Overview of the Russian Railway Market in March-April 2016
Loading: growth exceeds expectations
In March 2016, loading exceeded Russian Railways forecasts by 1.6% increasing by 2.0% YoY to 105.1 million tons.
Traffic of coal increased by 5.2%, of construction materials by 21.4%, of mineral fertilizers by 6.7%, of iron ore by 1.1%, of ferrous metals by 3.1%, of timber materials by 7.7%, of nonferrous ore by 5.9%, and of grain by 26.7%. Shipping of oil and oil products dropped by 8.8%, of cement by 4.5%, and of ferrous metal scrap by 21.4%.
Freight traffic amounted to 197.7 billion tons-km in March 2016. A 1.2% decrease as compared with previous month is preconditioned by the fact that traffic growth was mainly boosted by short-distance shipment of construction materials and loading of exported oil and oil products significantly decreased.
Coal: growth continuing
In March, loading of coal within Russian Railways network grew by 5.2% YoY to 28.2 million tons, thus setting once again a record in transportation in this month for the past 15 years. A total of 83.3 million tons of coal, 3.8% above a year before, have been shipped by railway since the beginning of 2016,.
In March, coal extraction was 6.9% a year before and 6.2% a year before according to Russia’s Ministry of Energy and according to Rosstat respectively.
Domestic freight traffic improved by 8% and exports by 2%. Freight flow increased 3.4-fold to South Korea, 1.7-fold to China, and 1.5-fold to Ukraine. In addition, exports still mounted to India and just started to Italy.
According to forecast of Russia’s Ministry of Energy in February, this year extraction and exports of Russian coal will remain at the level of 2015, i.e. 372 million tons and 150 million tons respectively.
In the mid-run exports of Russian coal may still be high if export freight traffic strengthens in the directions new for Russia.
Oil and oil products: “no way out from the pipe”
In March, loading of oil and oil products within Russian Railways network contracted by 8.8% YoY to 20.7 million tons. A total of 61.3 million tons of oil and oil products have been shipped by railway since the beginning of 2016 which is 7% below a year before.
Oil production rose by 5.3% YoY according to Rosstat and by 2.1% according to Russia’s Ministry of Energy.
Domestic transportation of oil and oil products remained the same as a year before while export traffic decreased by 20%. Export freight flows dropped two-fold to South Korea, by 6.3% to Italy, and to Turkey (exports to the country practically stopped). However, the Netherlands posted the biggest drop. Thus, exports including those of furnace fuel oil and diesel fuel oil to the country dove by one-third. Such trend corresponds to overall trend of decrease in national consumption of oil and oil products. For the past 10 years, demand fell by 1.5% every year in the Netherlands while renewable electricity generation climbed more than two-fold. Compared with the last year global oil imports declined by 20%. Experts say that transfer to renewable energy sources was driven by the fact that the Netherlands is located below sea level. Thus, air pollution contributes to global warming, which leads to sea level rise and consequently to floods. In order to improve ecological situation, the government of the Netherlands intends to ban completely diesel and petrol cars by 2025 and to obtain all the energy required for railway operation from wind by 2018. Implementation of the governmental program will contribute to further decrease in oil and oil products.
As Russia’s Ministry of Energy forecast for April, production of Russian oil will go up by 0.5-1.2% this year and will remain at the level of 2016 in 2017. Shipping of oil and oil products by railway will remain at the current low level thanks to unfavorable conditions in global markets and launch of new pipelines.
Construction cargoes and cement: growth thanks to infrastructure projects
In March loading of construction cargoes within Russian Railways network increased by 21.4% YoY to 11.9 million tons while loading of cement contracted by 4.5% to 2.1 million tons. A total of 28.8 million tons of construction cargoes and 4.7 million tons of cement have been shipped by railway from the beginning of 2016, which is up 20.6% and down 11.7% on a year earlier.
Transportation of construction materials mounted 4.5-fold to the Belgorod Region, 3.5-fold to the Novgorod Region, 1.5-fold to the Tyumen Region and 1.5-fold to the Krasnodar Region.
