing a shortage of coal due to depletion of mines operated by several coal mining companies. The situation may change as Poland switches to nuclear power, but this will not happen in the next few years.
There will be new opportunities for coal exports from Yakutia in 2018 when the first railway bridge between Russia and China is completed (joining Nizhneleninskoye in Russia with Tongjiang in China). The bridge construction is designed for two tracks with Russian and Chinese standard gauge.
A forecast by the Russian Ministry of Energy, given in August, predicts that coal exports will increase by 8% year-on-year in 2017 to 185 million tons. According to the Ministry, export demand for Russian stone coal will remain steady in the future, suggesting that loading of coal will stay at a high level.
Oil and petroleum products: further decline in cargoes
Crude oil and petroleum product shipment were down by 4.5% year-on-year in August 2017 to 19.2 million tons. In total 156.7 million tons of crude oil and petroleum products have been shipped by rail since the beginning of 2017, which matches their level in the same period of 2016.
The decline in August was due to a shrinkage of exports by almost 14% compared with August 2016, while domestic traffic grew by 1%.
Exports fell on routes to Netherlands ports (-25%), Italy (-15%) and Ukraine (-40%). However, there was an increase in supplies to Belarus (+45%), Great Britain (by 2.5 times) and Poland (by 1.5 times).
Trends in cargo structure were unchanged: shipment of fuel oil continued to decline (‑30%) and there was growth in shipment of gas condensate distillates (+20%).
In mid-August, the Russian President Vladimir Putin said at a meeting devoted to transport infrastructure in the North-West of Russia that there is a need to link oil supplies to refineries in Belarus with transportation of their refined petroleum products through Russia.
The Russian Energy Ministry is now working to attract Belarusian petroleum product exporters to Russian ports. Russian Railways already gave a discount to the Belarusian exporters, but this has not yet brought positive results. Increase in rail shipments of petroleum products can only be foreseen if new transport solutions are proposed.
Construction materials and cement: shortage of gondolas holds back growth
Construction cargo shipment continued to fall in August 2017 and were at a level of 12.5 million tons (-13.8% compared with August last year). Loading of cement rose to 3.1 million tons (+6.9%), representing the first year-on-year growth since 2015. In total, 90.2 million tons of construction cargoes and 18.5 million tons of cement were shipped by rail since the beginning of 2017, representing year-on-year declines of 7.8% and 1.1%, respectively.
According to the State Statistics Service (Rosstat), about 6.3 million m2 of new housing (measured by floor space) was completed in August 2017, which is 13.1% more than in August 2016. However, total completions since the beginning of the year are down by 7.3% year-on-year.
Lowering of Russia’s key interest rate (to 8.5% in September 2017) has fuelled mortgage lending, which, coupled with the fall in housing completions, could drive price increases, leading to an upturn in the construction industry. Mikhail Men, the Minister of Construction and Housing, has said that 74-76 million m2 of new housing will be completed in 2017, and that the figure will increase in 2018.
Positive dynamics of cement production already point to a revival of the construction industry. Production of cement grew by 2.7% in August compared with August 2016, ending a decline, which had been in evidence since the beginning of the year.
The emerging positive trends in the construction industry may lead to a gradual recovery in the shipment of construction materials and cement in the medium term, but shortage of gondola cars, which are currently needed for transport of more profitable cargoes, is holding construction cargoes back for the time being.
Ferrous metals: growth driven by domestic consumption
Ferrous metal shipment totalled 6.1 million tons in August 2017 (+3.4% compared with August 2016). A total 47.4 million tons of ferrous metals have been shipped by rail since the start of the year, which is 0.3% more than in the same period of 2016.
Domestic shipments grew by 20% in August, while exports fell by 7% (shipments to Italy, Belgium and Egypt fell by half). The increase in ferrous metal shipment on domestic routes is partly due to track repairs (loading of the track grid was up by 65% in August, compared with the same month of last year). It is also driven by growing domestic consumption of sheet steel (+15%), rolled ferrous metals (+15%) and slabs (their consumption has doubled).
According to estimates by the steelmaker Severstal, Russian consumption of steel will grow by 5% year-on-year in 2017. It should be noted that growth in the first half of the year was driven by non-core markets: rolling-stock manufacturing and the automotive industry. Next year Severstal expects a 3% increase of domestic demand and a similar increase of global steel consumption.
Growing domestic steel consumption and ongoing repairs to the Russian rail network should ensure growth of ferrous metal shipment in the near term.
