Overview of the Russian Railway Market in January-February 2018
Positive dynamics seen at the beginning of 2018
In January 2018, freight handling totaled 103.5 million tons (+3.5% year-on-year).
An increase was noted in the shipments of construction freights (+13.3%), iron ore (+4.3%), ferrous metals (+10.5%), fertilizers (+6.3%), cement (+6.2%), timber freights (+5.8%) and grain (+36.6%).
The coal shipments fell for the first time in a 15-month streak (-1.1%), excessive load on the railway infrastructure of Kuzbass being one of the causes. Apart from that, a decline was seen in the shipments of crude oil and refined products (-2.5%), ferrous scrap (-17.8%) and charred coal (-3.8%).
In January, the freight turnover amounted to 214.8 billion t-km (+5.6% vs. January 2017).
Coal: lower freight handling due to lacking infrastructure
In January, coal loading fell 1.1% year-on-year, down to 31 million tons. Domestic shipments shrank (-10% versus January 2017) whereas the exports went up 5%.
The major cause for the reduction was traffic congestion that affected 32,000–33,000 empty gondolas in a railway in Kuzbass. The congestion occurred due to unfavorable weather both in the ports of the South and the Far East where effective coal unloading was prevented by storms, and in Kuzbass where frosts led to coal freezing in late January, some experts maintain. As deemed by other experts, the gridlocks were caused by aggressive plans of coal exports in view of the favorable satiation on external markets, which resulted in too many cars in Kuzbass.
Subsequently, in January the shortage of shipments in the Kemerovo region totaled some 1.6 million tons, but the coal companies and railway operators plan to remedy the situation as early as by April. Throughout the year, the shipments are predicted to grow by 3%, according to estimates by Alexander Gritsay, First Deputy Head of the West Siberian Railway.
In the near future, the coal shipments are expected to restore to the last year’s levels, to be followed by moderate growth.
Crude oil and refined products: increased competition for cargo base
In January, the loading of crude oil and refined products fell 2.5% year-on-year, totaling 20.7 million tons. Domestic shipments reiterated the 2017 levels, and exports plunged nearly 10%.
At the start of the year, the Government of the Russian Federation reverted to the issue of establishing the transport and economic balance, which will allow dividing freight shipments between the inland water, railway, road and pipeline transport. Such division may make the situation with shipping crude oil and refined products by railway more predictable and stable.
The loading of crude oil and refined products to the Russian Railway network would be immensely influenced by the scheduled deregulation of tariffs on haulage of the above freights, estimated Ivan Grishagin, CEO of Russian Container Company. Once this step is taken, it will drastically enhance the competitive ability of the railway transport, which means a certain part of the cargo base that is anticipated when a pipeline project is designed may fail to be transported via the pipeline.
The loading of crude oil shipments will be shrinking in the medium term, although the pace of that process may be decelerated due to state regulation.
Construction freights and cement: expected increase in loading
In January, the loading of construction freights was up 13.3% year-on-year to make 8.8 million tons, and cement loading grew by 6.2% to reach 1.2 million tons.
January 2018 saw construction of 5 million sq. m of housing in the Russian Federation, as reported by the Russian Federal State Statistics Service (Rosstat), 16.3% above the figures for January 2017. In 2018, as predicted by the Union of cement producers (SoyuzCement), the housing commissioning rate will go up 7%, and cement consumption will grow by 3% due to renovation of the existing housing, implementation of integrated area development projects, and increasing the share of constructing concrete roads.
A slump in the mortgage rates largely contributed to revival of the construction industry, the experts maintain. In 2018, the average amount of mortgage rate in Russia will be around 9%, to go down to 8% by the end of the year, and the rate reduction will continue for three years, says Alexander Plutnik, CEO of the Agency for Housing Mortgage Lending.
Positive trends in the construction industry that are propped by the growing output of the rolling stock will consistently lead to an increase in loading of construction freights and cement to the Russian Railway network.
Ferrous metals: higher loading in all directions
January saw ferrous metals loading up by 10.5% year-on-year, reaching 6.6 million tons. The shipments increased both for the domestic (+12%), and foreign routes (+7%). A rise was noted in exports to Poland (hardly any shipments made last year), the U.S. (+22%), and Turkey (+18%).
NMLK Group President Oleg Bagrin predicts steel consumption on the Russian market will go 1.5-2% up in 2018 as the demand in construction, machine and automotive industries increases to reach its previous levels.
Steel demand in the EU market is expected to rise, too. The European Steel Association (Eurofer) estimates that the steel demand will go up 1.9% this year. Despite the sanctions against the Chinese, Russian and Ukrainian steelmakers, the aggregate steel imports to the EU fell only 1% last year. Deliveries to the European market were massively boosted by Turkey (+64%), which is the largest importer of Russia-made products.
