Overview of the Russian Railway Market in February-March 2017
February 2017 - traffic keeps on growing
In February 2017, freight performance figures with regard to the railway network showed continuous growth: the shipment amounted to 96 million tonnes (+0.9% relative to February 2016), freight turnover — 189.1 billion t-km (+2.2%), having set a new record in that month. At the same time, with no calendar factor taken into consideration (February 2016 had 29 days), the growth rates in February 2017 could have been higher: increase in shipment - 4%, increase in freight turnover - 6%.
Overall monthly transportations rose last year: (+8.3%) for coal, (+6.1%) for timber products, (+4.7%) for fertilizers, (+20.7%) for ferrous metal scrap, and (+9,3%) for coke . Volumes of carriage dipped for oil (-2.0%), construction cargoes (-9.2%), iron ore (-1.2%), ferrous metals (-1.8%), concrete (-6.7%), and grain (-11.1%).
Coal: India instead of Ukraine
The shipment of coal in February 2017 set a record for the given month and stood at 28.7 million tonnes (+8.3% relative to last February). Since the beginning of 2017, 60.1 million tonnes of coal have been hauled by rail, which is 9.1% above the year earlier.
The growth of shipment is preconditioned by the increase in export traffic by over 15% relative to the level of the last year. Most supplies were carried to Japan (+25%), then China (+20%), India (by 3 times), Great Britain (+11%) and Germany (by 2.5 times). But for the two-fold drop in supplies to Ukraine following the restriction for Russian trains to enter the territory of this country, export figures in February could be better.
India’s interest in Russian coal has been growing. Over the last five years supplies to this country are going through a boom. In March, Indian Tata Power (energy company), Sberbank of Russia, and Russian public officials have come to agreement on a $400 million project financing of the coal mining in Kamchatka. The project capacity of up to 10 million tonnes of coal per annum supposes the construction of transport and related infrastructure from scratch.
The demand for Russian coal within the Pacific Rim countries remains at a high level and pushes forward a further increase in coal shipment on the RZD network.
Oil and oil products: decline in shipment due to the calendar factor
Shipment of oil and oil products in February 2017 amounted to 19.3 million tonnes (-0.2% by February last year). Decline is due to the calendar factor. The rates of growth of daily shipment remained at the level of the previous month, i.e. +1.5% relative to the daily shipment of February 2016. Since the beginning of 2017, a total of 40.5 million tonnes of oil and oil products have been moved by rail, which is 0.3% below the year earlier.
In February last year there was an increase in supplies of oil and oil product to Belarus (by 2.5 times) and to Turkey (last year supplies were scarce). Positive dynamics of supplies to these countries is subject to the recovery in cargo traffic amid the improvement of business climate. However, no significant preconditions for substantial growth are yet in sight. In the medium-term, transportation of oil and oil products will remain low.
Construction cargoes and concrete: approaching the bottom
Shipment of construction cargoes in February 2017 totaled 8.9 million tonnes (-9.2% relative to last February), that of concrete — 1.4 million tonnes (-6.7%). Since the beginning of 2017, a total of 16.6 million tonnes of construction cargoes and 2.5 million t of concrete have been hauled by rail, which is 1.8% and 7.2% accordingly below the year earlier.
According to Michael Men, the minister of construction, housing and public utilities, this year Russia will see the same amount of new housing as last year - at least 80 million square meters. Such forecast is based on issued permissions for construction and project declarations of developers. At the same time the recovery of the industry by 2020 is anticipated, when the provision of housing may rise up to 100 million square meters. Reduction in domestic key interest from 9.75% since March this year will also positively influence the construction sector.
Despite of positive forecasts concerning the recovery of housing construction market, it is premature to speak about the increase in transportation of construction materials and concrete. The thing is, the delivery of such cargoes is a complicated logistics process, which generally involves highway transport due to the high segmentation of supplies. Therefore, the use of rail transport is reasonable when construction materials are required to be hauled over long distances, when a shortage of capacities of local manufacturing facilities is faced. This is the case for a market which is in high demand and short supply of construction materials or when large construction projects are being implemented, the number of which have been scaled back in the wake of impaired investment climate in the country. The construction of the bridge over the river Lena near Yakutsk is frozen for an indefinite period.
