Overview of the Russian Railway Market in February-March 2019

Slowdown in transportation growth

Freight increased by 1.4% to reach 199.3 billion tariff ton-km in February 2019. Freight handling on RZD network amounted to 100.0 million tons, which is 0.1% higher than the results of last year. In February, RZD started to consider the cargo base of Yakutia in freight handling, without which the freight handling index would have been 0.1% less than in 2018.

The key drivers of growth were as follows: coal (+1.3%), ferrous ore (+8.2%), ferrous metals (+1.7%) and fertilizers (+2.1%). Transportation of construction cargo (-9.6%), timber freights (-5.4%), non-ferrous metal ore (-2.7%), scrap (-4.8%) and grain (-8.3%) has decreased.

In February, RZD conducted negotiations with shippers in order to increase the amount of cargo supplied for transportation. The shippers expressed readiness to additionally issue over 660 thousand tons of finished goods (10.8 thousand cars) for shipment in February, provided that a reduction in the rate of rolling stock provision is ensured.

In total, since the beginning of year, freight handling has increased by 0.9% as compared to the same period of last year, and amounted to 205.4 million tons. Freight handling increased by 1.9% to 419.7 billion tons.

Coal: increase in freight handling continues

Coal loading in February increased by +1.3% as compared to last year and amounted to 30.2 million tons, repeatedly setting a record for this month. In total, 63.1 million tons of coal have been shipped since the beginning of the year, which is 3.2% higher than in the same period of 2018.

In February, transportation grew in the export direction (+3%), while the domestic transportation dropped by 4%. In comparison with last year, imports of Russian coal mostly increased in Germany (almost ten-fold), Japan (+11%), Finland (2-fold) and Ukraine (+18%) as compared to last year.

In February, coal imports to Poland decreased by 30% as compared to the previous month, and amounted to 700 thousand tons. The possible cause of decrease in coal supplies to Poland was the activities of the Agrarian Union (AGROunia) farmer movement, which put forward political demands which included closing of the national market for Ukrainian and Western competitors, as well as an embargo on coal supplies from Russia.

The plans of SIBENKO to increase coal production this year by 5 million tons - up to 115 million tons - were announced in March. The report also mentions the development of the export direction: an growth of exports by 4 million tons is forecasted - to reach 49 million tons by the end of year.

In March, Donmetugol declared its intensions to re-enter the three flooded mines for anthracite production in Rostov region, and to build a processing plant as well. The company intends to invest 1.2 billion rubles over the period of three years in order to reconstruct the first mine, for an annual production of 150 thousand tons of coal and its further supply to Romania. According to expert estimates, it will be impossible to pay back the investments with the stated production volumes.

RZD and the authorities of the Republic of Altai are resuming negotiations on the development of the railroad branch from Biysk, Altai Krai, to the Republic of Altai. Construction of a railroad will allow to increase cargo flow, which is currently represented by motor transport only.

In the medium term, the growth in freight handling will continue due to increased exports.

Crude oil and refined products: fluctuations at zero level

In February, freight handling of crude oil and refined products remained at the level of last year and amounted to 18.8 million tons. A total of 39.5 million tons of oil and refined products were shipped since the beginning of the year, which is 0.1% higher than in the same period of 2018.

In February, exports grew to Italy (by 1.5-fold) and Poland (2-fold), while supplies decreased to the Netherlands (-10%) and Belarus (-80%).

In March, the Russian State Duma ratified the protocol dated 10 October 2018 on amendments to the agreement with Belarus on the supplies of oil and refined products dated 12 January 2007. The document prohibits Minsk to export Russian crude oil and refined products, and establishes procedures to harmonize the indicative balances and protocols. If the parties do not agree before the beginning of the next calendar year, the supply of crude oil and refined products will amount to the values provided by the indicative balances and protocols of the previous year.

In March, the Russian Government proposed to introduce a discount to the tariff for transportation of gasoline, diesel fuel and aviation kerosene by rail to the Far East, and to introduce a surcharge to the tariff for transportation of fuel supplied for export. The construction of Eastern Petrochemical Company (VNHK) in Primorsky Krai could resolve the problem with fuel in the Far Eastern Federal District. This Rosneft project has been discussed for several years, but no final decision has been made. According to experts, supplies of refined products from other regions of Russia can help to resolve the temporary problems of the Far Eastern Federal District, but will not become a panacea. According to Mikhail Burmistrov, Director General of INFOLine-analytics, a discount to the tariff will unlikely impact the volumes of supplies, wholesale and retail prices for fuel.

According to Tamara Safonova, Executive Director of the Independent Analytical Agency for Oil and Gas, the structure of oil product exports suggests that diesel oil and fuel oil are the main oil products demanded on the international market, and a reorientation of oil flows to the East has been recently observed. The expert estimated that there has been a significant outflow of 11.8 million tons this year, which impacted the decrease of freight turnover at Russian sea terminals in the European direction. By 2022, the amount of cargo base for export railroad transportation of dark refined products under a risk of losing will be 14 million tons, and light refined products - 6 million tons.

