Overview of the Russian Railway Market in July-August 2016
Loading keeps growing for 6 months in a row
In July 2016, loading within Russian Railways network grew by 1.6% YoY to 104.4 million tons.
Transportation of coal increased by 1.2% YoY, of construction materials by 11.5%, of wood products by 9.1% and of nonferrous metal ore by 5.6%. Traffic of ferrous metals, scrap, grain and coke remained at the level of the previous year. Loading of oil and oil products, iron and manganese ore, fertilizers, and cement decreased by 5.2%, 1.1%, 2.3% and 3.2% respectively.
Loading onto gondolas mounted almost by 5% in July.
Freight turnover totaled 197.6 billion tons*km (+0.5%) setting the record for the same month within the past 15 years.
Coal: exports growth limited by port capacities
In July, loading of coal within Russian Railways network grew by 1.2% YoY to 25.6 million tons once again setting record in traffic for this month within the past 15 years. A total of 187.7 million tons of coal, 3.8% above a year before, have been shipped by railway since the beginning of 2016.
In July, coal extraction was up 4.5% on a year before according to Russia’s Ministry of Energy and up 5.8% according to Rosstat.
In July, internal traffic contracted by 3% YoY and exports mounted by 5%.
Export freight turnover keeps escalating by 15% to the Cyprus, by 5% to Japan, by 15% to China and to India to which exports jumped to the record-breaking amount of 250,000 tons.
The global market posts a rapid recovery of prices. Thus, since early May price for coal climbed from 20% to 40% depending on its type. Thus, as of mid-August, the price for coal in North-Western European ports (CIF ARA) reached USD 61.1/ton. With this, experts point out that even with increased prices coal is three-fold cheaper than wind energy and four-fold cheaper than solar energy.
Along with this, it is forecast that with quiet conditions in the market and decrease of global production, Indonesia, the largest exporter of coal, will not manage to return its share of the market because of debts of its mining companies.
A significant potential of Russian coal in export markets sped up expansion of coal handling facilities for exports in the Far East. Summa group announced its plans to advance the construction of the coal terminal Sever (North) with capacity of 20 million tons/year in Vostochny port. This project is estimated at USD 385 million. Summa planned to launch first priority facilities for 7 million tons in 2018. Moreover, Managing Port Company expressed its readiness to finish the construction of third priority facilities next year.
The implementation of projects on development of Far Eastern ports will allow Russian exports of coal to keep growing.
Oil and oil products: with no hope for recovery
In July, loading of oil and oil products within Russian Railways network reduced by 5.2% YoY to 20.0 million tons. A total of 136.5 million tons of oil cargoeses, down 7.8% on a year before, have been shipped by railway since early 2016.
Oil extraction in July was up 1.8% on a year before according to Russia’s Ministry of Energy and up 1.7% on a year before according to Rosstat. With that, primary crude oil processing decreased by 3.1%.
Exports are still decreasing to the Netherlands (down 15%), South Korea (five-fold), Turkey (supplies practically stopped), and Belarus (down 40%). A significant boost of traffic to China should be noted. It amounted to 70% and was driven by increase in diesel fuel supplies, record-breaking for the past three years.
Transportation of oil and oil products by railway is forecast to remain at the same low level as now because of unfavorable conditions in the global markets and launch of new pipeline capacities.
Construction materials and cement: recovery continuing mainly thanks to infrastructure projects
In July, loading of construction cargoeses within Russian Railways network increased by 11.5% YoY to 14.6 million tons. Meanwhile, loading of cement dropped by 3.2% to 3.0 million tons. A total of 83.4 million tons of construction cargoeses and 15.7 million of cement, up 19% and down 5.4% on a year before respectively, have been shipped by railways since early 2016.
In July, shipping of construction materials escalated by 45% to the Tyumen Region, 1.5-fold to the Leningrad Region, by 60% to the Perm Region, by 30% to the Volgograd Region, and by 35% to the Omsk Region, two-fold to the Chuvash Republic and by 20% to the Krasnodar Region.
The increase in supplies of construction materials to the Tyumen Region was due to construction of new industrial park Borovskiy within the area of 27.9 ha, which was launched in April this year. At present, significant works on backfilling the area with sand because of mixed soil have been performed at the facility, gas and lighting connections have been arranged, crushed stone was put on prospective roads for start of facility construction. At next stage, roads will be built. Moreover, it is planned to build another park Borodinskiy with area of 250 ha.
In the Chuvash Republic, roads are being built up. It is envisaged to spend RUB 53.4 million on public motorways of local significance within the Kanash Region, a part is dedicated for construction of 5 crushed rock roads of transition type.
Within the period from January until July, in Russia, about 37.2 million m2 of housing were put into operation, 7.4% below a year before. As experts estimate, a decrease in housing launched into operation will be about 10% in Russia. However, there is another opinion on the market. Thus, it is suggested that in 2016, new housing indicator will be either stable, or will go down, but not more than by 5%.
