Overview of the Russian Railway Market for July-August 2017
Transportation Indices Reached Peak Values
Positive dynamics in the field of transportation continued in July of 2017: freight handling amounted to 106.6 million tons (+2.2 % as compared to the same period of the previous year), and freight turnover reached 208.0 billion tonne-kilometers (+5.1 %).
Positive dynamics in the field of transportation continued in July of 2017: freight handling amounted to 106.6 million tons (+2.2 % as compared to the same period of the previous year), and freight turnover reached 208.0 billion tonne-kilometers (+5.1 %).
As compared to the previous year there has been an increase in the transportation of coal (+12.5 %), iron stone (+2.2 %), ferrous materials (+5.2 %), timber freights (+2.8 %), fertilizers (+11.6 %) and grain (+18.2 %). There has been a decrease in freight handling of crude oil and petroleum products (-1.5 %), construction freights (-13.0 %), cement (-3.3 %), nonferrous metal ore (-5.3 %) and charred coal (-10.0 %).
In August the transportation indices will remain on a current high level, but they are unlikely to surpass the record figures of last year, as the efficiency of rolling stock operation is already on a peak level, which is characteristic of the third summer month. Further growth will be possible with gradual accumulation of a significant stock of modern carriages stock in the Russian Railways network in combination with the development of locomotive traction, which will allow to collect heavier and more reliable trains.
Coal: wide prospects of further growth supported by the development of transport infrastructure
Coal loading set a monthly record in July 2017 when it amounted to 28.8 million tons (+12.5 % as compared to July of last year). Since the beginning of 2017 a total of 206.1 billion tons of coal were shipped by rail, which exceeds he results of the same period in 2016 by 9.8 %.
Coal transportation increased in July both for domestic (+2 % against July last year) and external routes (+20 %). There has been an increase of export freight traffic to China (almost twofold), Poland (almost threefold) and Turkey (almost threefold). Supplies to Romania are on their historic peak - approximately 300 thousand tons, seven times higher than the previously achieved level. In should be mentioned that supplies to Ukraine started to grow (+10 % against July last year), which were decreasing since the beginning of the year.
A growing demand for Russian coal in the global market leads to higher capacities of the transport infrastructure. For instance, a railroad departure yard established at the largest port railway station of the Far Eastern railroad - Nakhodka-Vostochnaya - is currently 70 % completed. The number of railway tracks at the station increased to 13, and its traffic capacity increased almost twofold. Besides the departure yard, Port Management Company and Vostochny Port will also construct a new receiving yard for non-public loaded cars. The construction is planned to be completed in 2019.
It became known in mid-August that China renounces the construction of coal-steam plants until 2020, the total power of which could have amounted to 150 GW. It has been revealed that this decision was made for the purpose of avoiding excessive power production and adherence to new environmental standards. It is also planned to take old coal-steam plants with a total power 20 GW out of operation, and the coal-steam plants with total power 1 GW will be upgraded. In general, the established power of Chinese coal-steam plants should not be in excess of 1.1 thousand GW by 2020.
Today China is the third biggest consumer of Russian coal after Japan and Great Britain. A reduction power of Chinese coal-steam plants could adversely affect coal transportation in short term perspective, whereas in the mid-term perspective supplies could be redirected to other countries, and therefore a considerable reduction of supplies could be avoided.
There is still every opportunity for further growth of Russian coal export supplies in the market.
Oil and oil products: the downfall resumed
In July of 2017 oil and oil products freight handling decreased by 1.5 % as compared to the previous year and reached 19.7 million tons. Since the beginning of 2017, a total of 137.5 million tons of oil and oil products were shipped by rail, which is 0.7 % higher than in the same period of the previous year.
A reduction of transportation capacity was caused by export reduction of almost 10 % compared to July of previous year, whereas the domestic transportation has become 2 % higher than in previous year. Export reduction has been observed in the direction of of ports in Netherlands (-30 %), Italy (-5 %) and Ukraine (twofold). However, supply to Belarus (+80 %), China (+20 %) and Mongolia (more than twofold) has increased.