In the medium term, there will be no significant prerequisites in the market for an increase in the shipment of crude oil and refined products by rail.

Construction cargo and cement: analysts forecast a crisis in construction industry

Freight handling of construction cargo decreased by 9.6% in February as compared with the same period of last year and amounted to 8.5 million tons, while the shipment of cement remained at the level of last year - 1.5 million tons. Since early 2019, a total of 16.8 million tons of construction cargo and 2.6 million tons of cement have been shipped by rail, which is 7.6% and 3.5% lower than the values of the same period of last year, respectively.

The commissioning of housing in Russia decreased by 2.2% in February 2019 as compared to February 2018, and amounted to 5 million m2. This indicator increased by 20.8% in comparison with January 2019. Analysts of the Rating Agency of Construction Complex (RASC) have forecasted a major construction crisis in Russia. According to their estimates, Russian developers which have been declared bankrupt failed to put into operation a total of 3.6 million m2 in 2018. There were 150 developers at different stages of bankruptcy all over the country, which is almost two percent higher than in 2017. By the beginning of 2019, another 198 developers were under threat, as their creditors informed about the intentions to initiate a bankruptcy procedure. According to RASC, these companies are building 7.8 million m2. According to the estimates of “Business Russia”, up to 30% of minor and average developers can leave the market by the end of this year. The main cause for future bankruptcies is the transition of the industry to project financing and tightening of the rules for working with shareholders.

Problematic projects will be transferred to the balance of the currently being established Dom.RF, which will become the main financial institution of the industry. Transition processes will take several years, during which the volumes of housing construction is likely to decrease. According to analysts of Gazprombank, in 2019 the decline in construction will be reach 70 million m2 as compared with 75 million m2 in 2018, while the demand for housing in the upcoming years will not significantly increase due to a limited solvency of the population.

According to the Union of Cement Manufacturers Soyuzcement, the demand for cement is expected to increase by 3% in 2019 to reach the level of 2018, taking into account the implementation of national projects. At the same time, experts do not rule out negative scenarios involving a market decline of about 3%.

Freight handling of construction cargo and cement will continue to decline until the industry starts to recover. In the meantime, the implementation of national projects can become a driver for the increase of freight handling.

Ferrous metals: slight increase in the segment

In February, freight handling of ferrous metals grew by 1.7% and amounted to 6.1 million tons. A total of 12.7 million tons of ferrous metals have been shipped since the beginning of the year, which is 0.5% higher than in the same period of 2018.

At the same time, the growth in domestic shipments in February was about 10%, while the exports dropped by almost 15%. The freight flow has decreased to Turkey (-20%), Germany (-75%), Poland (-60%) and Finland (almost to zero).

A strong growth of demand for metal products is not expected in the automotive industry. The Ministry of Industry of Russia is making a three-fold reduction of the stimulation of demand for cars: 10.4 billion rubles will be allocated in 2019 as compared to 30.4 billion rubles in 2018. In comparison with 2017, the amounts of state support have decreased five-fold. According to various estimates, the funds allocated for 2019 will be used within six months. Analysts of Avtostat are convinced that the sales of new passenger cars will not grow above 3% in 2019. Approximately the same figure is declared by the “Russian Car Dealers” association.

In the middle of March, according to the Department of Trade Negotiations of the Ministry of Economic Development, Russia proposed to establish an arbitrary group to resolve the dispute with the European Union, which is applying anti-dumping measures to cold rolled products of Russian manufacture.

In the short-term, a moderate growth in ferrous metal transportation by rail is forecasted.

Ore: record loading over the last 15 years

Ore loading increased by 8.2% in February as compared to previous year and amounted to 9.2 million tons, setting a transportation record for this month. In total, 19.1 million tons of ferrous metals have been shipped since the beginning of the year, which is 8.1% higher than in the same period of 2018.

In February, shipments grew in both domestic (+5%) and export (+25%) directions. Exports of ore to China and Slovakia has doubled. In addition, the supply of ore to Vietnam and the United States has started.

The growth in demand for Russian products will be facilitated by the suspension of operation of Dique III iron ore facility of Brazilian Vale corporation in Minas Gerais state by decision of judicial authorities, since the tailings management facility (a complex of special facilities and equipment intended for storage or disposal of mineral processing wastes, referred to as tailings) is potentially hazardous. In addition, Vale has suspended the operation of Alegria mining and processing enterprise in the same state for safety reasons. The production capacity of this plant is about 10 million tons per year. In the middle of March, the court demanded the company to shut down Timbopeba mine producing 12.8 million tons a year. Simultaneously with the loss of capacity, the company was granted a permission to re-activate the Brucutu complex with a capacity of 30 million tons per year. According to BMO Global Commodities Research, the re-launch of Brucutu will provide Vale with about 16 million tons of iron ore in 2019. At the same time, BMO predicts that due to the decommissioning of certain Vale’s assets this year, it will lose production capacities amounting to a total of 64 million tons per year.

In the medium term, favorable conditions for the growth of export shipments of ore by rail will be established in the market.

