Overview of the Russian Railway Market in February-March 2018
February: traffic increase in all key freights except oil
In February 2018, the growth of freight traffic persisted, the freight handling amounting to 99.8 million tons (+3.9% year-on-year) and the freight turnover to 196.3 billion t-km (+3.7%).
The growth of coal shipments resumed (+3.8%); a traffic volume increase was also registered for construction materials (+5.6%), iron ore (+3.7%), ferrous metals (+7.1%), timber freights (+5.7%), fertilizers (+6.7%), cement (+7.1%), grain (+43.8%) and charred coal (+4.5%).
There was a decline in the shipments of crude oil (-2.6%), nonferrous ore (-6.3%) and scrap (-6.5%).
Coal: towards new best scores
Coal loading in February went up 3.8% on last year, amounting to 29.8 million tons and thus setting up a record for this month. Year-to-date, 60.8 million tons of coal have been shipped by rail, showing a 1.1% increase compared with the same period of 2017.
Domestic shipments dropped (-3% versus February 2017), whereas the exports went up 8%. The highest rise was registered in the exports from Russia to Poland, Ukraine and Romania, with a 300–500 thousand tons increase in February for these countries. It should be noted that the rating of the main consumers of the Russian coal has somewhat changed. Thus, Great Britain takes second place after Japan in view of import of Russian products, having overtaken China. Poland, historically not a major importer, has by now achieved consumption volumes comparable with shipments to China, along with Ukraine.
According to the Department of Coal Industry of Kemerovo Region, the mining companies intend to increase their capacities: In 2018, a new section of Ubinskiy-1 open pit is planned to be put into operation by the open-cut mine “Shestaki”, and a development project for the Gusinskiy – Yuzhnyi section is planned to be launched by OOO “Barzasskoye tovarischestvo”. It is planned to start constructing three processing plants with the total capacity of 12.5 million tons, including: the Uvalnaya plant (by UK Sibirskaya); the Krasnokamenskaya plant (by IK YUKAS-Holding), the Taldinskaya-Energeticheskaya plant (UK Kuzbassrazrezugol). It is assessed by the administration of Kemerovo Region that the total processing capacity of the region after the launch of these factories will increase by 8% and amount to 175.4 million tons.
Moreover, the first export shipments from Zashulanskoye field (Trans-Baikal Territory) to the Nakhodka-Vostochnaya port railway station took place in March. By the end of the year, export of 230 thousand tons of coal is planned, and the design capacity of the open cast (6 million tons of coal per year) is expected to be reached by 2021.
The large-scale plans for export of Russian coal are limited by lack of infrastructure. RUSSIAN RAILWAYS has already recommended using the freight rail cars of increased capacity for transportation of coal from Kuzbass to the port of Vostochny. As a result, a moderate increase in the shipments of coal by rail is expected.
Crude oil and refined products: the decline goes on
In February, the loading of crude oil and refined products fell 2.6% year-on-year, totaling 18.8 million tons. Year-to-date, 39.5 million tons of oil and refined products have been shipped by rail, demonstrating a 2.6% decrease compared with the same period of 2017.
According to the Institute of Natural Monopolies Research (IPEM), further decline in the loading of oil freights by rail is expected due to the commissioning of a number of pipeline capacities including: ESPO-2 was connected to Komsomolsky Refinery (5.1 million tons), the Volgograd – Tikhoretsk pipeline was constructed and Volgograd refinery (2.6 million tons) was hooked up as well as the trunk oil pipelines of Afipsky and Ilsky refineries (1.5 million tons). Moreover, it is planned to switch the oil pipeline in Moscow to white oil products, which will result in 1 million tons of loading lost by RUSSIAN RAILWAYS.
Despite the fierce competition pipeline transport presents, Russian Railways is planning to increase the transportation of crude oil and refined products by at least 7 million tons by 2025. For this purpose, Russian Railways is conducting negotiations with Transneft concerning geographical and product segmentation of crude oil and refined products transportation by rail and pipeline transport.
In order to attract more freights for shipment by rail, Russian Railways has also introduced a 50% discount for empty tank cars after their shipment of oil products from the Oktyabrskaya Railway port stations to the Belarusian Railway stations. The discount is valid until the end of the year.
The loading of crude oil and refined products is expected to decrease in the medium term, however this process might be slowed down by government control and balanced shares of different modes of transport.
Construction freights and cement: recovery due to housing construction
In February, the loading of construction freights was up 5.6% year-on-year to reach 9.4 million tons, and cement loading grew by 7.1% to reach 1.5 million tons. Year-to-date, 18.2 million tons of construction freights and 2.7 million tons of cement have been shipped by rail, showing a 9.8% and a 7.3% increase respectively, compared with the same period of 2017.
