Overview of the Russian Railway Market in June-July 2017
Increase in freight turnover for 15 consequential months, increase in freight handling for 7 months
In June 2017 positive dynamics of transportation kept up: freight handling amounted to 103.8 million tons (+2.6% as compared to the similar period of the previous year), freight turnover amounted to 202.5 billion tonne-kilometer (+7.5%).
Key growth drivers of increase in transportation remain the same: coal (+9.4%), crude oil and petroleum products (+0.5%), iron stone (+2.2%), timber freights (+2.8%), fertilizers (+12.2%) and grain (+37.5%). As compared to the previous year there is decrease in transportation of construction freights (-10.1%), ferrous materials (-5.3%), cement (-3.3%), nonferrous metal ore (-5.6%), ferrous steel scrap (-11.8%) and charred coal (-10.0%).
Coal: extensive growth prospects
In June 2017, coal handling make a record for this month and reached 28.0 million (+9.4% as compared to June of the previous year). In total since the beginning of 2017 177.3 million tons of coal have been transported by rail which is by 9.4% more as compared to the similar period of 2016.
Export shipments are constantly growing (+18.5% as compared to June of the previous year) whereas inland transportation remains at the level of 2016. Among the main consumers of Russian raw materials are China (+80%), Turkey (growth in 2.3 times), Poland (growth in 1.5 times), Romania (5 times growth), Great Britain (+10%), and Democratic People’s Republic of Korea (DPRK) (3 times growth). Moreover deliveries to Ukraine have also increased (+10% as compared to June of the previous year).
According to forecasts of the analysts from the company “Russian Coal” global demand for power generating coal will keep growing for the next 30 years, and the main driver thereof will be Asian-Pacific Region, mainly China.
Despite of numerous statements of PRC (People’s Republic of China) regarding decrease in coal consumption in favor of renewable energy in real life coal strengthens its positions in Chinese energy system. In May 2017 coal extraction increased by 12% as compared to the similar period of the previous year whereas import of coal increased by 17%. For the first 5 months of 2017 Chinese import of coal increased by 30%. According to five-year plan of the State-Owned Development and Reorganization Commission of the PRC by 2020 coal excavation in China will increase up to 3.9 billion tons and consumption will reach 4.1 billion tons, capacities of the power plants burning coal will increase by 19%.
Concurrently starting from 01 July 2017 China imposed veto on importation of coal through small ports operated without permission of the State Council in order to improve control over resources and prices therefor. Experts believe that China strives to limit import of low quality, “impure” coal. First of all it may result in decrease of deliveries from Indonesia. Moreover Chinese Government prolonged veto on importation of coal from DPRK which also may promote increase in import from the RF.
At the background of increasing demand for Russian coal JSC “Russian Coal” is going to increase annual production capacity of Sayano-Partizanskiy opencast coal mine located in Krasnoyarsk Krai up to 3 million tons and is considering construction of a coal-preparation plant.
At the end of June we became aware of that in 2017 Poland may need more than 5 million tons of coal to satisfy its domestic demand due to 30-50% backlog of the required level of excavation. Polish company “Weglokoks” declared its intention to purchase the required volumes from Russia. According to the representative of the above company Polish Government has already approved this decision.
On the market there are still kept the prerequisites for further growth of export of Russian coal.
Oil and oil products: positive dynamics of transportation remained unchanged
In June 2017 handling of crude oil and petroleum products increased by 0.5% and amounted to 18.8 million tons. In total since the beginning of 2017 117.8 million tons of crude oil and petroleum products have been transported by rail which is by 1.1% more than for the similar period of the previous year.
Increase in handling was mainly due to increase in transportation of light naphtha (in 1.5 times), crude oil (+13%), and petroleum coke (in 2.5 times). Thereat there was observed increase in export to Belarus (+60%), Kirghizia (in 2.5 times), and to Great Britain (in 3 times).
Despite of the positive dynamics it is still to early to speak about recovery of the volumes of crude oil and petroleum products transportation by rail.
Construction materials and cement: experts expect recovery already this autumn.
In June 2017 handling of construction freights amounted to 12.4 million tons (-10.1% as compared to June of the previous year), handling of cement amounted to 2.9 million tons (-3.3%).In total since the beginning of 2017 65 million tons of construction freights and 12.5 million tons of cement have been transported by rail which is by 5.5% and 1.4% (accordingly) less as compared to the similar period of the previous year.