In March a decision to decrease the indexing rate of the Russian toll collection system “Platon” has been made with effect from 15th April: instead of two-fold increase the cost will grow by 25% totaling 1.91 rub/km. Thus, the highway transport will become more cost-consuming for a shipper, but not as much as planned.
In the medium-run, the recovery of transportations of construction materials is anticipated, however their growth won’t be rapid. The expected upsurge in the volumes of coal to be shipped may cause certain difficulties with the provision of rolling stock for the transportation of crushed stone.
Ferrous metals: Turkey provides an impetus to export
Shipment of ferrous metals in February 2017 stood at 5.6 million tonnes (-1.8% relative to February last year). Decline is due to the calendar factor: The rates of growth of daily shipment made up +1.8% relative to the daily shipment as of February 2016. A total of 11.5 million tonnes of ferrous metals have been hauled by rail since the beginning of the year, which is 1.8% above the year earlier.
Reorientation of export flows is under way. There is an increase in supplies to Turkey (by 1.5 times), Finland (last year supplies were scarce), and Kazakhastan (+80%). The key countries having reduced the imports of Russian metal products are Vietnam (supplies to this country when compared to the year earlier have almost halted), Italy (-25%), Egypt (-80%), and Germany (-60%).
The estimates of the volumes of consumption in domestic market do not provide an accurate picture. Infrastructure and commercial construction has not yet been fully recovered, but over the last two years metal structures have been extensively used for agricultural facilities (hothouse plants, cattle and poultry farms, warehousing centers, etc.), which further development is forecast.
Experts take a positive view of the potential of the use of metal structures in house construction, which was obstructed by the absence of practice, norms, and standards for applying metal structures in the housing development. Currently practices are being actively developed to put forward the demand for metal structures in domestic market and, thus, boost the amount of freight moved by rail.
Iron and Manganese Ore: redistribution of export cargo traffic
Shipment of ore in February 2017 amounted to 8.2 million tonnes (-1.2% relative to February last year). Decline is due to the calendar factor: The rates of growth of daily shipment made up +2.3% relative to the daily shipment of February 2016. A total of 17 million tonnes of ore have been moved by rail since the beginning of the year, which is 1.8% below the year earlier.
Export supplies remained at the level of the previous year, though cargo traffic has been significantly redistributed. Poland and Germany have boosted the import of Russian ore four times, ranking second and third in terms of consumption after China. In addition to that, deliveries to Iran have been launched, which were scarce before. A major cut in transit involved supplies to Ukraine (deliveries have been practically halted) due to the restriction of entry of Russian trains to the territory of the country. Turkey (-75%), Italy (-50%) and Japan (-80%) have cut back on the imports of Russian ore as well.
In the medium-term, when moving towards a new export logistics, the amount of ore to be shipped by rail is expected to increase.
Timber Products: cargo base has major growth potential
Shipment of timber products in February 2017 amounted to 3.5 million tonnes (+6.1% relative to last February), mainly due to a 8% increase in export. Since the beginning of the year a total of 6.7 million tonnes of timber products have been shipped, which is 6.8% above the year earlier.
The lion share of supplies are still delivered to China - accounting for over 60% in the export structure. In February 2017, the export supplies were charged up and grew by 20% when compared to 2016.
A demand in timber products in domestic market is also expected to grow. According to Denis Manturov, the Minister of Industry and Trade, wooden house-building (glued, galvanized, laminated lumber, wooden sandwich panels) is likely to provide an impetus to the development of timber processing plant.
At present, the Ministry for Industry and Trade in collaboration with designated associations and key market players are winding up the elaboration of the strategy for the development of timber processing plant till 2030. According to the paperwork, the contribution of timber sector in the country’s GDP by 50% is predicted through the increase in the volumes of goods to be hauled and added value per unit of converted wood.
A proposal to establish quotas for the use of wooden house-building products in state programs has been submitted by the Ministry for Industry and Trade for the RF government approval. Moreover, at the request of the President, the action plan has been prepared in collaboration with the Ministry for Construction to extend the use of wooden structures in the construction.
Therefore, timber industry is crucial for further increase in shipment by rail, for the traffic is still two times lower than at the beginning of the 2000s.
