Overview of the Russian Railway Market in May-June 2016
Loading keeps growing
In May 2016, loading within Russian Railways network grew by 3.1% YoY to 102.9 million tons.
Traffic of most cargoes increased as compared with the volume posted last year: of coal by 3.5%, of construction materials by 19.6%, of iron ore by 10.1%, of ferrous metal by 1.7%, of wood products by 18.8%, and of ferrous metal scrap by 15.4%. Traffic of grain, nonferrous metal ore and coke remained at the level of the previous year. Loading of oil and oil products decreased by 10.8%, of cement by 3.6%. Meanwhile decrease of oil traffic is brought about by both refocus to pipeline transportation (oil extraction grew by almost 3.3% in January-May) and cutback of oil processing.
Apart from traffic of oil and oil products, total loading mounted by an average of 5-6.5% YoY for the past 4 months.
Freight turnover totaled 195.5 billion tons*km (+3.0%) in May 2016, a record-breaking value for this month within the past 15 years.
Coal: another record-breaking loading
In May, loading of coal within Russian Railways network grew by 3.5% YoY to 26.7 million tons once again setting record in traffic for this month for the past 15 years. A total of 136.5 million tons of coal, 3.9% above a year before, have been shipped by railway since the beginning of 2016.
In May, coal extraction was up 5.5% on a year before according to Russia’s Ministry of Energy and up 6.1% according to Rosstat.
In May, internal traffic increased by 8.3% YoY and exports by 2.9%. Freight turnover advanced 2.6-fold to China, 1.7-fold to Ukraine, by 40% to South Korea, and to India (supplies were almost null last year).
Experts believe that growth of exports of Russian coal to China is partially preconditioned by increase of global prices for coal. As of early June 2016, increase of global prices as compared with December 2015 totaled 5-10% (depending on the region). In such conditions, exports from Russia seem more agreeable. Exports of Russian coal to China escalated to compensate for supplies of anthracite from Democratic People’s Republic of Korea imports from which have been banned from April 2016.
According to May forecast of Russia’s Ministry of Economic Development, coal extraction will grow by 0.8% YoY in 2016, internal consumption of coal by 0.7%, and exports by 1.3%.
In the mid-run, coal traffic will remain at the current high level.
Oil and oil products: drop continues
In May loading of oil and oil products within Russian Railways network contracted by 10.8% YoY to 18.1 million tons. A total of 97.8 million tons of oil cargoes, a 8.5% below a year before, have been dispatched by railway since early 2016.
In May oil extraction was up 1.1% on a year before according to Russia’s Ministry of Energy and up 1.2% on a year before according to Rosstat.
In May internal traffic of oil and oil products dropped by 6% YoY and exports by 18%. The drop was again mainly due to the transit through the Netherlands where supplies declined by one-third as compared with 2015. In addition, export cargo traffic decreased to Belarus (two-fold) and to Turkey (exports to the country almost stopped). Exports mounted by 14% to Italy, 1.9-fold to South Korea, and 2.3-fold to Latvia.
According to May forecast of Russia’s Ministry of Economic Development, oil extraction as per target-oriented scenario will go up by 0.9% YoY from 533.2 million tons in 2015 to 538 million tons in 2016, and oil supplies to Russian oil refineries will slightly go down, a 0.4% below a year before).
In 2016 new pipelines for both oil and oil products are planned to start operation. First, the first stage of construction of trunk pipeline Zapolyarye – Purpe capable to transport 32 million tons of oil per year should be mentioned. Another critical project is construction of Kuyumba - Taishet oil pipeline with maximum flow rate of 8.6 million tons of oil per year to be completed in H2 2016.
This year it is also planned to implement the first stage of the project on increase of supplies of diesel fuel to be exported in the direction to Primorsk port. Thanks to the project, supplies are to increase from 8.5 to 15 million tons per year.
It is forecast that railway transportation of oil and oil products will remain at the current low level because of unfavorable conditions in the global markets and launch of new pipelines.