Activity in the field of construction in the RF is constantly decreasing. According to Rosstat (State Statistics Committee), in June 2017 in Russia there were commissioned 6.4 million m2 of residential property which is by 6.4% less than for the similar period of the previous year. In total since the beginning of the year this index decreased by 11.2%.
According to the study named “Business Climate in Construction Industry” conducted by the Higher School of Economics (HSE) in II quarter of 2017, production of construction materials increased by 5.5% as compared to II quarter of 2016. The study states that “back the last year the given sub-industry was one of the most depressed in the processing industry”. Thus even such increase became a positive signal. According to HSE, after 2014, market of construction materials demonstrated annual decrease of about 10%. However since May 2017 the manufacture started growing. On the basis of the above said there was expected recovery of construction with a 3-4 month lag.
According to Director of Statistical Studies and Economics of Knowledge, Georgii Ostapkovich, growth of salary results is followed by gradual decrease of real incomes of people. There has been accumulated huge deferred demand for durable goods including residential property which will apparently start to be satisfied by autumn of 2017.
Emerging positive trends in the field of construction may result in gradual recovery of construction freight transportation in the medium-term perspective.
Ferrous metals: new limitations for Russian products are possible
In June 2017 handling of ferrous materials amounted to 5.4 million tons (-5.3% as compared to June of the previous year). In total since the beginning of 2017, 35.2 million tons of ferrous materials have been transported by rail which is by 1% less as compared to the similar period of the previous year.
In June inland transportation increased by 7% (thanks largely to repair of railway tracks) whereas export decreased by 13% (export to Italy decreased twice, to Mexico and Belgium it decreased by 40%). Thereat there is observed increase in deliveries to Finland (last year there were almost no shipments), Kazakhstan (increase in 1.5 times), and Belarus (increase in 1.5 times).
Decrease in export is happening due to strengthening of competition at the global market and, as a consequence thereof, imposition of extra limitations by the importing countries aimed at protection of domestic manufacturers’ interests. Thus in the second half of July European Commission supposed to set up the minimum price limit for the imported hot-rolled steel amounting to 472.27 €/ton for manufacturers from Russia, Iran, Ukraine, and Brazil. Thereat the companies exporting products at the price less than the above mentioned price limit will have to pay anti-dumping duties. Among the Russian manufacturers European export prices of which will be slowed down by the set up minimum are Severstal, MMK, and NLMK. MMK is going to be subject to the highest duty — 33%, duty for NLMK may be equal to 15%, and for Severstal — 5.3%. European Commission will make final decision on introduction of the duties in early October of 2017..
In the opinion of Oleg Petropavlovskii, an analyst of BKS, such anti-dumping duties will not negatively affect domestic companies at the current prices. “Average price for hot-rolled mill products in Europe amounts to 492.5 €/ton. The companies will only have to pay the duties if the prices stay less than 470 €/ton, under the current conditions those duties are inapplicable”, — says he. Thereat the analyst notes that the duties for Severstal and NLMK cannot be deemed protective as the said companies may continue delivering. MMK, according to him, will have to redirect deliveries to other markets, for example, to Turkey or Russia.
At the background of dullness of construction industry in the RF as well as strengthening of competition at the external markets further decrease in transportation of ferrous materials by rail is probable. However this trend may be corrected at the expense of increase in transportation of ferrous materials for the purposes of RZD.
Ore: record handling, an alternative to Ukrainian market is found
In June 2017 ore handling made a record for this month for the last 10 years and reached 9.4 million (+2.2% as compared to June of the previous year). In total since the beginning of 2017, 54.6 million tons of ore have been transported which is by 0,5% less as compared to the similar period of the previous year.
Inland transportation increased by 4% and export decreased by 6% as compared to the previous year. Decrease in export is mainly due to cessation of supplies to Ukraine and decrease in export to China (-20%) and Finland (twice). Thereat deliveries to Germany increased in 4 times alongside with increase in export to Kazakhstan, Japan and UAE whereas last year our ore was not exported to the said countries.
Because of high prices for energy resources in Ukraine manufacturers have to decrease steelmaking and abandon purchasing of Russian ore. As a consequence in June 2017 Ukrainian manufacturing decreased by 7.3%, in total since the beginning of the year — by 17.2% as compared to January-June of 2016.
In the medium-term perspective increase in ore transportation is expected at the background of decrease in primary production by Russian plants as well as alongside with formation of new export logistics.
