Overview of the Russian Railway Market in June-July 2018
June: growth in transportation of all cargoes except for construction materials and cement is continuing
Transportation volume growth continued in June 2018: loading amounted to 107 million tons (+3.1% against the same period of last year), cargo turnover — 208.9 billion ton-km (+3.0%).
Transportation of coal (+5.0%), oil and oil products (+1.6%), iron and manganese ore (+8.15%), ferrous metals (+20.4%), forest products (+5.4%), fertilizers (+4.3%), non-ferrous ore (+4.7%), scrap metals (+6.7%) and grain (+90.9%) has grown. At the same time, transportation of construction cargo (-10.5%) and cement (-10.3%) has decreased.
According to Vadim Mikhailov, First Deputy of Director General of Russian Railways, the planned annual growth of loading is 3.8% until 2025 — the achievement of this value is necessary to implement the RF President decree issued in May.
In 2018, the growth of loading in the Russian Railways grid is expected to be at 3%, which is feasible considering the current dynamics: loading increased by 3.4% in the first half of 2018 as compared to the same period last year.
Coal: high global demand for coal will remain unchanged
Coal loading in June increased by 5.0% as compared to last year and amounted to 29.4 million tons, setting a record for this month over the last 15 years. Since early 2018, a total of 186.2 million tons of coal were shipped by rail, which is 5% higher than in the same period of 2017.
In June, both domestic (+6.7%) and export (+1.2%) transportation increased. The following countries increased the import of Russian coal as compared to others - Germany (10 times more) and Poland (1.6 times more). The increase in supplies to these countries amounted to about 900 and 500 thousand tons, respectively. In addition, supplies to Japan (+8%) and Ukraine (+16%) have significantly increased.
Experts highly estimate the global demand for coal despite the reduction of costs for renewable energy. The USA, China and European countries reduce coal generation in pursuit of environmental goals. However, developing countries set the task of uninterrupted power supply and support of their industry as their priority, and therefore continue to invest in coal generation.
Thus, according to forecasts of the International Energy Agency, the global demand for coal will grow at least until 2022. At the same time, the demand in China will decline by 11 million tons annually, in the European countries of the Organization for Economic Cooperation and Development - by 30 million tons, and in North America - by 37 million tons. However, the drop in demand compensates the annual increase in demand by 135 million tons in India and by 70 million tons in the Association of South East Asian Nations.
Russia is already entering new markets: Crimean Seaports state enterprise, established in 2014, will begin shipping coal, wheat and construction materials to Syria from the ports of Kerch and Feodosia at the end of this year. During 2019, the volume can amount to 1 million tons of cargo, with an increase to 5 million tons by 2021. According to Alexei Volkov, Director General of the company, the Syrian project will allow the company to achieve self-sufficiency by means of transshipment increase. At present, its volumes are less than 1 million tons of cargo per year, whereas the capacity of the Crimean ports is estimated at 23 million tons.
Thus, further growth of coal transportation by rail is predicted, considering the high global demand for this energy carrier.
Oil and oil products: positive dynamics will be short-lived
Loading of oil and oil products increased by 1.6% in June and amounted to 19.1 million tons. A total of 117.9 million tons of oil and oil products were shipped by rail since the beginning of 2018, which is 0.1% higher than in the same period of 2017.
The shipment increase in June was accounted for by an increase in the shipments of oil heavy residues (6-fold as compared to June last year), gasoil (3 times) and gasoline (+8%).
According to Oleg Yatsenko, member of the Board of ISR Trans, the absence of a shipment decrease in June is due to the discounts provided by Russian Railways to many oil producers, in particular, Rosneft. However, in August-September the amount of transported oil and oil products will decrease due to the launch of a pipeline to Komsomolsk Oil Refinery, and a drop is predicted as a result of the year.
According to Anatoly Golomolzin, Deputy Head of the Federal Antimonopoly Service of Russia, a pilot project is currently being prepared for participation of Russian Railways in stock trading for transportation services, primarily oil cargo, designed to significantly increase the delivery rate. A corresponding resolution will be signed in the nearest future, under which a joint working group (with the participation of RR, stock exchange and FAS) will prepare this project for implementation, with the possibility of a staged expansion to other commodity markets.