The structure of transferred cargo still features the same trends: a decrease of fuel oil transfer and an increase in the transfer of light naphtha.
In mid-July Russian railways introduced a 44.9 % export rebate for crude oil transfer by the Northern railroad and further to Finland untill the end of 2018. However, this measure cannot provide a significant support of bulk oil cargo transfer by rail due to the increasing competition.
Construction materials and cement: at the lowest level, but recovery is expected
Construction materials freight handling amounted to 12.7 million tons in July of 2017 (-13.0 % as compared to July of the previous year), and cement - 2.9 million tons (-3.3 %). These parameters are the lowest ever in July for the last 10 years. A total of 77.7 million tons of construction freights and 15.4 million tons of cement have been transported by rail since the beginning of 2017, which is by 6.7 % and 1.7 % lower than in the same period of the previous year, respectively.
Activity in the field of construction continues to decrease in the Russian Federation. According to Rosstat (State Statistics Committee), a total of 5.4 million m2 of residential property was commissioned in July of 2017 in Russia, which is 5.6 % less than the results of the similar period in the previous year. In total, this index decreased by 10.4 % since the beginning of the year. According to a assessment by Head of the Ministry of Construction, Mikhail Men, commissioning of residential property in Russia can be 75-76 million m2 in 2017, which is 5-6 % lower as compared to the previous year.
However, as noted by experts of the Housing Mortgage Lending Agency, mortgage loans issued in 2017 are at a record high level. Over 420 thousand mortgage loans for 765 billion rubles were issued in the first half of the year, which is 15 % higher than in 2016 and corresponds to the record level of 2014. Further growth of mortgage lending is expected due to a reduction of interest rates to 9-10 % by major Russian banks.
A positive trend observed in the construction industry can lead to a gradual recovery of the volumes of construction materials transportation in mid-term perspective, but a lack of gondola cars currently used for transportation of more profitable loads could adversely affect this growth dynamics.
Ferrous metals: growth due to domestic consumption
Ferrous metals freight handling was 6.1 million tons in July 2017 (+5.2 % as compared to July of the previous year), the increase of transportation volume as compared to the previous month was more than 10 %. A total of 41.3 million tons of ferrous metals were transported by rail since the beginning of the year, which is 0.4 % less as compared to the similar period of the previous year.
Domestic transportation increased by 15 % in July (the increase is primarily caused by railway tracks repair), but export transportation decreased by 8 % (twice to Italy, 40 % to Taiwan, 70 % to Iran). At the same time, the supply to Turkey (+20%), Finland (almost no supplies during the previous year) and Mexico (+16 %) have increased.
According to an Evraz assessment, steel consumption in Russia increased by 5 % to reach 18 million tons for the first half of the year mainly due to an increase of figures for bars and rods. For instance, consumption of steel beams increased by 16 %, and reinforcing rods - by 4 %. From the beginning of 2017, flat rolled steel demand has increased by 7 % to constitute 4.6 million tons. At half-year end the amount of exported steel remained at the level of 14.7 million tons, and steel making constituted 36 million tons.
Due to an increase of domestic consumption and railway tracks repairs, a moderate increase of ferrous metals railroad transportation is expected.
Ore: export reorientation
Ore freight handling was 9.2 million tons July of 2017 (+2.2 % as compared to July the previous year). In total since the beginning of the year 63.8 million tons of ore were transported which is by 0.2 % less as compared to the similar period of the previous year.
Domestic shipment increased by 2 %; export shipment decreased by 4 % as compared to the previous year. Export decrease is mainly caused by a cessation of deliveries to Ukraine and Hungary and reducing of cargo traffic to Slovakia (-70 %), Finland (twofold) and Germany (by one-third). Supplies to Italy increased twice, to Turkey - by 3.5 times.
Ore transfer increase is expected in med-term perspective due to a reduction of ferrous metals export by Russian plants and the formation of new export logistics.