It should be mentioned that rate of decline of cement traffic significantly slowed down compared with a year before (down 4.5% on March 2015 against down 21.4% on a year before in January 2016). It is mainly brought about by change in the legislation made to decrease the amount of counterfeit products in the market. According to Deputy Head of Russia’s Ministry of Construction, over half of cement supplied to Russia’s construction sites is counterfeit. A new GOST with cement certification regulations was introduced by Rosstandard in February. Russia’s governmental decree No. 930 was put into effect March 7, making cement certification mandatory (it used to be voluntary). Therefore, there are now certain administrative barriers for imported cement which is supplied mainly by truck and Russian producers will be able to compensate for these supplies actively using railway for cement supplies.
In 2016 Rosavtodor plans to obtain about RUB 509.2 billion from the government against RUB 529 billion a year before. Therefore, it decreased its expenses on almost every direction except for projects on Kerchen bridge construction, Platon system management as well as for the federal targeted program “Traffic safety improvement within 2013-2020” and the federal targeted program aimed at development of the Kaliningrad Region.
The mid-term forecast regarding traffic remains the same. The current positive trend may continue thanks to government support. The industry will not recover to the pre-crisis level until 2017-2018, but it is already evident that transportation is growing as compared to the level in 2015.
Ferrous metals: new sale markets compensating for loss of Turkish market
In March, loading of ferrous metals within Russian Railways network rose by 3.1% to 6.6 million tons. A total of 17.8 million tons of ferrous metals have been dispatched by railway since the beginning of 2016, which is down 4.8% on a year earlier.
According to Rosstat, in March steel production contracted by 2.6%, production of rolled steel and cast iron by 2.2% and by 9.4% respectively and of pipes by 9.8%.
Internal transportation decreased by 8% while export traffic increased by 15%. Drop of freight flow to Turkey was compensated by increase of supplies to Italy, Taiwan and Mexico (four-fold, 1.6-fold, and 1.6-fold respectively as compared with March 2016) as well as by supplies to Vietnam and Egypt (ferrous metals were not exported to these countries last year). One of causes of growth is recovered prices for metal products in the global markets.
As Russia’s Ministry of Economic Development forecast in January, this year Industrial Production Index for economic activity Metal Production and Production of Finished Metal Products will go down by 2.1% YoY.
As Russian suppliers strengthen new export flows, ferrous metal shipment is forecast to remain high.
Iron and manganese ore: traffic grows as prices recover
In March, loading of ore within Russian Railways network mounted by 1.1% YoY to 9.2 million tons. A total of 26.5 million tons have been shipped by railway from the beginning of 2016, down 0.4% on a year before.
According to Rosstat, extraction of Russian iron ore grew by 0.5% YoY in March.
National transportation reduced by 1% while exports increased by 4.3%. Exports soared four-fold to Italy, three-fold to Ukraine, and two-fold to Finland.
As experts remark, prices for metal products and ore in the global market are gradually recovering as worldwide suppliers are making statements regarding decrease in extraction. Thus, because of delay in launch of autonomous trains the Anglo-Australian mining company Rio Tinto decided to cut production at its iron ore mines in Australia by 6% in 2017. It was followed by BHP Billiton’s statement regarding contraction of its production plan for extraction of iron ore in Western Australia by 4% in this financial year.
The existing conditions are favorable for Russian exports. Growing global prices due to closure of unprofitable mines in China as well as cutback of production by largest mining companies allow Russian suppliers to maintain export freight flow at the current high level.
Grain and milled products: High level of exports to remain same at least until end of 2015/2016 season
In March loading of grain and milled products within Russian Railways network grew by 26.7% YoY to 1.9 million tons. A total of 5 million tons of grain, up 7.8% on a year above, have been shipped by railway from the beginning of 2016.
In March national freight traffic improved by 5% and exports by 43%. Exports were boosted by shipment to Egypt (volume increased eight-fold compared with March 2015), still the largest consumer of Russian grain.
As Russia’s Ministry of Agriculture Alexander Tkachev estimates, exports of Russian grain in this cropping year will remain the same as a year before and will amount to about 33 million tons. With this, it is not planned to change export fee arrangement until the new harvest.
According to Rosstat’s data as of April 1, grain reserves at all plants exceed those recorded a year before by only 0.6 million tons. However, companies plan to keep on enhancing exports. Thus, this year in the Zabaykal Region construction of a terminal point for exports of grain, legume, and oil crops to China with annual capacity of up to 7.5 million tons by 2025 is planned. The terminal point is to be launched in 2017 already, with traffic volume of about 900,000 tons/year.
According to Head of Federal Service for Hydrometeorology and Environmental Monitoring Alexander Frolov, warm winters favor agriculture, which may escalate crop yield by 8-12% this year.