Despite the fact that the vigorous activity of Russian Railways and the government restrains the outflow of oil cargo from the railway transport, the loss of a part of the volume is inevitable. A future reduction of oil cargo transportation by rail is expected.
Construction materials and cement: loading decline continues
Loading of construction cargo decreased by 10.5% in June as compared to the same period last year and amounted to 11.1 million tons, and loading of cement - by 10.3%, amounting to 2.6 million tons. Since early 2018, a total of 63 million tons of construction cargo and 11.8 million tons of cement were shipped by rail, which is 3% and 5.2% lower than in the same period of 2017.
According to the Federal State Statistics Service, housing commissioning amounted to 5.3 million m2 in June, which is 16.9% lower than in June 2017. At the same time, over the 6 months of 2018, housing commissioning was 3.8% higher as compared to the same period last year.
The government is currently developing the national project “Housing and Urban Environment”, which is expected to be adopted before October 1, 2018, and all of its performance indicators are planned to be achieved by December 31, 2024. The targets include the introduction of a total of 120 million m2 of housing annually, two-fold increase of the availability of mortgages (i.e. increase in the number of loans), reduction of the loan rate to at least 8%, and changing of the quality index of the urban environment. By the end of the project, it is planned to implement at least 90% of the planned activities to improve yards, public areas and places for community recreation under the comfortable urban environment programs. In the same timeframe, it is proposed to establish standing mechanisms for resettlement of the emergency fund, specify the parameters of recognizing buildings as substandard housing, and by 2021 the ratio of substandard housing resettled to recognized substandard housing should be similar or even exceeding.
According to the Federal State Statistics Services, cement production in Russia decreased by 3.5% in the first half of 2018 as compared to the same period last year, while the drop in June was also 3.5% as compared with June 2017.
The revival of transportation of construction materials and cement by rail is expected in proportion to the implementation of the governmental plans to increase construction and commence new projects. In the short term, further decrease in loading is possible following the completion of a small number of projects in 2014-2015.
Ferrous metals: shipment growth in all directions
Loading of ferrous metals increased by 20.4% in June as compared to the level of the previous year and amounted to 6.5 million tons. Since early 2018, a total of 39.5 million tons of ferrous metals have been shipped by rail, which is 12.2% higher than in the same period of 2017.
The increase in loading occurred in June due to both domestic (+15%) and export (+20%) transportation. The Russian market demonstrates an increase in the consumption of track grid (1.5 times), large diameter steel pipes (1.8 times) and cast iron, which accounted for almost no internal transportation last year. Export shipments have increased to Taiwan (3 times), Turkey (1.5 times), and Mexico (2 times).
According to the Federal State Statistics Service, the production of rolled products, cast iron and pipes increased in June by 6.3%, 5.5% and 6.8%, respectively, as compared to the same period last year.
According to the information provided by the Association for Steel Construction Development, in the first quarter of 2018 the volume of production of steel structures for construction increased by 10%. At the same time, the most noticeable growth - more than 2-fold - was recorded in the Far Eastern Federal District. This is explained by the construction of several large infrastructure projects: a coal transshipment complex in the seaport of Vanino, a power plant in Sovetskaya Gavan, a dormitory for the Ministry of Defense, and energy sector facilities. According to experts, high construction activity will be observed in the region at least until 2025.
At the same time, an increase in domestic demand for metal structures in Russia is in particular accounted for by the growing interest of developers in modern building technologies using steel frames. Since early 2018, the number of construction contracts concluded in the Russian Federation has increased by 3.2%.
Against the backdrop of strong demand for steel products both in domestic and foreign markets, a further increase in rail transportation is expected.
Ore: internal demand increases
Ore loading reached a record level over the last 15 years in June and amounted to 10.2 million tons, which is 8.5% higher than the level of the previous year. Since the beginning of 2018, a total of 57 million tons of ore were shipped by rail, which is 4.4% higher than in same period of 2017.
