Overview of the Russian Railway Market in March-April 2018
March: increased freight handling due to explosive growth in coal shipments
In March 2018, the growth of freight traffic continued, the freight handling amounting to 112.4 million tonnes (+3.1% year-on-year), and the freight turnover to 224.2 billion t-km (+3.1%).
The traffic is growing for export-oriented freights such as сoal (+8.1%), ferrous metals (+14.3%), timber freights (+4.9%), fertilizers (+8.2%), and grain (+44.4%).
There was a decline in the shipments of construction freights (-7.1%), iron and manganese ores (-1.0%), cement (-14.3%), non-ferrous metal ore (-5.6%), scrap (-9.1%), and charred coal (-10.0%).
Coal: the highest loading figures in 15 years
Coal loading in March went up 8.1% on last year, amounting to 33.5 million tonnes and thus setting up an absolute record for the last 15 years. Year-to-date, 94.3 million tonnes of coal have been shipped by rail, showing a 3.6% increase compared with the same period of 2017.
In March, both domestic and export shipments went up, having grown by 6% and 8%, respectively. Poland registered the most significant growth in consumption of Russian coal, with the consumption volumes increasing two-fold compared to last year (over 1.1 million tonnes in March). Polish imports are likely to continue at the current high level. According to Polish Energy Policy 2050, old 12-gigawatt power plants will be decommissioned by 2030. At the same time, plans for either modernizing or building coal-fired power plants (CFPPs), with a total capacity of 11.9 gigawatts, are underway, i.e. the decommissioned plants will be replaced with new ones.
Japan ranks second in terms of the growth in supply of Russian coal, with a consumption volume of approximately 4 million tonnes (+15% by March, 2017). According to experts, over the last five years, the economy of Japan has become significantly more dependent on coal power generation, which currently accounts for more than 18% of its needs, while the national development strategy intends for the construction of new coal-fired power plants with a total capacity of approximately 17 gigawatts.
In addition, the highest rise in coal exports to Ukraine for the last 6 years has been registered, with volumes exceeding 1 million tonnes (+75% on last year). According to the Ministry of Energy and Coal Industry of Ukraine, one of the reasons for this growth is the abnormally cold winter and the coldest March in the last few years. As a result, coal consumption in Ukraine increased, and they had to purchase more of it.
In the medium term, coal loading will continue to grow on account of increased export supplies.
Crude oil and refined products: loading at last year's levels
In March, the loading of crude oil and its products remained at the previous year level and amounted to 20.7 million tonnes. Year-to-date, 60.2 million tonnes of crude oil and refined products have been shipped by rail, demonstrating a 1.7% decrease compared with the same period of 2017.
Loading of crude oil and refined products was supported by growing supplies to Belarus (+65%) and China (+20%), with a 100- to 200- thousand ton increase in supplies to these countries.
In early March, a 30% discount, valid until the end of 2018, on country-wide transportation of all freight types to the southern regions of Kyrgyzstan and back by Railways of Uzbekistan, was announced. As a result, an increase in refined product exports to Kyrgyzstan may be expected, in fact a year-on-year 25% increase was observed as early as in March.
In the medium term, the loading of crude oil and refined products will decrease; however, the rate of decline will depend upon government control and changes in export logistics.
Construction freights and cement: short-term drop in loading amid a general revival of the industry
In March, the loading of construction freights was down by 7.1% year-on-year to reach 10.5 million tonnes, while cement loading decreased by 14.3% to reach 1.8 million tonnes. Year-to-date, 28.7 million tonnes of construction freights and 4.5 million tonnes of cement have been shipped by rail, showing a 3% and a 2.5% decrease respectively, compared with the same period of 2017.
The construction industry is recovering gradually; in March 2018, according to the Russian Federal State Statistics Service (Rosstat), 5.5 million sq. m of housing were commissioned in the Russian Federation of, which is 11.3% above the figures for February 2017, while the growth year-to-date is 19.6%.
Reduction in mortgage rates has led to an increase in the number of mortgage loans. The value of mortgage loans granted in the 1st quarter of 2018 reached a total of 600 billion rubles, demonstrating an 85% increase compared with the same period of 2017.
Plans for major infrastructure projects are underway. Early in March, Russian Prime Minister Dmitry Medvedev signed an order to increase the registered capital of RZD by 25.9 billion rubles. The funding was increased to facilitate implementation of major investment projects to develop the railway infrastructure for common use. These projects include the development of the Moscow transport system; an integrated repairs of Maxim Gorky – Kotelnikovo – Tikhoretskaya – Krymskaya and Krasnodar hub bypass track section; the construction of Moscow – Kazan high-speed railway line, and the integrated development of Mezhdurechensk – Taishet line of Krasnoyarsk Railway.
