Overview of the Russian Railway Market in January-February 2019
Experts expect transportation growth in the new year
Loading increased by 1.6% in January 2018 as compared to last year and amounted to 105.4 million tons, and freight increased by 2.1% to 220.0 billion tariff t-km.
The key drivers of growth were as follows: coal (+5.2%), ferrous ore (+7.5%), timber freights (+6.0%) and fertilizers (+2.1%). Shipment of crude oil and refined products (-0.1%), construction cargo (-5.1%), cement (-7.5%), non-ferrous ore (-4.45%), scrap metal (-10.5%) and grain (-8.5%) has decreased.
In 2019, freight handling in the Russian Railways network will increase by 2.16% to 1317.4 million tons, according to 76% of respondents surveyed by the Institute for Natural Monopolies Researches. Surveying was performed at 8 industry conferences throughout 2018. More than 250 experts participated in the survey. The major number of respondents were representatives of freight car operators, shippers and logistics companies.
IPEM experts, in turn, are convinced that the growth of freight handling in the RZD network will only amount to 1.6% ─ 1.9% with an increase to 1311 million tons. The drivers of growth, in their opinion, will be grain, mineral fertilizers, iron ore, manganese ore, coal and ferrous metals.
Coal: increase in freight handling despite infrastructural constraints
Coal loading in January increased by +5.2% as compared to last year and amounted to 32.9 million tons, repeatedly setting a record for this month.
In January, shipments grew in both domestic and export directions. Imports of Russian coal mostly increased in Germany (almost ten-fold), Ukraine (+30%), Belarus (5-fold) and Japan (+6%) as compared to last year.
A special committee completed its work in Germany, which developed and proposed to the government the option of departure from coal-based generation. According to the plan, after the departure from nuclear generation in 2022 (i.e. after disconnection of the last German NPP from the grid), the last coal-fired power station will also be closed in 2038. At the same time, according to the committee’s decision, generation of electricity will be reduced at an accelerated rate, primarily using imported coal, and not its own brown coal, which will reduce the demand for the Russian product. However, it is not yet possible to declare that Russian coal miners are losing the German market ─ in 2023, 2026 and 2029 independent experts will verify how the rejection of coal as an energy source affects the reliability of energy supply, electricity tariffs and employment. Besides, the departure from coal generation can prove to be too expensive for the German economy. According to information from Olaf Scholz, Finance Minister of the country, a deficit of 24.7 billion Euros can emerge in FRG budget by 2023.
The increase in shipments to Belarus is due to the fact that the country has become a re-exporter of Russian coal to Ukraine. According to the official Belarusian Statistical Agency Belstat, shipments of coal from Belarus to Ukraine increased from 0.6 thousand tons to 588.5 thousand tons, while there is no coal industry in the exporting country.
According to experts, coal exports from Russia in January could have been higher, but handling of trains in ports was delayed due to poor weather conditions and repairs of car dumpers, which resulted in accumulation of trains and increase in car turnover.
In the short term, freight handling of coal will be influenced not so much by the global market situation, but rather by the throughput capacity of the transport infrastructure.
Crude oil and oil products: no prerequisites for growth
Freight handling of oil and oil products decreased by 0.1% in January and amounted to 20.7 million tons.
In January, the exports increased to Italy (+30%), China (+25%) and Mongolia (+60%), while the supplies to the Netherlands (-8%) and Belarus (-70%) decreased.
The decline in Russian supplies to Belarus can be related to the prolonged negotiations of both countries on the issue of compensation to the Republic for the losses caused by the tax maneuver in the RF oil industry. Belarus demands that Russia subsidizes its oil refineries in the amount of $2 billion/year, but the RF is currently not ready for such expenses.
It became known in February that the commissioning of the railway complex for transshipment of liquified gas of “Rospan International”, subdivision of Rosneft, which would contribute to the growth of LPG supplies, was postponed until the end of 2019. Installation and heat treatment of spherical vessels and equipment piping at the loading station continue in the railway terminal. It is expected that after commissioning the production of gas will grow to more than 21 billion m3 per year, and of liquid hydrocarbons ─ to over 5 million tons per year.
According to the Ministry of Energy, nine oil refineries, including Afipsk, Antipinsk and Mari refineries, as well as Novoshakhtinsk refinery, Orsknefteorgsintez, Neftekhimservis and others, have entered into agreements with the Ministry to modernize their plants. The companies having signed the agreements, will have to invest about 300 billion rubles and put 13 new units into operation until 2026, which will increase the production of Euro-5 gasoline by 3 million tons per year.
Thus, an increase in the volumes of shipment of oil and oil products by rail in the medium term is unlikely.