In February 2018, according to the Russian Federal State Statistics Service (Rosstat), 5.2 million sq. m of housing were commissioned in the Russian Federation, which is 33.8% more than in February 2017. The growth year-to-date is 24.6%.
In March, President of Russia Vladimir Putin set a goal in his Address to the Federal Assembly to build 120 million sq. m of housing annually, which exceeds the current volumes 1.5 times. According to Mikhail Men, Minister of Construction Industry, Housing and Utilities Sector, this goal is meant to be achieved in about 10-15 years, starting from 2024-2025, with the mortgage rate around 7-8%.
The target parameters appear quite achievable: according to the Central Bank of Russia, the weighted average mortgage rate was 9.85% by February. In February, a new achievement was registered on the mortgage market: over 100 thousand loans were given for a total of 200 billion rubles, which is twice as much as in 2017. However, by the end of March the Central Bank made a resolution to mark down the domestic key interest rate from 7.5% to 7.25%, which will lead to a further reduction of mortgage rates and an increase in the volume of granted mortgage loans. Moreover, the Central Bank is planning to lower the key rate further to 6-7% by the end of the year.
In March, analysts and stakeholders of the cement transportation market declared a possible shortage of bulk cement transport units in the near future. This was caused by the revival of the construction industry, along with the facts that no purchases of bulk cement cars took place in the preceding years, and a great deal of grain cars previously utilized for shipping cement had to be used for their intended purpose as a result of a bumper harvest.
In the medium term, the revival of the construction industry is stimulating an increase in the loading of construction freights and cement by rail; however, the rate of this growth will depend on the availability of rolling stock for shippers.
Ferrous metals: the highest loading figures in 10 years
February saw ferrous metals loading up by 7.1% year-on-year, reaching 6.0 million tons and setting up a 10 years record for this month. Year-to-date, 12.6 million tons of ferrous metals have been shipped by rail, showing a 10.3% increase compared with the same period of 2017.
The shipments have increased both for domestic and foreign routes. A rise was noted in exports to Poland (hardly any shipments made last year), Germany (fourfold), Mexico (+30%) and Turkey (+08%).
Andrey Eremin, MMK Director of Economics and Management Board Member, predicts a 3-3.5% increase in demand on the Russian market conditioned by the automotive and the construction industry. At the same time, according to Rosstat, the production of passenger cars in Russia has grown by almost 30% year-to-date.
In March, the USA introduced a 25% import duty on steel products and a 10% duty on aluminum. The USA ranks 5 in the rating of consumers of the Russian ferrous metals (also when delivered by rail), with export volumes totalling some 3 million tons last year.
However, a total loss of these export volumes due to the US measures will not necessarily be the case. Minpromtorg (Ministry of Industry and Trade of the Russian Federation) has declared that Russia has plans to appeal to the WTO court, while two Severstal subsidiaries (Severstal Export GmbH and Severstal Export Miami Corp.) have filed a lawsuit against the U.S. government in the Federal International Trade Court. In addition, the North American subsidiary of NLMK USA, a steel manufacturer, has filed an application for excluding NLMK products (slabs) from the goods to which the new duties are applicable.
Mexico ranks second in the consumption of Russian metal products, and restrictive duties are not applied to it. It might happen that Russian ferrous metals will be satisfying the domestic Mexican demand, while Mexican iron and steel companies will be exporting their products to the USA.
Oleg Bagrin, NLMK Group President, predicts that steel consumption on the Russian market will go 1.5-2% up in 2018 along with the demand in construction, machine and automotive industries.
Within the given scenario, a moderate increase in ferrous metal transportation by rail is expected to be governed by growth of demand in the domestic market along with the development of export.
Ore: redirecting towards the domestic market goes on
In February, ore loading amounted to 8.5 million tons, which is 3.7% above the previous year’s level. Year-to-date, 17.7 million tons of ore have been shipped by rail, showing a 4.0% increase compared with the same period of 2017.
The shipments went up almost 10% in the domestic routes and collapsed by more than 30% in the export routes. The decline was noted in exports to China, with a decrease by almost 200 thousand tons. Besides, shipments of Russian ore to Poland shrunk more than twofold. This may be caused by the shortage of domestic coal in the country and, as a consequence, the decrease in smelting in view of its low profitability, along with increased imports of finished metal products.
In the medium term, a variety of shipping trends is expected due to the increase of smelting by domestic iron and steel companies.
Timber freights: further growth driven by domestic shipments
In February, loading of timber freights was 5.7% up year-on-year and totaled 3.7 million tons. Year-to-date, 7.1 million tons of timber freights have been shipped by rail, showing a 5.5% increase compared with the same period of 2017.
Domestic shipments grew by 14%, whereas exports remained the same as last year.
