Overview of the Russian Railway Market in May-June 2017
Stability of the positive dynamics
In May 2017, the positive trend emerged at the end of 2016 continued: loading amounted to 106.5 million tons (+3.5% against the same period last year), cargo turnover – 209.6 billion net tons-km (+7.2%).
Key growth drivers were the same: coal transportation (+10.1%), oil and oil products (+2.2%), timber freights (+7.9%), fertilizers (+14.3%) and grain (+40.0%). Indices transportation of construction materials (-6.0%), iron ore (-2.0%), scrap of ferrous metals (-3.3%) and nonferrous ore (-5.3%) fell comparing to the past year.
Coal: Coal companies are planning further output ramp up
The loading of coal in May 2017 set a monthly record and amounted to 29.4 million tons (+10.1% against May last year). Since the beginning of 2017, 149.3 million tons of coal were shipped by rail, which is by 9.4% higher than in the same period of 2016.
Export shipments are still growing: the export growth was 16.5% of the last year. The main consumers, which increased the import of Russian coal, were Turkey (increase by 2.5 times), China (+30%), United Kingdom (+20%), Poland (increase by 2 times), Democratic People’s Republic of Korea (increase by 2.5 times) and Japan (+5%). As in the past, supplies to Ukraine were falling (-30%), while shipments to Cyprus-based companies increased.
As per the latest forecast by RF Ministry of Energy, 2017 will demonstrate the coal output increase by +3.1%, up to 397.7 million tons on a year-on-year- basis, despite stagnation of the domestic consumption.
Due to the growing demand in the world market, the Russian companies have declared the coal output increase. Thus, for example, in June, JSC SUEK-Kuzbass declared the output growth up to 38 million tons this year compared to the previously stated planned decline up to 35.9 million tons, and the next year the company is planning to launch the largest underground mining enterprise in Russia of 11 million tons capacity.
In 2017 Elga Coal, a part of Mechel Group, intends to increase the output by 21%, up to 4.5 million tons, at the Elga deposit in Yakutia – one of the world’s largest deposits of high-quality coking coal. The coking coal covers the larger segment of products (about 75%), the rest belongs to the energy segment.
The transport infrastructure is developing simultaneously with the mining capacities. Khakasia Ministry of Transport is closely cooperating under the high-priority logistics project on construction of industrial rail spurs in Kamyshta station vicinity. Currently the funding sources are being negotiated. It is planned to extend the existing station using the Russian Railways investment, one more track will be built. Kamyshta-2 station will be constructed using Temporary Service Department funding, the design documentation development has been completed already.
According to the Head of the Ministry of Transport, now not more than four trains are handled at the station, and in future the train-pair interchange will be increased up to 8-10. The track electrification will allow to minimize shunting operations, it is planned to route the traffic to west-east direction. 480 gondola cars are being shipped according to the unified flow process at Kamyshta station. For the future up to 700 gondola cars are required to remove coal from Khakasia.
The market still retains all the factors for further growth of the Russian coal export.
Oil and oil products: positive trend has continued
In May 2017, oil and oil products shipment increased by 2.2% comparing to the previous year and reaches 18.5 million tons. In total, since the beginning of 2017, 99 million tons of oil and oil products were shipped by rail, which is 1.3% higher than the same period last year.
Export is growing as follows: Poland (increase by 3 times), Belarus (+75%) and China (+40%).
The major loading growth has been due to increased shipments of light naphtha (+25%), fuel oil (+5%) and black oil fuel (exponential growth, almost no supplies last year).
Despite the positive dynamics, we cannot confirm the recovery in the volume of transportation of oil and oil products by rail yet.
Construction materials and cement: no recovery is expected yet, despite the mortgage loan growth
Volumes of construction cargo shipment in May 2017 amounted to 12.6 million tons (-6.0% compared to May of the previous year), cement — 2.7 million tons (the same level as in the previous year). In total, since the beginning of 2017, 52.6 million tons of construction materials and 9.6 million tons of cement were shipped by rail, which is 4.4% and 1.5%, respectively, less compared to the same period last year.
Construction industry activity in the RF tends to decline. According to the Russian Federal State Statistics Service, in May 2017, 4.3 million m2 housing buildings we finished, which is 2% less than the result of the same period last year. Since the beginning of the year, the indicator has fallen by 12.5%.