So, the soaring demand in the domestic and foreign markets will govern a moderate growth in railway transportation of metal products.
Ore: redirecting towards domestic market is underway
In January, ore loading amounted to 9.2 million tons, which is 4.3% above the previous year’s level.
The shipments went up almost 10% in the domestic routes and collapsed by more than 20% in the export routes. The decline was noted in exports to Germany (-60%) and Turkey (-80%). The freight traffic increased into the countries that had not previously been procuring Russian ore or had purchased inconsistently — France, Egypt, Japan, and Serbia.
Growth in export directions is unlikely until ore demand is preserved in the domestic market. Companies gain more profits by exporting high value-added products (rolled stock). The growth in domestic ore shipments is expected to remain.
Timber freights: growth driven by domestic shipments
In January, loading of timber freights was 5.8% up year-on-year and totaled 3.4 million tons. Domestic shipments grew by 12%, whereas exports saw only a 3% increase, primarily to China (+5%), and Kazakhstan (+80%).
The wooden housing construction is being actively developed in the Russian Federation, Vladimir Potapkin, Head of the Department of Chemical Engineering and Timber Processing Complex, maintains: large-scale manufacturers of LVL beams, OSBs have been established, and support programs have been developed. The state intends to subsidize 5% of the crediting rate for buyers of wooden housing. As expected, some RUB 10.2 billion may be attracted into the segment of low-rise housing construction in 2018, RUB 9.2 million of them being borrowed loans, which will allow constructing 318,000 sq.m. of wooden housing.
The domestic shipments are predicted to rise due to higher demand from construction companies; also predicted is moderate development of the export route.
Grain and grain mill products: growth continues
In January, grain loading stood at 2.2 million tons (+36.6% versus January of the previous year).
Domestic shipments went up 7%, along with an over 50% rise in exports, primarily due to doubled volumes to Egypt.
This season the experts predict unprecedented exports, which will cause further growth in grain loading to the railway network. The exports may be up to 50 million tons, including legumes and flour, the analytical center of Rusagrotrans evaluates. As reported by the analytical company ProZerno, the Russian grain exports may reach the level of 49 million tons. The Ministry of Agriculture of the Russian Federation expects the exports to amount to 45−47 million tons, with wheat accounting for 35 million tons. In its February outlook, the USDA once again raised the forecast for Russian wheat by 1 million ton (to 36 million tons), excluding the crops from the Crimea. Even if the current pace of shipments is preserved, Russia is already reaching a 50-million mark, with wheat accounting for 38 million tons of that, the SovEcon center maintains.
Chemical and mineral fertilizers: further growth
In January, the loading of fertilizers amounted to 5.2 million tons (+6.3% year-on-year). The growth was mainly driven by an increase in export deliveries (+5%) to Brazil (by 1.5 times) and China (+15%).
Fertilizer manufacturers have plans to boost the exports event further, which will cause a rise in fertilizer haulage by railway. PhosAgro has announced its plans to ramp up 2018 production by 10% versus the previous year. Members of UralChem and Uralkali declared their intentions to create a Russian hub in Southeast Africa for direct deliveries of mineral fertilizers, the demand for which is predicted to manifest a robust rise in the region.
The cooperation will enable the African agricultural producers to directly purchase Russia-made fertilizers at the price of $250-300/t, instead of going to intermediaries whose price is some $450-500/t. Therefore, the annual deliveries to Southeast Africa may go up from the current 100,000 tons to 500,000-600,000 tons.
Leasing rates: lease rates stably high
The rolling stock sales and leasing rates data are sourced from the Rynok Podvizhnogo Sostava (Rolling Stock Market) journal.
In January 2018, car sales by CIS factories totaled 5,100 units (3,800 of them being gondolas), which is 44% above the January 2017 results (3,500 units). The car output in January saw a seasonal drop versus the previous month, by 32%.
The demand is far beyond the current level of disposal. In January 2018, the disposal concerned 2,000 of railcars (800 of them being gondolas).
The commercially feasible fleet grew up to 1,022,000 units whereas by the beginning of February the unserviceable fleet remains minimum — around 51,300 units. As a result, the fleet surplus totaled 78,000 units, and the surplus of gondolas saw a seasonal rise, although not above 2% of the fleet.
In February, the standard gondola leasing rate remained the same as in the previous month – some RUB 1,600/day. No prerequisites exist now for rate reduction, and the rate may only fall by early 2019, some experts maintain.
Leysana Korobeynikova, Head of Analysis
