Overview of the Russian Railway Market in February-March 2016
With exports improving, freight traffic resuming
In February 2016, loading within Russian Railways network amounted to 95.2 million tons, 2.9% above a year before. Daily loading decreased by 0.6% YoY.
Monthly transportation of coal increased by 3.5%, of construction materials by 28.9%, of mineral fertilizers by 7.5%, of timber materials by 6.5%, of nonferrous metal ore by 6.7%, and grain by 20%. At the same time, loading of oil and oil products fell by 4.4%, of ferrous metals by 3.4%, of cement by 11.8%, and scrap metal by 19.7%.
This February freight turnover grew by 5.9% to 184.9 billion ton-km. Daily freight turnover is 2.4% above a year before, i.e. monthly freight turnover enhanced not due to extra day volumes (February 29), but thanks to increase in exports of coal, grain, and fertilizers.
Coal: next record-breaking loading
In February, loading of coal within Russian Railways network improved by 3.5% YoY to 26.5 million tons, thus setting once again a record in transportation in this month for the past 15 years. A total of 55.1 million tons of coal, 3.1% above a year before, have been transported by railway since the beginning of 2016.
Extraction of coal was 5.2% a year above according to Russia’s Ministry of Energy, and 6% a year above according to Rosstat.
Domestic transportation grew by 2.4% and exports by 6.2%. Freight traffic escalated four-fold to South Korea, 1.7-fold to China, 1.6-fold to Ukraine, by 20% to Finland and Poland. It should be specifically mentioned that exports to India are still mounting. In the short-run, the Indian market may occupy the second place in consumption of Russian coal (following China).
In early March South Korea imposed ban on calling to South Korea ports for the third-country ships that visited North Korea within previous six month. Due to this exports of Russian coal for South Korea companies through transport corridor Khasan –Rajin may stop. However, exports to China shall not be affected.
China is still planning to cut about 1.8 million workers at coal mines which will decrease coal extraction by 500 million tons. Thanks to this, optimistic forecast of exports of Russian coal to China can be made.
In the short run, exports of Russian coal may remain high if coal volumes dedicated for South Korea are retargeted to other markets or alternative supply patterns are introduced.
Oil and oil products: shipping still remaining low
In February, oil and oil products within Russian Railways network dropped by 4.4% YoY to 19.7 million tons. A total of 40.6 million tons of oil products, 5.9% below a year before, have been shipped by railway since early 2016.
According to Rosstat, oil extraction improved by 7.2% YoY.
Domestic shipping of oil and oil products ticked up by 7% YoY and exports declined by 15%. Exports retreated by 17% to the Netherlands, by 6.9% to Italy, and to Turkey (supplies were almost null last year).
In early March, heads of oil companies endorsed preliminary agreements with OPEC and agreed to freeze oil extraction at the level of January 2016. Thank to this decision, hopefully, Russian shipping of oil and oil products will stabilize unless new pipeline capacities are put in operation.
Construction materials and cement: shipping recovering slowly as construction industry stabilizing
In February loading of construction materials within Russian Railways network escalated by 28.9% YoY to 9.8 million tons. Meanwhile, loading of cement shrank by 11.8% to 1.5 million tons. A total of 16.9 million tons of construction materials and 2.6 million tons of cement have been shipped by railway since the beginning of the year, 19.3% above and 14.8% below a year above respectively.
Shipping of construction materials rose four-fold to the Novgorod Region, by 35% to the Khanty-Mansijsk Autonomous District, by 17% to the Moscow Region, by 28% to the Tyumen Region, and four-fold to the Belgorod Region.
According to Russia’s Minister of Construction, housing and Utilities Mikhail Men, Russian real estate developers have adjusted to new market conditions and managed to take into consideration recommendations of the government focusing on economy class projects.