At the same time, the mortgage loans issued within 5 months of 2017 increased by 11% and exceeded 610 billion rubles. Agency for Housing Mortgage Lending explains the rising trend by significant lowering of rates and improved key macroeconomic parameters. As per Alexander Plutnik, General Director of the Agency, Sberbank and VTB Group inhibited the rate growth, they declared lowering of rates at the key point of the state program closeout. Besides, the Central Bank once again lowered the rate in June (by 0.25 percentage point up to 9%), and the Agency believes that this reduction is not the last this year.
Despite the growing mortgage loans, it is still too early to talk about the construction industry recovery and the trend towards increased construction materials shipments.
Ferrous metals: increased competition on the world market
Ferrous metals shipment in May 2017 amounted to 5.9 million tons (-3.3% compared to May last year). In total 29.8 million tons of ferrous metals were shipped by rail from the beginning of the year, which is 0.4% lower than in the same period last year.
In May the shipments decreased both for domestic and external routes. Exports of Russian ferrous metals decreased as follows: to Italy (-30%), to Spain (-75%) and to Egypt (-60%). Therewith the freight flow to Taiwan is intensively growing – compared to May 2017 the shipments grew nearly 5 times.
According to World Steel Association data, in May 2017, 67 world countries, which submit their statistics information to this international organization, produced 143.3 million tons of steel which is 2% higher compared to the level of the last year.
In China the steelmaking increased by 1.8% – up to 72.3 million tons, which is surprising against the backdrop of declarations made by the national leadership about closure of steelmaking facilities. Within 5 months of 2017 42.4 million tons of steelmaking capacities were abandoned in China, in 2016, 65 million tons of capacities were abandoned, which in total is more than 100 million tons out of 150 million tons Beijing promised to abandon in 5 years. Against slowdown in export (more than by a quarter in May against the same period last year), and lack of visible signs of accumulated stock reserve, the experts believe that China won’t be able to keep consuming steel in such significant quantities for a long time, which will result in decreased world market demand.
The world market competition is intensifying. End April, Donald Trump, USA President, ordered to start studies on the steel import impact on the national security. Soon the study results will be released and Washington, probably, will introduce new duties or quotas in this domain. The European Union has announced intention to take counter measures in case the USA imposes restrictions on European steel imports. End June the European Commission initiated anti-dumping investigation related to supplies of low-carbon ferrochrome from China, Russia and Turkey based on the claim by Elektrowerk Weisweiler German factory the only European manufacturer of these products.
Against the underperformance of the construction industry in the Russian Federation and as well as competition escalation in the external markets, further decrease of in ferrous metals shipments is probable.
Iron and manganese ore: China renounced Russian ore supplies to support shipment from DPRK
The ore shipment in May 2017 amounted to 9.6 million tons (-2.0% compared to May of the previous year). In total, 45.2 million tons of ore were supplied since the beginning of the year, which is 1.1% lower than the same period last year.
Domestic shipments increased by 6%, and exports decreased by one-third comparing to the previous year. The main drop in exports was seen in China (-70%) and Turkey (decrease by two times). In addition, supplies to Ukraine stopped.
After the United Nations, late last year had clamped restrictions on import of Korean coal, which used to be the DPRK main export product, Pyongyang increased iron ore exports to cover the foreign currency shortage. As a result, China decreased the supplies from Russia, having relied on the ore from the DPRK and having ramped up supplies from the Northern Korea by 4.5 times compared to the last year.
Decreased supplies to the Ukraine are attributed to the crisis situation in the Ukrainian metal industry, due to which 10 top largest global manufacturers left the country. As per the Ministry of Metal Industry of the Ukraine in January-May 2017, the steel output decreased by 18% (8.7 million tons), rolled stock – by 20% (7.5 million tons), pig iron production – by 22%, coke – by 25% (up to 4.2 million tons) compared to the same period in 2016.
In the mid-run, increase of ore shipment by rail is expected amid decreased smelting by RF plants and as new export logistics scheme is being established.
Timber freights: wooden house construction will get budgetary support
Shipment of timber freights in May 2017 amounted to 4.1 million tons (+7.9% compared to May last year). Since the beginning of the year, 19.1 million tons of timber freights were shipped, 4.3% more comparing to the same period last year.
Domestic shipments increased by 15%, while exports – by 5%. The exports increase is still owes it to China: shipments there grew by 10% compared to last year. Besides, exports to Kazakhstan grew by 40%.