Construction cargo and cement: hopes for state support
Construction freight handling decreased by 5.1% in January as compared to the same period of last year and amounted to 8.3 million tons, while cement freight handling decreased by 7.5% to 1.1 million tons.
The commissioning of housing in Russia decreased by 16.8% in January 2019 compared to January of last year, and amounted to 4.2 million m2. This was caused by an increase in the mortgage interest rate and the adaptation of the industry to new working conditions. At the same time, according to Artem Fedorko, Chairman of the Board of Bank DOM.RF, the growth in mortgage rates in Russia is temporary, and the rates can begin to decrease in the second half of the year.
Experts note that the progress of the industry reforming process is very slow. By February 11, developers had sent to banks only 275 applications for project financing with a transition to mandatory settlements through escrow accounts since July 1 of this year.
The state announced the plans to provide additional measures to support the industry, in particular, families with children. President of the Russian Federation Vladimir Putin said in his message to the Federal Assembly that he considers it important to lower the mortgage rates to 8%. And for families with two or more children, in his opinion, the preferential mortgage rate of 6% should be valid for the entire loan period, instead of the current limit of three and five years. The President noted that it is already possible to provide an additional measure of support in the amount of 450,000 rubles from the federal budget for families with three or more children to pay off the mortgage. According to the President, such payments will require additional 26.2 billion rubles this year, 28.6 billion rubles in 2020 and 30.1 billion rubles in 2021.
In addition, Russian Prime Minister Dmitry Medvedev instructed the Ministry of Transport, the Ministry of Construction, the Ministry of Industry and Trade and the Ministry of Economic Development to submit proposals to increase the volumes of cement concrete roads construction, taking into account the assessment of their economic efficiency, until March 27. According to estimates by the representatives of Soyuzcement, in 2019 the demand for cement is expected to grow by 3% to the level of 2018 with account of the implementation of national projects.
The efficiency of state support measures, and how the industry adapts to the new working conditions, will become clear at the start of the new construction season. In the meantime, the negative dynamics of construction material and cement transportation will continue.
Ferrous metals: preservation of current demand is forecasted
Freight handling of ferrous metals in January remained almost at the level of last year and amounted to 6.6 million tons.
At the same time, the growth in domestic shipments in January was about 5%, while the exports dropped by 7% (for instance, to the USA (-20%) and Finland (almost to zero)). Import of Russian metals was increased by Italy (+ 30%), Mexico (+ 20%) and Spain (with no supplies last year).
In late January — early February, the world steel market began to grow, breaking the reduction tendency of the second half of 2018, due to a slowdown in global economy, escalating trade conflicts in USA-China and USA-EU directions and the introduction of restrictions for steel imports to the USA and the EU, economic crisis in Turkey, and the increased risks for China. Experts are convinced that this price surge is short-term and caused by higher prices for scrap metal against the background of a rising demand in Turkey and growing prices for iron ore due to the accident at Vale mine in Brazil. The impact of the first factor will cease very soon. Although the economic situation in Turkey has somewhat improved, in comparison with the end of last year it is still far from prosperity, and prices in this market have already started to decline.
As forecasted by Severstal, low demand for Russian steel is expected to remain in 2019. At the same time, MMK management expects that the sales of commercial products in the first quarter of 2019 will continue to be influenced by the factors of seasonal weakening of demand and a decrease of steel prices in global markets. Nevertheless, these factors will be partially compensated by the growth in the share of domestic sales, including those resulting from the positive impact on demand of the domestic market from the reduction in sheet metal supply from metal producers, as well as the maximum loading of a number of high-margin units.
The implementation of infrastructure projects of RZD will have a positive impact on the transportation of ferrous metals by rail. As early as January, loading of new rails and track grid increased by 20-25% as compared to last year.
Ore: record loading over the last 15 years
Ore loading increased by 7.5% in January as compared to previous year and amounted to 9.9 million tons, setting a transportation record for this month.
In January, shipments grew in both domestic and export directions. Exports of ore to China (+40%), Finland (+80%), Italy (+25%) and Slovakia (1.5-fold) have increased.
At the same time, according to the Australian iron ore corporation Fortescue Metals Group Ltd., the demand for iron ore in China will remain high and will allow the mining companies to increase the profit. According to company management, there are no signs of a slowdown in the economic growth at Chinese steel plants, and their output increased last year. Significant investments stimulate the demand for steel and iron ore.
In late January the Brazilian Mining Agency instructed the global largest iron ore producer Vale SA to stop operations at its Corrego do Feijao mine due to a dam break, which according to an analyst from Argonaut Securities will lead to Vale output decrease by 1.5%.
