Overview of the Russian Railway Market in June-July 2016
Loading keeps growing for 5 months in a row
In June 2016 loading within Russian Railways network amounted to 101.3 million tons (+4.2% compared with 2015).
Transportation of coal (+6.2%), coke (+11.1%), construction materials (+19.0%), iron ore (+5.7%), wood products (+9.1%), non-ferrous metal ore (+5.9%) and ferrous metal scrap (+21.4%) increased compared to the same period a year before. Transportation of ferrous metals and fertilizers remained at the level of year before. Loading of oil and oil products (-7.0%), cement (-3.2%) and grain (-20%) decreased.
Loading onto gondolas grew by 13% in June 2016 YoY.
Freight turnover totaled 188.4 billion tons*km (+1.9%) equaled the record set in the same month in 2014.
Coal: growth in domestic and exports market
In June loading of coal within the Russian Railways network grew by 6.2% YoY to 25.6 million tons having set a record of transportations of the month for the last 15 years. A total of 162.1 million tons of coal were transported by rail from the beginning of 2016, and that is by 4.2% higher than the level of 2015.
In June the mining of coal was higher (by 5.3% according to RF Ministry of Energy and by 6.9% according to Rosstat) than that last year.
In June domestic and exports traffic increased by 7% YoY and 16% YoY respectively.
Experts say growth of domestic traffic is preconditioned by increasing demand for coal in the domestic market created by fuel power enterprises as a result of low water level of Siberian rivers. Low water level is bringing about decrease of hydro generation and water transportation of coal. According to preliminary estimates, the situation will remain the same due to expected dry weather in July-August.
Exports freight traffic has significantly increased by one-third to Cyprus, 1.5-fold to China, by +6% to Japan, and by 22% to Ukraine.
As Russia’s Ministry of Energy estimates, in the current year exports of coal may improve by 6% to 165 million tons compared with 156 million tons in 2015 among other things thanks to 25% increase of supply to China.
Increasing freight traffic to Ukraine was caused by the fact that DNR and LNR stopped supplying anthracite to Ukraine on the 1st of June and it is to be compensated by Russian coal.
In the mid-run transportation of coal will remain at the same high level thanks to growing supplies within Russia and abroad.
Oil and oil products: decline continues
In June loading of oil and oil products within Russian Railways network dropped by 7.0% YoY to 18.7 million tons. A total of 116.5 million tons of oil and oil products have been transported by railway since early 2016, which is by 8.2% lower than the level of 2015.
Extraction of oil in June was higher by 1.1% and by 0.6% than in the last year according to Russia’s Ministry of Energy and to Rosstat accordingly.
Exports freight traffic reduced by 10% to the Netherlands, by 75% to South Korea, and by 40% to Belarus. Supplies to Turkey and Great Britain have almost completely stopped.
From January to May 2016 monthly crude oil distillation decreased by an average of 3-4% YoY but the situation changed in June. Thus, processing grew by 0.5% YoY, though it is too early to say that trend discontinued.
According to forecasts, transportation of oil and oil products by railway will remain at the same low level because of unfavorable conditions in the world markets as well as of putting new piping facilities into operation. However the situation may partially improve thanks to possible growth of oil processing.
Construction materials and cement: restoration continuing mainly thanks to infrastructure projects
In June loading of construction cargos within Russian Railways network grew by 19.0% YoY to 13.8 million tons. At the same time, loading of cement fell by 3.2% to 3.0 million tons. A total of 68.8 million tons of construction cargoes (by 20.9% up YoY) and 12.7 million tons of cement (by 6.0% down YoY) have been transported by railway since the beginning of the year.
In June transportation of construction materials increased by 65% YoY to the Tyumen Region, 1.5-fold to the Krasnodar Region, 1.5-fold to the Leningrad Region, by 30% to the Volgograd Region, by two-thirds to the Bryansk Region, and by two-thirds to the Novgorod Region.