It is already known that interest rate on subsidized mortgage will not exceed 12% in 2016, and up to RUB 16.5 billion is envisaged for the program in 2016. As Mikhail Men estimates, in Russia mortgage loans may decrease from RUB 1.1 trillion last year to RUB 0.9-1.0 trillion in 2016 due to negative trend in the construction market.
In 2015 Russia’s record-breaking area of housing, 84.2 million square meters, was launched in 2015. This year Russia’s Ministry of Construction decreased its planned new housing supply by almost 5% from 80 million square meters to 76.2 million square meters. Decrease of the plan will affect shipment of cement, but not that of construction materials (crushed stone) as basic scope of shipment will fall within infrastructure projects.
The medium-term forecast of shipping remains the same: the current positive dynamics may be maintained thanks to governmental support. The industry will not recover to the pre-crisis level until 2017-2018, but it is already evident that transportation is growing as compared to the level in 2015.
Ferrous metals: entrance to other sales markets gradually compensating for loss of Turkish market
In February, loading of ferrous metals within Russian Railways network declined by 3.4% YoY to 5.7 million tons. A total of 11.2 million tons of ferrous metals, 8.5% below a year before, have been shipped by railway since early 2016.
According to Rosstat, production of steel fell by 2.7% in February, production of rolled products by 5.3%, production of cast iron and pipes grew by 10.9% and 2.7% respectively.
Decrease in shipment was brought about by drop of freight traffic to Turkey which is partly compensated by increase in shipment to Italy (5.5-fold) and to Taiwan (by 35%) and to Vietnam and Egypt (supplies to this countries were almost null last year).
Russian Railways have accommodating steelmaking companies cancelling 13.4% exports surcharge to tariff that was introduced in 2015 to distribute depreciation profit. The discount will be provided if metal producers do not cut their shipping as compared with last year level.
In the next few months, shipment of metal products is expected to go down. An increase in freight traffic to new export destinations may improve the situation.
Iron and manganese ores: shipment stops falling
In February loading of ore within Russian Railways network remained as it was last year and totaled 8.3 million tons. A total of 17.3 million tons of ore have been shipped by railway since early 2016, which is 1% below a year before.
According to Rosstat, extraction of Russian iron ore grew by 5.2% YoY in February.
Domestic traffic rose by 4%, exports dropped by 10%. The decline was mainly caused by ceased exports to Great Britain, the Netherlands, and Romania. Meanwhile, exports moved up significantly to Ukraine, to Italy, to Finland, and to Turkey, i.e. two-fold, 2.5-fold, two-fold, and by 30% respectively.
Since early 2016 cost of iron ore has escalated by 29%, whereas March 7 the prices jumped by 19% to $63.74/ton, a record-breaking increase within account management history starting from 2009. March 25 the prices already fell to $56.37/ton. Analysts say the prices increased due to several factors. The flower exhibition in China from April until October when Chinese metal manufacturers will stop working is the first contributing factor. The second one is economic stimulus measures stated by the Chinese government. One of them is investments in the infrastructure in the amount of $123 billion, where construction of railways accounts for $2.5 billion. Moreover, the prices may be affected by the crisis in the Chinese steelmaking industry because of disproportionality between demand and supply.
In general, the current conditions are favorable for Russian exports. With unprofitable facilities in China closed down, rise of the prices in the global market allows Russian companies to maintain export traffic at the current level.
Grain and milled products: High level of exports to remain until the end of 2015/2016 season
In February loading of grain and milled products within Russian Railways network escalated by 20% YoY to 1.8 million tons. A total of 3.1 million tons have been shipped by railway since early 2016, 0.5% above a year before.
In February 2016, domestic shipping escalated by 6%, exports by 46%. Exports mainly boosted to Egypt which is still top consumer of Russian grain.
In near future Russia and Japan are to start negotiations about increase in exports of Russian grain. At present, despite the fact that Japan is purchasing more than 6 million tons of food grain, Russia accounts for less than 1% in the Japanese grain imports. Rosselkhoznadzor representatives paid attention to the possibility of exports of forage grain to the Japanese market as well. The demand for forage grain amounts to at least 15 million tons per year.