Timber freights: decrease in freight handling due to the drop of exports

Loading of timber freights in February reduced by 5.4% as compared to the level of previous year, and amounted to 3.5 million tons. A total of 7.1 million tons of timber freights have been shipped since the beginning of the year, which is 0.3% lower than in the same period of last year.

In February, freight handling decreased due to a drop in export shipments by almost 10%, mainly to China (-7%) and Finland (-12%).

According to the estimates of market participants, the decline in transportation is due to changes in market conditions associated with the introduction of export quotas. Raw materials which were previously acquired by processing companies from other regions are no longer demanded. Certain companies have not resumed suspended production after the occurrence of problems with the shipment by rail in the second half of last year. Others reduce their own risks, finding alternative logistic schemes. In many cases, the railway is behind road transport.

Meanwhile, containerization of timber freights is increasing. In January-February, the increase amounted to over 40% and reached 70.2 thousand TEU as compared with the same period of last year.

A significant increase in freight handling of timber by rail is possible along with the development of the Russian timber industry and the implementation of national projects.

Grain and grain mill products: new harvest is awaited

Grain freight handling amounted to 2.1 million tons in February (-8.3% as compared to February of last year). In total, 4.1 million tons of grain freights have been shipped since the beginning of the year, which is 8.3% higher than in the same period of 2018.

In January, domestic shipments grew by almost 5%, while exports decreased by 20% mainly due to a drop in supplies to Egypt (-20%), Bangladesh (-50%) and Mongolia (-80%).

According to the estimate of Igor Pavensky, Director of Strategic Marketing Department at CJSC Rusagrotrans, the competitiveness of Russian grain has decreased in contrast to the first half of the season: against the background of high domestic prices, purchasing of grain by exporters for its supply abroad has become unprofitable. Both Strategic Marketing Department and the Ministry of Agriculture estimate the exports of grain for the 2018/19 season at 42 million tons, including 34.8 million tons of wheat. However, if the domestic prices remain unchanged, about 1.5-2 million tons of wheat intended for export may not be exported and remain in the stocks.

Expert continue to forecast a high yield of grain in 2019. The Strategic Marketing Department at CJSC Rusagrotrans raised the forecast for grain production in Russia from 123.3 million tons to 124 million tons, and therefore, its production could reach a level second to the record of 2017. The forecasts of the Institute for Agricultural Market Studies remain at the level of 121.5 million tons, including 78.5 million tons of wheat. ProZerno analytical company estimates that the grain harvest will amount to over 128 million tons. At the same time, SovEcon analytical center raised the grain harvest forecast from 121.4 million tons to 126.1 million tons in early February, and the forecast to wheat from 77.3 million tons to 80 million tons against the background of favorable weather conditions throughout the winter.

According to favorable forecasts for the next season, grain transportation by rail can increase starting from the second half of 2019.

Chemical and mineral fertilizers: another record in terms of freight handling

Loading of fertilizers in February amounted to 4.9 million tons (+2.1% as compared to February of last year), setting another record for the month. In total, 10.2 million tons of fertilizers have been shipped since the beginning of the year, which is 2% higher than in the same period of 2018.

In February, domestic shipments of fertilizers grew by 4%, while the exports decreased by 3% mainly due to a drop in supplies to Ukraine (-50%).

Russia and Angola are planning to establish joint production of mineral fertilizers for the agricultural industry. The project provides for the construction of a carbamide plant with a capacity of over 1 million tons per year in the north of Angola. The main objective of negotiations is the expansion of product markets.

PhosAgro is planning to increase the fertilizer production capacity in the Leningrad region 5-fold by 2023. The company intends to construct production facilities for sulfuric acid with a capacity of 800 thousand tons per year, modernize the production of mineral fertilizers, and commission a plant for the production of water-soluble fertilizers. Warehouses for liquid ammonia and finished products will also be constructed, as well as a combined heat and power plant with a 25 MW power unit. Production facilities for phosphoric acid will be re-equipped in order to increase the capacity to 500 thousand tons per year.

A further increase in fertilizer freight handling by rail is expected due to a high demand for Russian products in both domestic and international markets.

Rental rates for gondola cars remain unchanged

The source of data on rolling stock sales and rental rates is Rynok Podvizhnogo Sostava (Rolling Stock Market) journal.

The commercially usable fleet is 1,055 thousand units, same as in January. The defective fleet remains at a low level despite a slight increase to 52.8 thousand units as of the beginning of March. As a result, the surplus of the fleet was 74.5 thousand units.

In February 2019, the sales of cars by the CIS plants amounted to 7.6 thousand units, which is 17% higher than the production volumes in February 2018 (6.5 thousand units) and 31% higher that the sales in January this year (5.8 thousand units). At the same time, decommission of cars amounted to about 1.9 thousand units (including gondola cars - 0.6 thousand units)

Rental rates for standard gondola cars in March remained at the level of February - up to 2,000 rubles per day, and a seasonal increase in the idle fleet is observed.

In February, car turnover decreased to 15.4 days in comparison with the previous month. However, it should be noted that in comparison with the same period of last year, this figure has increased by 3.3%.