It is worth mentioning that supplies to the Krasnodar Region are at the top level since 2013. Implementation of Kerchen Bridge Project mainly contributes to this. Road traffic is to start by late 2018, railway traffic by late 2019. The Kerchen Bridge is boosting development of similar projects in the country. Thus, in July 2016 in the Jewish Autonomous Region construction of cross-border railway bridge has officially started. The new fundamental structure is to link Nizhneleninskoe village in the Jewish Autonomous Region and Tunzan (the People’s Republic of China) and to connect Trans-Siberian Railway with Chinese railway network by mid-2018.
There are some positive trends in housing construction as well. In Russia 6.8 million square meters of housing accommodation was launched in June 2016 which is by 6.8% higher than in the same month a year before. Residential mortgage market increased by 48% YoY to over RUB 550 million. The parameter grew by 55.3% compared with that in the previous month. As the National Agency for Financial Studies estimates, as of 2016 real estate loans in Russia will approach record breaking values of 2014, i.e. they grew by 30-40% to approximately RUB 1.5-1.6 billion.
Still, imports of construction materials is at minimum level as of three last years. Imports dropped more than five-fold in some months of 2016 compared with the situation in the country before devaluation which actually made imports of construction materials in Russia unprofitable. Experts of the relevant industry think that devaluation has opened new exports opportunities for companies. In June 2016 exports was at its historical maximum for this month for last three years.
Thus, government-supported projects still remain key boosters of construction materials transportation. Housing construction as well as exports of construction materials have been showing positive trending. The industry may not be restored to the pre-crisis level before 2017-2018, but active growth of transportation is observed even now as compared with 2015.
Ferrous metals: «conflict of duties» prevents exports from growing
In June loading of ferrous metals within Russian Railways network remained at the level of last year and amounted to 5.7 million tons. In total since early 2016 35.6 million tons of ferrous metals were dispatched by railway which is 1.7% less than in 2015.
Transportation grew eight-fold to Italy, two-fold to Taiwan, by one-third to the USA, 1.5-fold to Mexico, and to Egypt (supplies were almost null last year).
According to Rosstat, in June steel production rose by 2.5%, rolled ferrous metal products by 3.1%.
Experts say drop of domestic transportation is associated with boost of prices for metal products within the country (from 20% to 80% depending on the type). Therefore at present buyers have adopted a wait-and-see attitude hoping for the prices to stabilize. Now FAS is studying metal products price policy as it has received over 50 complaints within last months.
Supplies of steel products to the USA is increasing. In late June the US government announced to implement duty more than 500% for imports of Chinese metal products. In July the US Department of Commerce also established antidumping duties on cold-rolled mill products from China and Japan in the amount of 71% and 266% respectively.
Meanwhile the EU is initiating antidumping investigation regarding Russian hot-rolled mill products. The EU already introduced duties on cold-rolled mill products from Russia in the amount of 20-26% in Q1 2016 and increased them by 19-36% in May.
Despite increase of worldwide price for steel, further growth of transportation of ferrous metals from Russia was hindered by the EU existing and planned restrictive measures.
Iron and manganese ore: loading increases
In June loading of ore within Russian Railways network grew by 5.2% YoY to 9.7 million tons. A total of 54.9 million tons of ore have been dispatched by railway since early 2016, 1.6% above a year earlier.
According to Rosstat, extraction of ore grew by 11.7% in June.
Exports mainly grew to Italy (supplies were null last year), Finland (four-fold), Germany (six-fold) and Hungary (two-fold).
Under existing conditions it is probable that exports of ferrous ore will rise due to new limitations for Russian exports of ferrous metals.
Grain and milled products: expecting new harvest
In June loading of grain and milled products within Russian Railways network fell by 20% YoY to 0.8 million tons. Until new harvest starts, grain transportation is facing low season. A total of 8.4 million tons of grain have been dispatched by railway since early 2016, 7.4% above a year earlier.
In June domestic transportation improved by 0.2% YoY and exports transportation fell by 50%. Exports to Yemen (-80%) and Egypt dropped the most. The latter was top buyer of Russian grain and has not held any tenders for its purchase since April 2016. However, at the first Egyptian tender held in new crop year Russian companies managed to win supply of two-thirds of the required scope of grain.