Timber freights: slow growth, huge potential
In July 2017 timber freights handling amounted 3.7 million tons (+2.8 % as compared to July of the previous year). In total since the beginning the year 26.5 million tons of timber freights were transported which is 3.9 % higher as compared to the similar period of the previous year.
In July both domestic and external transportation increased. Export increase was repeatedly promoted by China (+13 %) and Kazakhstan (+30 %).
As explained by Deputy Minister of Trade and Industry of the Russian Federation Viktor Evtukhov, development strategy of the timber processing industry untill 2030 set a goal for the timber processing industry to increase the added value of cut timber cubic meter by 2.5 times in the course of ten years – primarily by means of added-value wood conversion.
According to an assessment by the Ministry of Industry, Russia possesses considerable reserves both for import substitution, especially in the field of paper and cardboard production, and for export increase, mainly to Southeast Asian countries. These are the countries where the major part of global demand will be present, and it will grow to 17 million tons per year by 2030.
However, timber processing industry of Russia remains attractive for investors. For instance, on the background of an overall reduction of investments to the Russian industry by 4.5 % to 1.8 tln. rubles, investments to timber processing industry have increased by 16.4 % to reach 117 billion rubles.
In current conditions, further growth of timber freight by rail is expected.
Grain and grinding products: experts significantly improved forecasts with regard to this season's crops
Grain freight handling amounted to 1.3 million tons in July of 2017 (+18.2 % as compared to July the previous year). A total of 10.5 million tons of grains have been transported by rail since the beginning of the year, which is 10.1 % higher as compared to the similar period of the previous year.
In July domestic transportation remained on the level of the previous year, whereas the export increased by 40 %, primarily to Egypt (+40%), to Denmark and Iran (almost no supply to these countries in the previous year).
Experts of Rusagrotrans CJSC Analytical Center improved the forecast of croppage to 127-129 million tons; the previous forecast was 118.3 million tons (in 2016 croppage was 120.7 million tons). Whereas Ministry of Agriculture of the Russian Federation still adheres to conservative forecast for this year - at the level of 103-105 million tons.
Taking into account the reserves remained from the previous year, further growth of grain transportation by rail is expected.
Chemical and mineral fertilizer: entering new selling markets
Fertilizers freight handling in July 2017 was 4.8 million tons (+11.6 % as compared to July the previous year), a new record for this month was achieved. A total of 33.2 million tons of fertilizers have been transported by rail since the beginning of the year, which is 8.5% higher as compared to the similar period of the previous year.
Whereas domestic transportation has increased by 13 %, export growth was 8 % as opposed to the previous year. Russian fertilizers supply increased to China (+18 %), Brazil (+12 %), as well as to UAE and France, though there was no export to these countries in the previous year.
There are still opportunities for further export freight traffic growth due to entering new markets.
Rental rates stabilized
The data on rolling stock sales and rental rates has been provided by the Rynok Podvizhnogo Sostava (The Rolling Stock Market) magazine.
In July 2017, the sales of cars by CIS plants amounted to 5.7 thousand units (3.8 thousand units are gondola cars), which is twice as high as the results of July 2016 (2.6 thousand units), and 5 % higher than the level of the previous month.
Demand for gondola cars exceeds checking: in June, 1.3 thousand open cars were checked. In total 4.0 thousand units of rolling stock were checked in the month under report. Commercially feasible rolling stock remains on a high level and constitutes 991 thousand units; as of the beginning of August defective rolling stock was reduced to 63.5 thousand units (minimum level since 2014). As a result, rolling stock proficit amounts to 62 thousand units, and gondola cars proficit is close to zero point.
Rental rates growth for gondola cars on standard bogies stopped in August despite start of preparation for heating season. In September slight increase of rates is possible, but it can be changed by smooth rates reduction to the level of 1 000–1 200 rubles per day by the end of the year.
Leysana Korobeynikova, Senior Analyst