Construction cargoes and cement: recovery still ongoing thanks to infrastructure facilities
In May loading of construction cargoes within Russian Railways network mounted by 19.6% YoY to 13.4 million tons. Meanwhile, loading of cement declined by 3.6% to 2.7 million tons. A total of 55 million tons of construction cargoes and 9.7 million tons of cement, up 21.3% and down 6.8% on a year before, have been dispatched by railway since early 2016.
In May transportation of construction materials improved by 65% YoY to the Tyumen Region, 2.2-fold to the Novgorod Region, 2-fold to the Orenburg Region, 1.5-fold to the Saratov Region, and 2-fold to the Belgorod Region.
Mortgage loans climbed four-fold in Russia for four months of 2016 as compared with the same period last year. According to Russia’s Minister of Construction, Housing and Utilities Mikhail Men, it is mainly boosted by prolongation of governmental program regarding mortgage interest rate subsidization until January 1, 2017. However, this decision has had no impact on new housing volume yet.
Russia’s Ministry of Transport plans to improve construction of federal roads in 2018-2020. As soon as Russia’s economy started posting crisis conditions, construction of highways began to decrease. Thus, in 2015 only 422 km of roads were built instead of originally planned 652.5 km. This was brought about by the fact that in 2015 the relevant budget contracted from RUB 129 billion to RUB 93.3 billion and by over-fulfillment of the plan by 47.5 km in 2014. According to the new version of the project, it is planned to build and reconstruct 360.3 km of federal highways instead of 734.2 km planned in 2013.
As Russia’s Ministry of Transport forecasts, low activity will continue for three years, but afterwards the industry will post a great improvement. In 2018, road construction will advance three-fold as compared with a year before and almost two-fold in 2020.
Thus, transportation of construction materials are still boosted by government-supported projects. 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: exports still low notwithstanding growth of global prices
In May loading of ferrous metals within Russian Railways network eased up by 1.7% YoY to 6.1 million tons. A total of 29.9 million tons of ferrous metals, down 2.1% on a year before, have been dispatched by railway since early 2016.
In May internal freight traffic firmed by 1% YoY as exports drifted by 6%. Traffic still posted growth to Italy (13-fold), Spain (four-fold), and Egypt (supplies were practically null last year). Turkey is still receiving a part of ferrous metal exports (about half of exports last year in spite of existing sanctions).
According to Rosstat, steel production crept up by 0.4% in May, rolled ferrous metal production by 1.6%.
Since the beginning of the year, global prices for ferrous metals have moved up by 25%. Experts believe the growth was brought about by restraints of imports of Chinese and Russian metal products introduced by some countries.
According to May evaluation made by Russia’s Ministry of Economic Development, in 2016 production of ferrous metals is not expected to increase and the industry is forecast to start recovering from 2017 with growth rate +1-3%. Meanwhile, exports of steel products in 2016 will slightly mount and internal consumption will contract by 10%.
Further increase in exports of ferrous metal from Russia is hindered by existing restrictions imposed by the EU notwithstanding growth of global prices for steel and contraction of internal demand for ferrous metals.
Iron and manganese ore: record-breaking loading
In May, loading of ore within Russian Railways network rose by 10.1% YoY to 9.8 million tons setting a record in transportation for this month for the past 15 years. A total of 45.7 million tons of ore, up 0.8% on a year before, have been dispatched by railway since early 2016.
According to Rosstat, ore extraction in May took off by 3.2%.
In May, internal transportation advanced by 5% YoY and exports by 25%. Exports mainly moved up to China (two-fold), to Finland (three-fold), and to Italy, which did not export last year.
In the existing conditions, it is probable that export traffic of iron ore should tick up because of stabilization of prices for the resource and introduction of new limitations for Russian exports of ferrous metals. Such conditions may lead to purchase of additional volumes of iron ore abroad.