Russia’s Ministry of Agriculture increased its forecast grain harvest in 2016 from 106 million tons to 110 million tons. Record-breaking harvest in Russia will become possible thanks to favorable weather conditions as well as timely preparation for sowing and implementation of spring sowing campaign within the established dates. Previous record-breaking harvest, i.e. 108.2 million tons, was posted in 2008.
Russia’s Ministry of Agriculture has set an objective to harvest 115 million tons of grain per year until 2020. Meanwhile, harvest potential directly depends on equipping producers with agricultural machinery. Maximum harvest may amount to 150 million tons allowing for the fact that cultivated areas occupy around 50 million ha and crop yield may reach 3 tons per hectare. It is forecast that Russia’s grain exports potential will increase to 50 million tons by 2030.
Thus, high level of grain transportation is expected to recover with start of supplies to Egypt and new harvesting.
Chemical and mineral fertilizers: transportation reaches its peak
In June loading of fertilizers within Russian Railways network remained at the highest level within these last 15 years and amounted to 4.1 million tons. A total of 26.3 million tons of fertilizers have been dispatched by railway since early 2016, 3.6% above a year before.
In June domestic transportation grew by 17% YoY and exports by 0.6%. Brazil and Lithuania boosted supplies of fertilizers from Russian 1.6-fold and two-fold respectively.
According to experts, trend in decrease of global prices for mineral fertilizers as well as difficulties in financing projects will make producers cut their investment programs and capital expenditures while current high production volumes will remain the same. Thus, for instance, in 2016 a 25% cut of investments is expected with Uralchem compared with previous version of business plan, i.e. from RUR 8 billion to RUR 6 billion. At the same time, volume of investments will remain at the level of 2015. However the company does not rule out placing some projects on the shelf.
According to Russia’s Ministry of Agriculture, from the 1st of January to the 18th of July 2016 agricultural producers acquired 1.8 million tons of active ingredient of mineral fertilizers, which is by 179,000 tons or 11% more than within the same period last year.
Decrease of global prices is causing increase in production of fertilizers to maintain market share. This escalates competition among producers. However Russian companies have more stable position because of ruble devaluation. At the same time, active development of Russian agricultural sector may ensure stable demand for mineral fertilizers in the domestic market as well. Combination of these factors is expected to ensure that the existing high level of transportation of mineral fertilizers should remain at the same level and should grow continuously as new facilities are introduced.
Russian Railways being concerned about lack of freight cars
Data regarding sales of rolling stock are taken from Rolling Stock Market magazine.
In June 2016 the CIS plants sold 2,593 freight cars, which is 30% above a year before and 8% down a month before.
Sales fell by 3% YoY among type freight cars fitted with 18-100 bogie or its equivalents and rose by 60% among new generation freight cars.
Use of new generation freight cars is still highly effective. According to statistical data about operation of fleet fitted with Barber bogie as of June 2016, average freight turnover per 1 gondola with increased axle load escalated by 106% to 524,000 tons-km compared with type freight cars.
As of June 2016, discarding is still high and amounts to 10,500 freight cars where gondolas account for 4,000. Total discarding for H1 2016 advanced 1.5-fold YoY to 66,500 freight cars.
Defective fleet declined to 95,300 pcs as of late June. Rolling stock suitable for commercial transportation within Russian Railways network is still less than 1 million freight cars, i.e. 994,000 pcs. Actual surplus of fleet totaled 99,800 pcs where gondolas accounted for 11,500 pcs.
OJSC Russian Railways board of directors spoke against directive consolidation of fleet of freight cars. As the board says, Russia has a full-fledged market for use of freight cars where involvement of additional rolling stock through purchasing or leasing is normal, an evolutionary process meeting needs of the economy. Therefore OJSC Russian Railways considers implementation of measures on directive consolidation of fleet on the basis of intermediate companies unreasonable; it may disturb transportation process and lead to artificial deficit of rolling stock.
Leysana Korobeynikova, Senior Analyst