In the medium term, the revival of the construction industry might stipulate an increase in shipments of construction freights and cement, and there is a considerable potential for further growth in this segment.
Ferrous metals: the highest loading figures in 10 Years
February saw ferrous metals loading increase by 14.3% to reach last year level, reaching 7.2 million tonnes and setting a 10-year record for this month. Year-to-date, 19.8 million tonnes of ferrous metals have been shipped by rail, which is a 10.8% increase compared with the same period of 2017.
The shipments increased both for domestic and foreign routes. The Russian market has shown growth in the consumption of sheet steel (+20%), cast iron (hardly any shipments at all made in March of last year), large diameter steel pipes (+65%), and slabs (+6%). Severstal still expects a 2.6% increase in the demand for steel in 2018, following GDP growth and the recovery of the Russian economy.
Poland registered a rise in exports (hardly any shipments made last year), USA (+ 75%), and Italy (1.5-fold). However, due to the tariffs introduced at the end of March, exports to the United States might decrease soon. According to Evraz, the effect of the duties has been somewhat offset by the growth of demand for steel in the U.S. market as the consumers hurried to replenish stocks out of concern for a possible complete termination of imports. However, Evraz management hopes that its products will be excluded from the list of companies targeted by the tariffs. Thus the American branch of Evraz has filed the required application in accordance with the existing special procedure in the United States.
In the medium term, shipments of ferrous metals by rail will grow due to the recovery of domestic demand and the development of export.
Ore: redirecting towards the domestic market continues
In March, ore loading amounted to 9.5 million tonnes, which is 1.0% lower than the previous year levels. Year-to-date, 27.2 million tonnes of ore have been shipped by rail, which is a 2.5% increase compared with the same period of 2017.
Domestic shipments rose almost 10%, while the export ones fell by more than 40%. The exports to China declined (two-fold as compared to last year), and those to Poland fell to minimum levels. Growth in domestic shipments is attributable to an increased consumption of ore for smelting of steel in Russia.
In the medium-term, multi-directional shipping trends are expected due to increases in smelting by metallurgy companies.
Timber freights: moderate growth amid the industry growth
In March, loading of timber freights rose by 4.9% to previous year levels and totaled 4.3 million tonnes. Year-to-date, 11.4 million tonnes of timber freights have been shipped by rail, which is a 5.4% increase compared with the same period of 2017.
Domestic shipments have increased by 10%, while exports have grown only by 5%, mainly due to the growing traffic to China.
According to Alexander Derkach, Deputy CEO at CJSC Eurosib SPb Transport Systems, the loading of timber freights is expected to grow by 10% annually. The reason is the modernisation of many domestic timber processing enterprises, along with the commissioning of new plywood, and pulp and paper mills.
The increase in on-site wood processing will be facilitated by the gradual rise in export duties on round timber from the current values of 25% to 80% in 2021, while the value added wood processing plants will enjoy duties of only 6.5%.
The Far East Region is actively preparing for an increase in duties. Thus, for instance, the company, RFP Group, has built two plants for producing plywood veneer sheets and sawn timber in Amursk and is starting the construction of a wood fuel pellet manufacturing facility.
The full forestry potential of the Far East remains untapped. The authorities of Yakutia are currently working on a new roadmap for development. As estimated by the Ministry of Industry and Geology of Yakutia, implementation of this plan will allow for a lumber harvest increase from the current 176 thousand cubic meters to 800 thousand cubic meters per year by 2020, as well as streamlining of sawn timber production.
In the medium term, loading of timber freights by rail will grow due to the development of the timber industry of Russia.
Grain and grain mill products: growth continues
In March, grain loading stood at 2.6 million tonnes (+44.4% as compared to March 2017). Year-to-date, 7.1 million tonnes of grain have been shipped by rail, which is a 42.1% increase compared with the same period of 2017.
Domestic shipments have risen by 8%, while exports by 60% as a result of doubled shipments to Egypt and Bangladesh, as well as to Mongolia (hardly any shipments made last year).
According to the data provided by the analytical centre, Rusagrotrans, in July 2017 ─ April 2018, the export of Russian grain by rail will reach 15.3 million tonnes, exceeding the combined last season volumes by 4.5 million tonnes. Record-high deliveries are being noted even at the end of the season. The reason is that wheat prices have grown to $215, which is $30 higher than last year.