Heads of the Ministry of Finance and Ministry of Industry and Trade have agreed to prepare additional conditions on implementing the wooden housing construction. In particular, up to 30% of social and cultural facilities under construction which are funded through the federal budget will be built of these materials. It is also expected to incorporate changes to the rules on providing and distribution of federal subsidies to the federal subjects in case buildings and structures are constructed using Industrial wooden housing methods.
Under current conditions the rail shipments of timber freights are expected to grow.
Grain and grinding products: Turkey will save the Russian export
Shipment of grain in May 2017 was amounted to 1.4 million tons (+40.0% compared to May last year). Since the beginning of the year, 8.1 million tons of grain have been shipped by rail, which is 6.2% higher than in the same period last year.
Domestic shipments increased by nearly 20%, while exports grew by about 50%. Import of Russian grain was increased by Egypt (three times), Turkey (hardly any supplies were accomplished last year) and Azerbaijan (two times).
The export grew against increased grain prices in the world market. Summer wheat sowing conditions in the USA became the major market growth driver. The statistics service at the US Department of Agriculture (NASS) as of June 11, leveled down the portion of sowing area being in good/excellent condition straight by 10 percentage points, up to 45%. It has become quite a surprise for the market that expected decline by 2 percentage points on the average and also the worst value since 2006.
Early June, SovEcon analytical center reported that Egypt could again establish the zero ergot content for imported grain. However, this factor won’t have significant impact on the grain export volumes. According to the data provided by Igor Pavensky, Director of Strategic Marketing Department of Rusagrotrans CJSC, in June Turkey might become the leader among the Russian grain buyers, displacing Egypt from the first place.
Late June, the roadstead grain transshipping practically stopped due to intensified maintenance checkoffs with regard to river-sea navigation vessels on behalf of the dock supervisory services at the Azov Sea shallow-water ports. As per I. Pavensky the export problems may occur early new farming year, as the Kavkaz port won’t be able to handle transshipping redirected from the Kerch Straight.
However, sooner or later, the market will adjust to these conditions and roadstead transshipping will be redirected between the Kavkaz port and “deep water”. About 14 million tons of grain per year are exported by low water, 7 million tons of which account for roadstead transshipping: 4 million tons for Kerch Straight, 3 million tons for the Kavkaz port, which can take no more than 30% of the Kerch volumes. As a result, the remaining part is attributed to deep water ports. As per the expert assessment not only the competitiveness of deep water terminals will increase, but grain rail shipments as well, since the railway will mainly serve to deliver grain to deep water ports.
Chemical and mineral fertilizers: Ukrainian farmers call for abolishing customs duties for Russian fertilizers
Fertilizers shipment in May 2017 amounted to 4.8 million tons (+14.3% compared to May last year). In total, 23.8 million tons of fertilizers were shipped by rail from the beginning of the year, which is 7.0% higher than in the same period last year.
Therewith domestic shipments have increased by 17%, and growth in exports comparing to the previous year amounted to 10%. Russian fertilizer exports increased by 4 times in the Ukraine, in China (+20%) and in Finland (3 times). However, supplies to the Ukraine have decreased by 11% compared to the previous month, probably, due to the duties introduced mid-May.
Late June, All-Ukrainian Agricultural Rada appealed to Kiev County Administrative Court asking to cancel decisions made by Interdepartmental Commission for International Trade on application of antidumping duties for carbamide and carbamide-ammonium mixture from the Russian Federation. The statement notes that this decision is illegal since it does not consider the interests of Ukrainian farmers – national consumers of the products.
In the short term, the export of mineral fertilizers to the Ukraine is likely to be reduced, but it may be improved by supplies to other countries.
Gondola car rates have stabilized
Data on rolling stock sales and rental rates is provided the magazine Rynok Podvizhnogo Sostava ("The Rolling Stock Market").
In May 2017, the sales of cars by CIS plants amounted to 3.8 thousand units (2.5 thousand units — gondola cars), which is 37% higher than the results of May 2016 (2.8 thousand units), but lower by 31% than the level of the previous month.
Demand for gondola cars corresponds to write-off level: 2.3. thousand units of gondola cars were written off in May. In total 6.3 thousand units of rolling stock were written off.
Rolling stock suitable for commercial transportation amounts to 990 thousand units. At the beginning of June, the detective fleet is 70.8 thousand units (minimal level since 2014), the surplus is 72 thousand units (among them gondola cars — only 2 thousand units).
In June gondola car rent rates remained within the previous range – 1,300-1,400 Rub/day. The players in the market expect that July rent cost for gondola cars to be stable.
Leysana Korobeynikova, Senior Analyst