Grain and Regrind Products: China may compensate for the loss of Turkish market
In February 2017, the shipment of grain amounted to 1.6 million tonnes (-11.1% relative to last February). Since the beginning of the year a total of 3.2 million tonnes of grain have been shipped, which is 1.7% above the year earlier.
The reason for a fall in traffic lies in bad weather conditions in February. Thus, Novorossiysk port terminals were off-duty 30% to 80% of the time.
Exports to South Korea and Mongolia have been sharply reduced - almost halted actually. Supplies to Syria (almost no supplies last year), to Turkey (+60%), and Israel (+30%) were growing.
In March Turkey imposed 130% tariff on Russian wheat and corn. 9.7% duties were introduced on beans. The loss of the Turkish market is crucial for Russian agricultural producers. According to Andrey Sizov, the director of the analytical center “Sovekon”, before the end of the current season (with an end in June), Russian exporters could have as much as 0.5 - 1 million tonnes of wheat shipped to Turkey, 400-700 k tonnes of corn and 100-200 k tonnes of sunflower seed meal.
Following Turkey, exports to Egypt have become troublesome as well. A Russian exporting company has been claimed of shipping 63,000 tonnes of wheat to the port of Egypt containing “dead, unidentified insects”. With this said, the company has not been given evidence of such. An investigation of the matter is currently being carried out.
According to Rosselkhoznadzor, at the end of March Russia sent the first large batch of wheat to China. Earlier, only small supplies had been made. Phytosanitary documents have been issued for 500 tonnes of wheat planted and harvested in 2016 in the Krasnoyarsk krai.
Yet, according to the estimates of the UN Food and Agriculture Organization (FAO), a bumper wheat harvest is expected in Russia for the second year in a row. Experts forecast that in 2017 a wheat crop will be 1% above the year earlier totaling 74 million tonnes. According to the Ministry for Agriculture, Russia’s grain production can reach 107 million tonnes.
In the short-run, difficulties encountered in export markets will result in decline in the transportation of grain by rail, on the other hand, in the medium-run, the increase in shipment due to a last year bumper crop and this year positive perspectives is expected.
Chemical and mineral fertilizers: gaining access to European markets
Shipment of fertilizers in February 2017 amounted to 4.5 million tonnes (+4.7% relative to last February), mainly due to a 10% increase in export, whereas domestic transit edged down by 6 %. Since the beginning of the year a total of 9.4 million tonnes of fertilizers have been hauled, which is 4.5% above the year earlier.
China (+30%), USA (+65%), Lithuania (two-fold) and Ukraine (+20%, where the share of Russian fertilizers reached 90%, however the country decided against imposing duties before the sowing season) have boosted the exports of Russian fertilizers.
In March, EuroChem group of companies purchased 100% of shares of the Bulgarian distributor of Agricola Bulgaria fertilizers within the frameworks of implementation of the strategy on the expansion of the group to Eastern Europe.
The growth of exports to European markets with a high demand for fertilizers is likely to be seen.
Balance of scrapping and production: anticipated tension remove
The source of data on the sale of the rolling stock and lease rates - “Rolling Stock Market” magazine
In the wake of the prolonged stagnation, domestic rail car building is attaining long-term sustainable levels of production. Thus, in February 2017 the CIS factories sold as much as 5,000 rail cars (3,400 new-generation freight cars), which is twice as high as the results of February 2016 (2,300 units) and 41% above January 2017.
Production has entirely compensated for the withdrawal of February: 5,100 rail cars have been discarded (1,100 gondola cars, 1,700 - tank cars).
Rolling stock commercially suitable for rail haulage comprises 983 thousand units. As of the beginning of March nonoperational fleet numbers in 79 thousand units, surplus - 85 thousand units. (a total of 10 thousand units of gondola cars).
In March the cost of renting gondola cars equipped with standard bogie 18-100 and its analogies rose to 1 150 rubles/day. Market players expect a further increase in rates up to 1 200 rubles/day in April. Market overheat is possible, but will not last long. Production of freight cars has already reached the volumes of scrapping. Before the end of the year the production of rolling stock may steadily exceed withdrawals, that will reduce logistic tension on the network.
Leysana Korobeynikova, Senior Analyst