As a result of the decommissioning of significant capacities in Brazil and an increased demand from China, favorable conditions for Russian exports are being established in the market.
Timber freights: reorientation from road transport
Handling of timber freights increased by 6.0% in January as compared to the level of last year and amounted to 3.6 million tons.
In January, freight handling increased due to a growth in domestic shipments (+20%), while exports decreased by 2% mainly due to a drop in supplies to China (-3.5%). At the same time, according to Andrey Frolov, Vice-President of the Union of Timber Manufacturers and Exporters of Russia, there are no economic reasons for a reduction in timber freight supplies to China.
According to the analytical center of TransLes, the share of rail transportation in domestic roundwood transportation has increased in the recent years mainly due to the transfer of cargo from road transport. In the European part of Russia, due to the growth in demand, there is a shortage of available forest resources, as a result of which the distance of raw material delivery to timber processing enterprises increases. The share of rail transport in the exports of timber and lumber has remained unchanged: 73% and 83%, respectively.
It is expected that timber freight transportation by rail will continue to grow along with the development of RF timber industry, and an increase in the exports of processed timber products is also possible.
Grain and grain mill products: a forecasted decrease
Grain freight handling amounted to 2.0 million tons in January (-8.5% as compared to January of last year).
In January, domestic shipments grew by 10%, while exports decreased by 20% mainly due to a drop in supplies to Egypt (-25%).
According to an assessment by Igor Pavensky, Director of Strategic Marketing Department at CJSC Rusagrotrans, the main volume of exports for this agricultural year (July 1, 2018) has already been delivered. Since the beginning of the year, 31.9 million tons of grain have been exported, including 26.9 million tons of wheat. Export potential in February-June is low. At the same time, the expert did not eliminate the possibility that if the prospects for the harvest of this year remain favorable, prices in the domestic market will be adjusted, and a certain revival of the exports will take place. According to his forecast, grain harvest can reach 123.3 million tons this year, as compared to 112.9 million tons of last year.
In mid-February, Head of the Ministry of Agriculture announced that with consideration of the latest information received from the regions, grain harvest will amount to 118 million tons in 2019. Thus, an increasing in grain transportation by rail is likely to occur since the second half of 2019.
Chemical and mineral fertilizers: Russian exporters leave the Chinese market
Loading of fertilizers amounted to 5.3 million tons in January (+2.1% as compared to January of last year).
In January, domestic shipments of fertilizers grew by 12%, while exports decreased by 7% mainly due to a drop in supplies to China (-6%) and Ukraine (-80%).
According to a representative of Russian Fertilizer Producers’ Association, the increase in fertilizer consumption in Russia is mainly due to the fact that farmers began to invest more in the harvest, and the profitability of production. According to the results of last year, agricultural production exceeded the level of 2000 almost 2-fold.
According to Director General of EuroChem, the company will bring the Usolsk Mining and Processing Plant in Berezniki of the Perm Territory to its design capacity approximately in the third or fourth quarter of this year. As noted by a representative of the company, if the traditional largest buyers of potash - India and China - do not raise prices above the current $300 per ton, the company will focus on Latin American markets, where Fertilizantes Tocantins was purchased by EuroChem in 2016.
Uralkali is also planning a reorientation to more profitable markets. The company withdrew from the traditional annual contract for the supply of potassium to India at $290 per ton (a benchmark set by the Belarusian BKK (Belorussian Potassium Company)), and concluded a contract with the same price for a small scope of supply with China. The company will send the available unused potassium to the African market. On this continent, fertilizer prices are above $320/ton.
Due to a reorientation of export cargo flows, a short-term slowdown in the growth of fertilizer transportation by rail is possible, but an increase is expected in the future due to ф high demand for Russian products in both domestic and foreign markets.
Rental rates for gondola cars remain stable for 3 months already
The source of data on rolling stock sales and rental rates is Rynok Podvizhnogo Sostava (Rolling Stock Market) journal.
The commercially usable fleet amounts to 1055 thousand units, while the defective fleet slightly increased as of early February, but still remains at a low level of about 52.3 thousand units. As a result, the surplus of the fleet was 49.3 thousand units.
In January, the sales of cars by the CIS plants amounted to 5.8 thousand units (including gondola cars ─ 3.4 thousand units) which is 15% higher than the results of January 2018. (5.1 thousand units). At the same time, decommission of cars amounted to about 2.2 thousand units (including gondola cars ─ 0.4 thousand units).
Rental rates for standard gondola cars remained at the level of the previous month in February, up to 2000 rubles per day, and a seasonal increase in idle fleet is observed.