In February, Russia for the first time became net exporter of soybeans. Almost the entire exports of soy came to the market of China. High demand is creating conditions for accelerating production of soy in the Far East.
According to experts including those with US Department of Agriculture, total exports of grain in 2015/16 will reach 33.0-33.5 million tons including 23.0-23.5 million tons of wheat making Russia second wheat exporter in succession to the European Union.
Therefore, the existing high level of shipping of grain cargoes and great exports potential are forecast to remain the same due to global market conditions favorable for Russian producers.
Chemical and mineral fertilizers: new record-breaking traffic
In February, loading of fertilizers within Russian Railways network increased by 7.5% YoY to 4.3 million tons, once again setting a record in this month for the past ten years. A total of 8.9 million tons of fertilizers have been shipped by railway since early 2016 which is 6.4% above a year before.
Traffic grew because of a 16% rise of domestic transportation. Meanwhile exports remained the same as last year. Brazil boosted exports of fertilizers from Russia by 25%, Ukraine by 41%, and Serbia four-fold.
According to Minister of Agriculture Alexander Tkachev, during coming fieldwork in the spring, prices for basic fertilizers will be maintained at the level of early January, which will have a positive impact on home traffic.
As PhosAgro forecasts, after drop in prices in late 2015 and early 2016, the market has started recovering gradually which is related to the growth of seasonal demand in key markets in Europe, North and South Americas. Stable demand for import fertilizers is expected in the markets of Latin America.
With the current fertilizer-to-agricultural product price ratio forecast for fertilizers global market is positive which will contribute to stable high level of export traffic. Domestic consumption will be maintained with agricultural sector supported by the government and with plans to increase cultivated area in 2016 fulfilled.
Fleet consolidation may accelerate recovery of gondola market
Data regarding sales of rolling stock are taken from Rolling Stock Market magazine.
In February 2016, CIS plants reduced their sales by 6.9% YoY to 2,351 freight cars. Sales of type freight cars fitted with 18-100 bogies and their equivalents dropped by 7.2% YoY.
In February 2016, about 11,100 freight cars were discarded where gondolas accounted for 5,900 pieces.
Defective fleet totaled about 114,900 pieces as of late February. Rolling stock suitable for commercial shipping within Russian Railways network totaled about 1,022 freight cars. Actual surplus of the fleet dropped to 114,000 pieces including 31,000 gondolas).
Recovery of the market may be accelerated by the beginning consolidation of freight car fleet. Federal Freight may gain control of gondolas of leasing companies controlled by some government-supported banks: VEB-Leasing, VTB-Leasing, Sberbank Leasing as well as State Transport Leasing Company (STLC) and TransFin-M. As a result, the number of gondolas used by Federal Freight may rise to 200,000 pieces.
In order to execute its plan, STLC will request up to RUB 30 billion for consolidation of leasing freight car fleet.
Coal and metal industry experts appeal to regulating agencies, primarily FAS, to prevent from monopolization of freight car market and rapid increase of leaser rates. According to experts, in response to the consolidation, the lease rate may rise to RUB 800-900 per freight car per day compared with the current RUB 450-550, which will significantly boost cargo owners’ expenditures. FAS is speaking against increase in lease rate and thinks that the money saved on infrastructure part of the tariff demanded by Russian Railways at the moment must not be involved into freight car component.
Meanwhile, Federal Freight is already engaged in the consolidation. The company regained control of its freight cars previously controlled by Center of Corporate Transportation Services and gained control of UVZ-Logistic gondolas March 1, 2016.
New generation freight cars in service still show high efficiency of shipping. According to statistics regarding use of fleet fitted with Barber bogie, in February, average freight turnover totaled about 469,000 tons-km per one gondola with increased axle load and 227,000 tons-km per one type gondola.
Leysana Korobeynikova, Senior Analyst