Therefore, infrastructure projects remain basic drivers of increase in traffic of construction materials. The industry may recover to the pre-crisis level until 2017-2018, but an active growth of transportation is observed even now as compared with 2015.
Ferrous metals: variety of trends in internal and export freight traffic
In July, loading of ferrous metals within Russian Railways network remained as a year before and amounted to 5.8 million tons. A total of 41.4 million tons of ferrous metals, 1.5% below a year before, have been shipped by railway since early 2016.
In July, internal transportation reduced by 14% while exports grew by 16%. Traffic kept growing to Italy (supplies were not performed last year) and to Taiwan (by one-third). Moreover, exports of ferrous metals to Iran and Egypt increased significantly while supplies were minimum last year.
According to Rosstat, production of steel increased by 0.9%, of cast iron by 1.5% whereas production of rolled products from ferrous metals dropped by 2.9%.
EU five-year duties for Russian cold-rolled steel came into effect August 5. Thus, duties will total 18.7% for MMK rolled steel, 34% for Severstal products, and 36.1% for NLMK and other Russian producers. Russia’s Ministry of Economic Development has reported its intention to put EU duties in issue at WTO court as EU antidumping investigation regarding cold-rolled steel was performed with WTO regulation violations.
Taiwan Customs Service imposed preliminary duties for imports of hot-rolled flat products from Ukraine, Brazil, China, India, Indonesia, and South Korea. The duties are within the range of 8.7% - 80.5% and valid for 4 months starting from August 22. Against this background, it is probable that exports of metal products by Russian producers to Taiwan will increase.
In August, India’s authorities imposed antidumping duties for flat-rolled steel from China, Japan, South Korea, Russia, Brazil and Indonesia effective until February 2017. However, such measure will not affect Russian exports of ferrous metals as exports to India is currently low.
Along with this, Russia plans to increase production capacities. Thus, Tulachermet-Steel is implementing the investment project on construction of a new casting and rolling complex. This will allow to produce 1.5 million tons of rolled steel per year and will make the plant a full-range metallurgical complex.
Even though global prices for steel keep advancing, the existing and planned limitations imposed by the EU and other countries are hindering the further growth of exports of ferrous metal from Russia.
Iron and manganese ores: ore duties may be imposed for first time ever
In July, loading of ore within Russian Railways network decreased by 1.1% YoY to 9.0 million tons. A total of 63.9 million tons of ore, 1.4 above a year before, have been transported by railway from the beginning of the year.
According to Rosstat, ore extraction decreased by 9.2% in July. In total, ore extraction from early 2016 is up 0.9% on a year before.
Exports contracted by 85% to Turkey and by two-third to Ukraine. Transportation are escalating to Italy (no exports last year), to Finland (three-fold) and to Slovakia (1.5-fold).
Australia is considering the possibility to introduce additional tax for ore extraction in the amount of USD 5/ton. The largest Australian mining companies Rio Tinto and BHP Billiton have already spoken against it. According to the companies, the new tax will lead to loss of current share in the global market.
Meanwhile, Metallurgical Miners' Association of China that unites over 20 national producers of iron ore raw material plans to file a complaint to China’s Ministry of Trade regarding dumping by competitors from Australia and Brazil. If this proposal is accepted, this procedures may become the world’s first antidumping investigation where iron ore raw material is the object.
If the above mentioned measures are taken, the situation in the global market may become more favorable for Russian exports which will contribute to its growth.
Grain and milled products: record-breaking harvest may lead to cancellation of export duties
In July, loading of grain and milled products within Russian Railways network remained the same as a year before and amounted to 1.1 million tons. Before an upcoming harvest, grain traffic still posts low season. A total of 9.5 million tons of grain, up 6.9% on a year before, have been shipped by railway since early 2016.
In July, internal transportation mounted by 10% YoY and exports dropped by 11%. Transportation declined to Yemen (supplies practically stopped) and the Saudi Arabia (by two-third). Exports to Egypt were resumed and grew almost two-fold compared with last year.
Exports decreased mainly because of low global prices for grain. As of August 23, the price for wheat, according to Rusagrotrans, totals USD 173 per ton compared with USD 185 the same time last year. Purchase prices are still low, RUB 9,300/ton. Because of this, producers are going long of the market.
According to a new forecast of the US Department of Agriculture, in the 2016/17 cropping year Russia may become the world’s top exporter of wheat leaving behind not only each country individually, but also the entire European Union. Analysts of the Ministry enhanced forecast wheat harvested in Russia directly by 7 million tons (compared with the previously forecast data) to 72 million and forecast exports of wheat by 4.5 million tons to record-breaking 30 million tons.
As Russian Grain Union estimates, this year Russia will have a record-breaking grain harvest 114 – 118 million tons including 69.5 million of wheat. Meanwhile, according to the president of Russian Grain Union, this year grain quality is inferior to that in 2015, but, in the end, producers will be able to produce accustomed volume of good-quality grain as harvest volume is record-breaking.