Thus, the current high level of grain shipment is forecast to linger.
Chemical and mineral fertilizers: record-breaking level of shipping remaining
In March loading of fertilizers within Russian Railways network increased by 6.7% YoY to 4.8 million tons once again breaking a record for this month within the past 10 years. A total of 13.7 million tons of fertilizers, up 5.7% on a year before, have been shipped by railway since the beginning of the year.
Loading grew thanks to a 9% increase in internal shipment and a 2% improvement of export freight traffic. Ukraine boosted supplies of fertilizers from Russia by 60%, the USA by 30%. The UAE started importing Russian fertilizers this year as well.
According to Russia’s Ministry of Agriculture, demand for mineral fertilizers by Russian agricultural producers increased by 20% YoY within the period from January 1 to April 11 2016.
As Head of Russia’s Ministry of Agriculture Alexander Tkachev says, producers of fertilizers will cut prices for their most popular products by 10% in order to maintain internal demand at the required level.
Export traffic may go down because of decrease in products imported by China that accumulated abundant stocks of fertilizers.
In the short run, shipping of mineral fertilizers will remain at the current high level following consistent demand in the domestic market and strengthening of new export flows that are actively developed to compensate for decrease in demand from China.
Experts expecting surplus of gondolas to stop in May, stabilization may be accelerated by “Hurricane”
Data regarding sales of rolling stock are taken from Rolling Stock Market magazine.
In March, CIS freight car builders reduced its sales to 2,157 freight cars, which is 26% below a year before and 8% down on a month before.
Drop of sales of type freight cars fitted with 18-100 bogie and its equivalents totaled 20% compared with March 2015.
This March a record-breaking amount of rolling stock, i.e. 18,100 freight cars, was discarded where gondolas accounted for 10,900.
Defective fleet totaled about 106,600 freight cars as of late March. Rolling stock suitable for commercial shipping within Russian Railways network amounted to about 1,016,000 freight cars. Actual surplus of the fleet reduced to 103,000 freight cars where gondolas accounted for 25,000.
Experts forecast lack of rolling stock and suggest that operators should receive extra support. According to Sberbank survey, railway transportation market may change in 2017. If conditions are now mainly dictated by buyers of services, the situation will change next year. In particular, in May-October 2016 the seasonal deficit may arise in the amount of 10,000 – 15,000 gondolas.
The situation may be bolstered by accelerated consolidation of the fleet. Analytical Center for the Government of the Russian Federation has submitted the analyzed plan for consolidation of gondola fleet (200,000 pcs.) developed by State Transport Leasing Company (GTLK) to Operator and Consumer Councils for Russian Railways. As the Analytical Center forecast, eventually freight car fleet will be decreasing and freight turnover will be growing. In 2016, it will go up by 1%. As a result, lease rate for type gondola will mount from the current RUB 550-650/day to RUB 1,100/day (with VAT) by the end of the year. This will allow the consolidated operator to undertake management of debt owed to leasing companies for leased or purchased gondolas (RUB 340 billion as of today).
At the same time, Pipe Freight Company (TGK) has purchased subdivisions of RailTransHolding that manage VEB-Leasing freight cars. As TGK owner specified, the number of freight cars is 37,000. Moreover, the company is also planning to acquire UVZ-Logistic. According to calculations of Infoline-Analitika, as the result of these transactions TGK fleet will reach 81,500 freight cars. By this parameter, the company will become third in the country following Freight One and Federal Freight.
However, FAS has already warned that it may contest the transaction on consolidation of freight car fleet. FAS thinks it necessary to introduce the question regarding “practicability and appropriateness of consolidation of freight car fleet” for discussion with the governmental transport committee. Moreover, the service points out that the rise in price does not oppose the government’s line preventing increase in load for shippers.
In accordance with transport machine building support program for 2016, as expected, rules for granting subsidies to buyers of innovation freight cars (up to RUB 7 billion) and their producers (up to RUB 3 billion) will be adopted soon.
The new generation freight car segment is stable, practically 100% of gondolas produced in Russia in March were fitted with bogie with improved axle load. Operation of new generation freight cars is still showing high traffic efficiency. According to statistics regarding use of fleet fitted with Barber bogie, in March, average freight turnover totaled about 520,000 tons-km per one gondola with increased axle load and 248,000 tons-km per one type gondola.
Leysana Korobeynikova, Senior Analyst