The positive dynamics in domestic transportation continued in June and increased by 15%, while exports dropped again (-25% as compared to June of last year). Supplies to China (-30%) and Germany (-80%) decreased, shipments to Japan terminated completely.
High demand for Russian ore by Russian metallurgists will facilitate the further reorientation of cargo flows to domestic destinations, as well as the further increase of ore loading by rail.
Forest product cargo: record in loading for July over the last 10 years
Loading of timber cargo in June increased by 5.4% against the level of the previous year, setting a record for this month over the last 10 years, and amounted to 3.9 million tons. Since the beginning of 2018, a total of 23.5 million tons of timber cargo was shipped by rail, which is 2.7% higher than in the same period of 2017.
Domestic shipments have increased by almost 15%, while the export remained at the level of the previous year. At the same time, reorientation of export shipments is underway. Supplies to China (-3%) and Finland (-5%) declined, while the import of Russian timber to Kazakhstan (+ 25%), Japan (+ 30%) and Azerbaijan (+ 5%) increased.
A decline in exports to Finland is likely to have a long-term nature - in accordance with the national forest strategy of Suomi, it is planned to increase the annual volume of proprietary stock to 80 million cubic meters by 2024.
A reduction of timber shipments abroad can occur due to the restrictions imposed by the Russian government. Thus, in July the deputies of State Duma proposed to ban the export of unprocessed coniferous wood: pine, spruce, fir, cedar and larch for ten years from 2020. The bill is designed to resolve three major issues: reforestation, elimination of unauthorized cutting, as well as the development of the woodworking industry and reorientation of the business to selling more expensive “processed” timber.
At the same time, the government intends to focus on the implementation of investment projects in the field of forest development. Prime Minister Dmitry Medvedev declared in July that such initiatives not only provide an incentive for the development of timber processing, but also create new jobs. He mentioned that almost 150 projects are currently being developed with the total amount of declared investments amounting to over half a trillion rubles, almost 410 billion of which have actually been invested. In 2018, four projects were commenced in Vologda, Arkhangelsk and Kostroma regions, and four more are planned to be launched in the nearest future.
Thus, the conditions for a further growth of domestic cargo have established in the market, whereas there are still no prerequisites for an export increase.
Grain and milling products: transportation is determined by the yields
Grain loading in June amounted to 2.1 million tons (+90.9% as compared to June of the previous year), setting a record for this month over the last 15 years. Since the beginning of 2018, a total of 14.4 million tons of grain were shipped by railroad, which is 55.3% higher than in the same period of 2017.
Domestic shipments increased by almost 25%, and export - by 2.5 times due to an increased volume of supplies to Egypt (7.5 times), Turkey (8.5 times), Bangladesh (with almost no deliveries last year).
According to estimates by the analytical center of JSC Rusagrotrans, this July will surpass the record of July last year in terms of the export of grain - the volume of shipments can reach 3.1 million tons due to the grain of the previous harvest and high rates of harvesting of new grain, which is actively delivered to the market.
In July, the managing partner of Agro and Food Communications, Ilya Bereznyuk, provided a weighted average harvesting forecast at the level of 112-113 million tons of grain, including about 69-70 million tons of wheat. The cause of a yield drop this season is a long drought, particularly in the southern regions. At the same time, SovEcon reduced the forecast for the new grain harvest from 118.6 million to 113.9 million tons (from 72.5 million to 69.6 million tons for wheat), and the Institute for Agricultural Market Studies - from 114.7 million to 112.8 million tons (from 71.5 million to 70.8 million tons, respectively). Head of SovEcon mentioned another reason for the reduction of harvest weight, which is unusually dry grain harvested in the south. The Moisture content of harvested grain is 10–10.5%, while the standard value is 12–13%. At the same time, Head of the Analytical Center of Rusagrotrans, Igor Pavensky, presently estimates the yield at 115.7 million tons.