Ore: growth in domestic consumption and redirection of exports
Ore shipment in August 2017 was 9.5 million tons (+2.2% compared with August 2016). In total, 73.3 million tonnes of ore have been shipped since the beginning of 2017, which is 0.2% more than in the same period of 2016.
Domestic shipments grew by 4%, while exports decreased by 8% year-on-year. Most of the decline in exports in August 2017 was due to lower supplies to Turkey (half of the level in August 2016) and Slovakia (-60%), as well as the termination of freight traffic to Hungary and Ukraine. However, there was growth in shipments to China (+20%) and also to South Korea, Japan and Egypt.
Growth in domestic ore consumption was driven by supplies to domestic smelting plants.
There may be a decline of ore shipment volumes in the medium term due to the appearance of new export logistics.
Timber freights: further achievement of export potential
Shipment of timber freights was unchanged in August 2017 compared with August 2016 at 3.5 million tons. In total, 30 million tons of timber cargo has been shipped since the beginning of the year, which is 3.6% more than the same period of 2016.
Domestic shipment of timber freights fell by 4% in August, while exports grew by 5%, driven by China (+20%) and Kazakhstan (+30%).
A number of new facilities are due to be launched by the end of the year. They include plywood production at the Vyatka Combine in Kirov Region and Murashinsky Plywood Plant, MDF production in Smolensk Region (at Egger Drevprodukt Gagarin), and the launch of a modern paper machine at the Segezha Pulp and Paper Mill in Karelia. The Kama Pulp and Paper Mill in Perm Territory is investing 30 billion rubles in a project to produce high-quality cardboard.
Experts believe that Russian exports of timber freights will expand more than three-fold by 2030. This entails further growth in the shipment of timber freights by rail.
Grain and milled products: a plentiful harvest and signs of world price growth
Shipment of grain in August 2017 totalled 1.9 million tons (+18.8% against August 2016). A total 12.4 million tons of grain have been shipped by rail since the beginning of the year, which is 10.9% more than in the same period of 2016.
Domestic shipment of grain and milled products fell by 7% year-on-year in August, while exports grew by 40%, mainly due to growth of supplies to Egypt (by 2.5 times).
This year’s grain harvest in Russia is expected to set a new record. By mid-September, more than 117 million tons of grain had been harvested. This contrasts with a predicted 20% fall of harvest volumes this year in America and Canada, which will cause an increase in world market prices.
Remaining stocks from last year, this year’s abundant harvest, and the forecast increase of prices creates optimism for further growth of grain shipment by rail in Russia.
Chemical and mineral fertilizers: accessing new markets
Fertilizer shipment was 4.8 million tons in August 2017 (+9.1% against August 2016), and it’s a new record for this month of the year. In total, 38 million tons of fertilizers have been dispatched by rail since the beginning of the year, which is 8.4% more than in the same period of 2016.
Domestic shipments grew by 3% in August, and the growth in exports against the same month of the previous year was 9%. There was an increase in supplies of Russian fertilizers to China (+8%), Brazil (+17%) and Finland (by 2.3 times). Exports were also reopened to Tanzania (there were no exports to Tanzania a year earlier).
At the end of August, the Argentinian government cancelled a 6% duty, which had been levied since 2011 on imports of high-quality Russian diammonium phosphate. Leading Russian fertilizer companies (Phosagro and Eurochem) estimate that removal of the levy will make it possible to export 300-350,000 tons of Russian fertilizers to Argentina.
Access to new markets for Russian fertilizers promises further growth of export cargoes.
Leasing rates have stabilized
Data on rolling stock sales and leasing rates are taken from the Russian industry periodical Rolling Stock Market.
CIS manufacturers sold 5.1 ths railcars in August 2017, including 3.0 ths gondolas, which is 35% more than in August 2016 (3.8 ths cars) and 10% less than in July. Experts predict that 50-52. ths cars will be manufactured in Russia in the whole of 2017.
Demand for gondolas is twice greater than the number being written off (there were 1.4 ths gondola write-offs in August this year). The total number of cars of all types removed from the Russian fleet in August was 3.8 ths units.
The share of the fleet in working order was at a high level of 996 ths cars at the start of September, while the number of cars out of service had fallen to 59,5 ths (the lowest level since 2014). As a result, the fleet had a “surplus” of 60 ths units, although the balance for gondolas is close to zero.
Daily lease rates for gondolas on standard bogies were unchanged in September at about 1,400 rubles. It is expected that rates will fall towards the end of the year as shortages disappear, reaching a level of 1,000-1,200 rubles per day.
Leysana Korobeynikova, Senior Analyst