Grain and milled products: in anticipation of new harvest
In May, loading of grain and milled products within Russian Railways network amounted to 1.0 million tons. Before an upcoming harvest, grain traffic still posts low season. A total of 7.6 million tons of grain, up 12% on a year before, have been shipped by railway since early 2016.
In May, internal transportation increased by 8% YoY and exports by 7%. Exports mainly moved up to Azerbaijan (two-fold) and Mongolia (supplies were practically null last year).
According to report of the US Department of Agriculture, Russia became the world’s top exporter of wheat. As of June 10, Russia exported 24.5 million tons, Canada 22.5 million tons and the USA 21.09 million tons. In total, based on data provided by Russia’s Ministry of Agriculture, grain exports escalated by 12.3% to 33.0 million tons from July 1, 2015, till June 8, 2016.
The Ministry raised its 2016-grain harvest forecast to 106 million tons, which is close to the 2008 record-breaking harvest of 108.1 million tons.
Therefore, traffic of grain cargoes is expected to remain at the same high level.
Chemical and mineral fertilizers: transportation still at record-breaking level
In May, loading of fertilizers within Russian Railways network remained high, at record-breaking level for the past 15 years, and amounted to 4.2 million tons. A total of 22.2 million tons of fertilizers, up 4.1% on a year before, have been dispatched by railway since the beginning of 2016.
In May, internal transportation rose by 7% YoY while exports dried up by 6%. Exports mainly dropped to China (by 16%), Switzerland (by 33%) and Syria (two-fold). The USA boosted imports of Russian fertilizers 1.5-fold, Brazil by 14%, and the United Arab Emirates (supplies were null last year).
According to Russia’s Ministry of Agriculture, within the period from January 1 till May 23, 2016, farmers purchased 1.6 million tons of active ingredient of mineral fertilizers, which is by 219,900 tons or by 17% more than in the same period last year. Accumulated stock of mineral fertilizers including that remaining from the last year amount to 1.9 million tons, which is by 272,600 tons more than in the same period last year.
Despite decrease in export traffic in May, it is too early to say that it will be a long-term trend. In the mid-run, transportation of mineral fertilizers will still be at the existing high level due to increased demand by domestic farmers and favorable conditions for Russian companies in the global market.
Market standing still in anticipation of equilibrium of railcar fleet
Data regarding sales of rolling stock are taken from Rolling Stock Market magazine.
In May 2016, the CIS plants sold 2,815 freight cars, which is 39% above a year before and 34% above a month before. Sales mounted by 38% YoY among type freight cars fitted with 18-100 bogie or its equivalents (mostly thanks to rolling stock required by Russian Railways, i.e. flatcars for transportation of packages of rail lengths and hopper-cars) and by 40% among new generation freight cars.
The new generation freight car segment is stable: 100% of gondolas produced in May were innovation ones. Operation of new generation freight cars is still highly efficient. According to statistical data regarding usage of fleet fitted with Barber bogie as of May 2016, an average freight turnover totaled about 511,000 ton-km per one gondola with increased axle load (110% higher as compared with type freight cars).
Discarding in May was still high amounting to 9,400 freight cars where gondolas accounted for 4,300 and freight cars with service life expiring within the period of H2 2016 – 2020 for 2,300. It means the trend of acceleration of fleet discarding is strengthening. Total discarding for first five months of 2016 advanced 1.8-fold YoY to 56,100 freight cars.
Defective fleet declined to 98,700 freight cars as of late May. Rolling stock suitable for commercial transportation within Russian Railways network dropped for the first time below 1 million freight cars to. 999,000 pcs. An actual surplus of fleet totaled 104,600 pcs where gondolas accounted for 14,000 pcs.
Experts of the National Agency for Financial Studies (NAFI) do not think improbable that railway equipment leasing segment will gradually recover. Recovery rate will depend on discarding rate as well as on market consolidation and transformation of leasing transactions into rental ones. Leasing of railway equipment is forecast to post 21% of total leasing transactions in 2016.
Leysana Korobeynikova, Senior Analyst