Timber freights: slow growth, huge potential
In June 2017 handling of timber freights amounted to 3.7 million tons (+2.8% as compared to June of the previous year). In total since the beginning of 2017 22.8 million tons of timber freights were transported which is by 4,3% more as compared to the similar period of the previous year.
In June increase in both domestic and external transportation is observed. Increase in export was promoted by China (+10%) and Kazakhstan (+60%).
In addition to wooden house construction production of pulp and paper may become promising for timber industry. According to Denis Manturov, Minister of Commerce and Industry, for ten years Russia is capable of constructing 4 more pulp and paper plants and 10 more by 2035.
Under the current conditions there is expected further growth of transportation of timber freights by rail.
Grain and grinding products: twofold growth of export
In June 2017, handling of grain amounted to 1.1 million tons (+37.5% as compared to June of the previous year). In total since the beginning of 2017, 9.2 million tons of grain have been transported by rail which is by 9,9% more as compared to the similar period of the previous year.
Inland transportation increased almost by 20% and export increased twice. Import of Russian grain was intensified by Azerbaijan (thrice), Egypt, and Israel (last year our grain was not exported to the said countries.)
RF and China agreed upon increase in export of wheat to China — approval of the document concerning admittance of grain from RF is now at the final stage of discussion. At present only four Russian regions are entitled to export whey to China: Altai Krai and Krasnodar Krai, Omsk Oblast and Novosibirsk Oblast. Documents permitting the deliveries were signed in the end of 2015, however in fact small volumes were supplied just this year. Russian and Chinese phytosanitary authorities discussed multiplication of the regions entitled to export whey to China. Moreover grain assortment may be expanded at the expense of barley and buckwheat.
In the second half of July Russian grain experts could renew deliveries to foreign Baltic ports. Shipments were stopped in February-March when traders could not transport up to 600 thousand tons of grain across the Baltic Sea. Opening of the direction is important for the experts taking into account possible full load of Russian ports during the new season.
According to the Head of Minselkhoz (Ministry of Agriculture), Aleksander Tkachev, in 2017, in Russia there were got in more than 105 million tons of grain. Thereat due to fresh weather in the number of regions end of the harvest season was moved for two weeks approximately. According to the forecast of Minselkhoz this season export of grain will exceed 35 million tons. Thus further increase in transportation of grain by rail is expected.
Chemical and mineral fertilizers: one more record
In June 2017 handling of fertilizers make one more record for this month and reached 4.6 million (+12.2% as compared to June of the previous year). In total since the beginning of the year, 28.4 million tons of fertilizers were transported by rail which is by 8,1% more as compared to the similar period of the previous year.
Thereat inland transportation increased by 12% and export increased by 11%. There is observed increase in deliveries of Russian fertilizers to China (+25%), Ukraine (increase in 1.5 times), deliveries to Turkey and France have also increased whereas last year Russia did not export fertilizers to those countries.
Volume of supplies to China will continue growing: Uralkali declared signing of the first for this year long-term macrocontract with consortium of Chinese buyers composed of Sinochem, CNAMPGC, and CNOOC. The contract will be in force from August till December. The company did not declare exact volume of deliveries having noted that “price for potassium fertilizers supplied to China corresponds to the current price level on the Russian market”.
Situation with Ukrainian fertilizers remains depressive. Even after introduction of anti—dumping duties for Russian mineral fertilizers amounting to 34% Russian products are still presented at the market.
At the market there are still persist the prerequisites for further growth of Russian export freight traffic.
Balance of the market of gondola cars
The source of data on sale of the rolling stock and rent rates – the magazine “Rolling Stock”.
In June 2017 plants of the CIS sold 5.4 thousand units of rolling stock. (3.5 thousand — open box cars) which is twice more than in June of 2016. (2.6 units) and by 40% more than the level of the previous month.
Demand for open box cars exceeds checking: in June, 1.5 thousand open box cars were checked. In total in June there were checked 4.7 thousand units of rolling stock.
Commercially feasible rolling stock totals 991 thousand units. As at the beginning of July defective rolling stock totalled 67 thousand units (minimum level since 2014), proficit amounts to 69 thousand units (of them 0 thousand open box cars).
Market participants believe that in June-July there was reached the peak of open box cars leasing rate and new prices will be in force up to the end of summer. Thereat no one is going to reduce the prices. It is noted that demand for open bpx cars significantly exceeds offer. There is almost no available rolling stock; at the spot market prices for small numbers of open box cars on standard bogie (18—100 and similar) reach 1,500—1,700 Rubles per day.
Leysana Korobeynikova, Senior Analyst