The traffic to Arkhangelsk Region showed the most significant growth (+20%). This was caused by the increase of production capacities in the region. Thus, ULK Group (Ustyanskiy Timber Industry Complex) launched two small-diameter wood manufacturing companies in March, with a capacity of 900 thousand cubic meters of saw log and 150 thousand wood pellets per year.
Representatives of Minpromtorg and Russian businesses and representatives of the Ministry of Economy of United Arab Emirates discussed the export outlook for the products of Russia's timber industry at Dubai Woodshow 2018, an international exhibition of the woodwork and timber industry. Moreover, an agreement was reached at the exhibition on the delivery to Kuwait of USD 500 thousand worth of scaffolding boards manufactured by STOD LLC (Ultralam), and advance requests for the products manufactured by other Russian exhibitors were entered.
The domestic shipments are predicted to rise due to higher demand from construction companies and growth in the woodworking industry; a moderate development of export with possible expansion into new markets is also predicted.
Grain and Grain Mill Products: Growth Continues
In February, grain loading stood at 2.3 million tons (+43.8% versus February of the last year). Year-to-date, 4.5 million tons of grain have been shipped by rail, showing a 41.5% increase compared with the same period of 2017.
Domestic shipments went up 7%, along with an over 65% rise in exports, still due to the tripled increase in export volumes to Egypt.
Despite Minselkhoz (Ministry of Agriculture) having increased the forecast for grain exports to 52 – 53 million tons, based on the results of the season, the opinion expressed by analytical company SovEkon is that the export may not be able to exceed the threshold of 50 million tons. This is affected by the uncertain situation regarding shipments in June and July in southern ports in connection with the World Cup 2018 and, consequently, the ban on grain fumigation (a pest extermination method) in the port areas, as some of them are not far enough from the venues. Moreover, the exporters are cautious about entering into contracts due to lack of clarity about how the export duties will apply after July 1, 2018. Furthermore, complaints on shortage of rolling stock have already been heard from some shippers.
It should also be noted that the future harvest might turn out to be much lower compared with the current season. According to Minselkhoz, it might amount to some 100 million tons. In the short term, shipments of grain by rail will show growth during the season; however the growth rate will depend on the numerous factors mentioned above.
Chemical and Mineral Fertilizers: Growth in all Areas
In February, the loading of fertilizers amounted to 4.8 million tons (+6.7% year-on-year), setting up yet another record for this month. Year-to-date, nearly 10 million tons of fertilizers have been shipped by rail, showing a 6.4% increase compared with the same period of 2017. It should be noted that the shipments increased both for domestic and foreign routes.
According to Minselkhoz, in January alone farmers purchased almost 50% more fertilizers than in the same month last year. The total volume of mineral fertilizers to be introduced in 2018 will increase by 100 thousand tons (in terms of active ingredients) to reach 3.3 million tons.
The most noticeable export growth was assigned to Switzerland (almost twofold), Brazil (+35%), as well as Syria and Moldova, whereas no shipments were made to these countries in the previous years.
In March, EuroChem put the Usolskiy Potash in Perm Territory into operation. By the end of the year, about 450 thousand tons of finished products will be manufactured at the plant. The potash chloride production capacity at EuroChem facilities as part of the operations of the first stage at Usolskiy Potash is 2.3 million tons per year.
As the demand for fertilizers is stable worldwide, along with the increase in the volumes of fertilizer introduction by Russian farmers, further growth of fertilizer shipments by rail can be expected in the medium term.
The fleet of new generation cars on the Russian Railways network has reached 100 thousand cars.
The rolling stock sales and leasing rates data are sourced from the Rynok Podvizhnogo Sostava (Rolling Stock Market) journal.
In Febuary 2018, car sales by the CIS factories totaled 6.4 thousand units (4.3 thousand being gondolas), which is 30% above February 2017 results (5.0 thousand units) and 27% above January 2018 results (5.1 thousand units).As of the beginning of March, the fleet of new generation cars supplied to RUSSIAN RAILWAYS by different manufacturers has reached 100 thousand cars.
The demand is far beyond the current level of disposal. In January 2018, 3.7 thousand railcars were disposed (1.2 thousand of them being gondolas).
The commercially feasible fleet grew up to 1.023 thousand units, whereas by the beginning of March 2018 the unserviceable fleet remains minimum — around 51,300 units. As a result, the fleet surplus totaled 78 thousand units, and the surplus of gondolas saw a seasonal rise, although not above 1.3% of the fleet.
In March, the standard gondola leasing rate has grown slightly to some RUB 1,650/day. No prerequisites exist now for rate reduction, as there is a trend of cargo base growth in all key industries.
Leysana Korobeynikova, Head of Analysis