Grain transportation by rail will be determined by the results of harvesting the grain of the new yield. However, the high carryover stocks of the current season will prevent a sharp drop in transportation, even in the case of a worst-case scenario.
Chemical and mineral fertilizers: new capacities, new records
Loading of fertilizers amounted to 4.8 million tons in June (+4.3% compared to the previous June), setting a new record for this month. Since the beginning of 2018, a total of almost 30.1 million tons of fertilizers were shipped by rail, which is 5.8% higher than in the same period of 2017.
Domestic shipments grew by 6%, while the exports reduced by 3%, mainly due to a drop in shipments to China (-35%) and Ukraine (supplies were at the minimum level), whereas fertilizer supplies to Brazil and the United States increased 1.5-fold. However, as early as in July, WTO recognized the increase of anti-dumping import duties applied by Ukraine for ammonium nitrate produced in Russia as non-complying with the rules of the organization, which could lead to the restoration of domestic shipments.
Closure of obsolete and unprofitable plants in the USA, in particular Mosaic's PlantCity in Florida and an increase of demand in the key markets, including India and Latin America, resulted in a deficit of about 3 million tons of phosphate fertilizers in the global market. As a result, according to Director General of PhosAgro, this year the holding will exceed 600 thousand tons of fertilizers sold by the company to the USA last year. In the 1st half of the year, PhosAgro has shipped over 500 thousand tons, while several years ago sales to the USA only amounted to about 100,000 tons per year.
It became known in mid-July that EuroChem signed the first agreement for the supply of potash fertilizers and NPK fertilizers to the Chinese agricultural producer Heilongjiang Beidahuang Farms. According to the representative of EuroChem, this is a framework memorandum not defining the specific amounts of supplies or prices, and if the contract is to be concluded, it will not happen this year. The company plans to start industrial production of potash fertilizers at Usolsk Mining and Processing Enterprise and Volgakaliy Enterprise in 2018, and produce 0.4-0.6 million tons per year. By 2025 the company intends to increase production by 8.3 million tons.
All the prerequisites for a further increase of fertilizer transportation by rail remain have preserved in the market.
Demand for rolling stock will change in quality
The source of data on rolling stock sales and rental rates is the Rynok Podvizhnogo Sostava (The Rolling Stock Market) magazine.
The commercially usable fleet is 1,027 thousand units, while the defective fleet remains at a low level of about 51 thousand units at the beginning of July. As a result, the fleet surplus amounted to 45 thousand units, but remained completely absent in the segments of gondola cars and hoppers.
In June, the sales of cars by the CIS plants amounted to 6.9 thousand units, which is 28% higher than the results of June 2017. (5.4 thousand units). At the same time, only 1.9 thousand cars have been decommissioned.
At the beginning of July, the fleet of new generation cars of different manufacturers exceeded 109 thousand units.
Gondola cars: market experts revised the terms of predicted decrease in demand
The fleet of gondola cars in the Russian Railways network reached 502 thousand units, which is 5% higher than the June level of last year.
At the same time, the main driver of growth is the increase of the cargo base. In June, the sales of gondola cars by the CIS plants amounted to 4.3 thousand units, while their decommissioning rate was 0.2 thousand units less.
Rental rates for standard gondola cars in July rose to 1,850 rubles per day. According to the Institute of Natural Monopolies, the demand for gondola cars will decrease in about three years from now. At the same time, Dmitry Zotov, Director General of the leasing company TransFin-M, predicts a market transition to surplus condition in 1-2 years and a corresponding reduction in gondola car renting rates in February-March 2019, while preserving the current production volumes.
Head of Infoline Analytics, Mikhail Burmistrov, noted that as early as in 2019 the share of the standard fleet in the gondola production structure will fall almost to zero. The share has grown due to an unsatisfied demand against the background of full utilization of the capacities of new generation car manufacturers. At the same time, experts agree that in the medium term, the market focus will shift from gondola cars to specialized wagons, considering the changes in the state support strategy.
Leysana Korobeynikova, Head of Analysis