Last year Russia’s government tried to restrain exports and imposed duty for exports of wheat. Today exports duty is calculated as 50% of customs commodity cost with RUB 6,500 deducted, but not less than RUB 10,000/ton. Despite the duty, exports, nevertheless, grew, which allowed Russia's Ministry of Agriculture to come to the conclusion that the duty does not affect the market and it should be zeroed. The relevant proposal has already been endorsed with Russia’s Ministry of Economic Development.
Therefore, in the mid-run, exports of Russian wheat are expected to go up thanks to record-breaking harvest and potential cancellation of wheat exports duty.
Chemical and mineral fertilizers: transportation attains its maximum
In July, loading of fertilizers within Russian Railways network dropped by 2.3% YoY to 4.3 million tons. A total of 30.6 million tons of fertilizers, up 2.7% on a year before, have been shipped by railway since early 2016.
In July, internal freight traffic escalated by 3% YoY and exports declined by 6%. Meanwhile imports of fertilizers to Russia mainly from Kazakhstan and Estonia rose two-fold.
Drop of exports is preconditioned by a 20% decrease in exports to China and a two-fold decline of exports to Syria. Exports of fertilizers from Russia are still improving by one-quarter to Brazil, by one-third to Lithuania, and four-fold to Belarus and India. Exports of fertilizers to Ukraine are still at record-breaking level for the past three years.
The USA abolished antidumping duties for nitrate of ammonium and carbamide August 20. This refers mainly to Uralchem products. The duties for product line of other top Russian producers of fertilizers, Acron and Eurochem, were abolished from November 2014 under condition that the check for dumping in the US market takes place annually. Moreover, according to preliminary data, the US Department of Trade zeroed the duty for Phosagro-Cherepovets as well, but final decision will be announced within three months only. The 64.93% duty for carbamide has been effective for almost 30 years since the USSR. Therefore, its abolition may become a milestone event.
Ukraine is considering the possibility to introduce duties for carbamide and carbamide-ammoniac compound as well as to increase the existing duties for nitrate of ammonium. As of today, four of six Ukrainian enterprises are shut down which is also caused by the predatory pricing by Russian producers in the Ukrainian market. As a result, the Ukrainian market for fertilizers is monopolized by a single enterprise and Russian fertilizers are the only alternative, but the Ukrainian authorities do not want to depend so heavily on importers. Therefore, Ukraine’s Ministry of Agrarian Policy and Food are seeking for an alternative while price for products by local producers are too high for the national market. The price difference is preconditioned by uneven conditions of resource acquisition: in July, Russian producers purchased gas at USD 70-80/1,000 m3 and Ukranian companies at USD 254.9 without VAT plus shipping costs.
A significant export potential of Russian fertilizers may be reduced by new duties imposed by Ukraine which may be compensated by growth of imports from the USA though. In the mid-run, transportation of mineral fertilizers may remain at the current high level thanks to stable demand both in the national and export markets and may even escalate as new facilities are put into operation.
Lease rates keep rising as fleet balances
Data regarding sales of rolling stock are taken from Rolling Stock Market magazine.
In July 2016, the CIS plants sold 2,598 freight cars, which is 3.8% below a year before and corresponds to the sales in June 2016.
Sales fell by 50% YoY among type freight cars fitted with 18-100 bogie or its equivalents and rose by 50% among new generation freight cars.
Operation efficiency (average freight turnover per month) of UWC innovation freight cars amounted to 504,000 tons-km in July, which exceeds efficiency of type freight cars by 111%.
Discarding in July decreased from the volume of the previous month to 5,700 freight cars where gondolas account for 3,000. It should be noted that over 3,000 freight cars with expired service life were transferred to defective fleet and will be discarded eventually. As a result, defective fleet as of early August increased to 99,400 pcs. Total discarding for first seven months of 2016 advanced 1.4-fold YoY to 72,200 freight cars.
Rolling stock suitable for commercial transportation within Russian Railways network is still less than 1 million freight cars, i.e. 994,000 pcs. An actual surplus of fleet totaled 83,400 pcs where gondolas accounted for 5,000 pcs. A decrease of supply in the gondola market boosted lease rates for them. Thus, in August, gondola with type bogie was leased at RUB 700-750/day maximum.
Until July 2016, the decrease of operating fleet was due to increase in efficiency of gondola use. However, as preparation for heating season begins, these reserves will be exhausted. In July, downtime of gondolas between shipments was minimum within the past 3 years.
In late July, the Kuzbass posted absolute minimum of stationed gondolas, 50,000 pcs instead of usual 60,000 – 65,000. Main part of freight cars was loaded and dispatched to Far Eastern and North-Western ports. Within next 20 days, they came to Nakhodka and Vanino ports. After that, within the same period, freight cars will return to the Kuzbass. As a result, the Kuzbass may post shortage of gondolas eventually.
Improved conditions within the gondola market already took an effect at car building plants. According to representative of UralVagonZavod, first time in 2 years the company is working at its full capacity. All UVZ employees who had to take vacations resumed their work in August thanks to orders made for UVZ railway products.
Leysana Korobeynikova, Senior Analyst