A bountiful harvest is forecasted for the next season. According to the International Grains Council, it will amount to approximately 117.8 million tonnes. In addition, reports from the middle of April stated that the government was going to support the suggestion made by the Ministry of Agriculture of the Russian Federation (Minselkhoz) to continue to apply zero duty rates on grain exports for at least two more years.
Significant carryover stocks of the current season along with the bountiful prospective harvest, and zero duty rates for the next 2 years will contribute to the growth of exports, and, therefore, to an increase in grain shipments by rail.
Chemical and mineral fertilizers: growth due to domestic demand
In March, the loading of fertilizers amounted to 5.3 million tonnes (+8.2% year-on-year), setting yet another record for this month. Year-to-date, nearly 15.3 million tonnes of fertilizers have been shipped by rail, which is a 6.5% increase compared with the same period of 2017. It should be noted that the increase was registered mainly on domestic routes, while the exports remained at the previous year levels.
The most noticeable export growth was noted for Brazil (+15%), as well as Syria, whereas no shipments were made there in the previous years.
In April, Prime Minister Dmitry Medvedev approved a roadmap for development of mineral fertilizers production in Russia by 2025. The implementation of this plan will allow for an increase in production volumes of mineral fertilizers by 7.3 million tonnes to the levels reached in 2016; a 4% growth in export share, as well as a higher consumption of mineral fertilizers by farmers. By June this year, Minselkhoz and Minpromtorg (the Ministry of Industry and Trade of the Russian Federation) are to develop a medium-term forecast plan for the introduction of fertilizers in every region by 2025.
In the medium term, in the midst of increasing volumes of fertilizer used by Russian farmers, along with a stable export traffic flow, further growth of fertilizer shipments by rail can be expected.
Specialization of the fleet is improving: the one, who buys, takes a ride
The data on rolling stock sales and leasing rates are sourced from the Rynok Podvizhnogo Sostava (Rolling Stock Market) journal.
The commercially feasible fleet has grown to 1,024 thousand units, whereas the unserviceable fleet has remained at a minimum of approximately 54 thousand units at the beginning of March 2018—. As a result, the fleet surplus totaled 60 thousand units, and the surplus of gondolas saw a seasonal rise, although not above 1.3% of the fleet.
In March, car sales by CIS factories totaled 6.9 thousand units, which is 13% higher than March 2017 results (6.1 thousand units). In the meantime, only 2.5 thousand railcars have been disposed of.
As of the beginning of April, the fleet of new generation cars supplied by different manufacturers has reached 102 thousand cars.
Gondola cars: growth of coal exports as a driver of demand
The registered fleet of gondola cars on the RZD network has reached 495 thousand units, exceeding that of March last year by 4%. The growth in demand was driven by coal exports, with a 7% increase of its shipments in gondola cars.
It should be mentioned that their manufacturing exceeds disposal by far. In March, gondola car sales by CIS factories totaled 4.4 thousand units, whereas only 0.5 thousand gondola cars were disposed of.
In April, the leasing rates for gondola cars remained at the same level of RUB 1,650 per day as in March, making. A correction in rates is expected in the near future, following a gradual saturation of the market with new rolling stock.
Hoppers: grain cars are for grain, while bulk cement cars are still for shipping fertilizers
Within one year, the registered fleet of grain cars has grown by 1.5 thousand cars, while the number of mineral hoppers and bulk cement cars has decreased by 0.8 thousand and 1.3 thousand units, respectively.
The grain car fleet, formerly involved in transporting ancillary freights, is gradually returning to its specialization, with the grain freight turnover shipped in grain cars increasing by 60%.
As a number of cement shippers have switched to shipping mineral fertilizers, the fertilizer freight turnover shipped in cement hoppers has nearly doubled.
An active growth in the freight base, amid fleet disposal, has fueled the demand for hoppers, with the average monthly hopper production of approximately 600 units by CIS manufacturers in 2018. It should be noted that the total production capacity of hopper manufacturing facilities in Russia in 2018 will exceed 10 thousand units, which is sufficient to meet the demand taking into account fleet disposal and freight base growth.
Flat cars: emphasis on timber and containers
The fleet of timber transportation flat cars and fitting flat cars on the RZD network has grown by 2.8 thousand and 3.8 thousand units, respectively. The turnover of timber freights has increased by 20%, and that of containers on flat cars by 2.3%.
As a result of the growing freight base, production of flat cars by Russian manufacturers has increased by 45% to 1.3 thousand units by March 2017.
Leysana Korobeynikova, Head of Analysis
