Overview of the Russian Railway Market in November-December 2016
Local shortage of gondolas for coal ended due to the reduction of construction freight traffic
In November 2016 the loading on RZD network amounted to 102.2 mln t (-0.9% compared to the same period last year).
Local shortage of gondolas is over. Construction freight traffic decrease (-11.2% compared to last year’s level, - 20.8% to October) allowed to redirect rolling stock for coal transportation. Coal loading’s lagging behind compared to last year stopped – loading compared to November 2015 increased by 0.7% and set a new record for the last 15 years for this month.
Oil (-3.8%) and cement (-5.6%) transportation continued to decrease. Transportations of export-oriented freights increased: of ferrous metals (+8.9%), timber freight (+13.8%), fertilizers (+9.3%) and coke (+25%).
Amid export increase freight traffic turnover in November 2016 grew up to 199.1 bln t-km (+0.9%), having set the next record for this month.
Coal will be setting new loading records if enough gondolas are provided
In November 2016 loading of coal on RZD network increased by 0.7% compared to last year’s level and amounted to 29.1 mln t, having set the next record for 15 years for this month. A total of 297.6 mln t of coal was transported by rail since the beginning of 2016, which is by 1.6% higher than the level of 2015.
Domestic coal traffic decreased by almost 12%, while export traffic increased by 11% amid high world prices. Export deliveries still grew to Japan (+20%), China (by 1.5 times), Great Britain (+15%) and EU countries (+7%). The situation for further development of the Russian export in the world market remains favorable. For instance, since the beginning of December until the end of the year China by 60% limited the supply of coal from the Democratic People’s Republic of Korea within the resolution of the UN Security Council. Due to this fact, the supplies of the Russian coal to China is likely to increase to compensate for the dropped out volumes of coal from the Democratic People’s Republic of Korea.
Amid export growth domestic companies plan to significantly increase coal mining due to capacities enhancement. However, due to the stagnation in demand in the domestic market, the new volumes will mainly be for export, which will lead to increased demand for gondolas.
Colmar company plans to increase by 1.5 times (to 5.8 mln t) the production of coal products in 2017. It develops two major Mining and Beneficiation Plants “Denisovsky” and “Inaglinsky” on the territory of Yakutia. Balance reserves of “Colmar” company exceed 1 bln t, most of which are short-supply grades of coking coal of top-quality.
Mechel company develops the priority project of Elga Coal Complex, where it is provided for the increase in coal production from 3.7 mln to 18 mln t by 2020. According to “Mechel”, the field has reserves of 2.2 bln t of coal.
In addition, the work has been going on regarding promising projects of Elegestinsky and Mezhegeysky fields in the Republic of Tuva. Currently the coal in Tuva is transported by road to a railway station, and this is a bottleneck in the logistics chain – it means not more than 2.5 mln t of freights per annum. For the development of the project it is required to construct a railroad Kyzyl – Kuragino which distance is over 400 km; the construction is scheduled to have been completed by 2019, which will allow to multiply increase the export of coal.
On the world market coal prices remain at a high level – 89.5 $/t (CIF ARA). “Mechel” company expects, that the prices will maintain at a current level in the first quarter of 2017.
Growth of domestic coal prices (following world prices) induced “RusHydro” to declare its intention to turn to the authorities of the Russian Federation for them to introduce protective duties on export-oriented grades of coal. According to the company’s representative, “RusHydro” managed to achieve prices growth by about 12% for 2017 during the negotiations with coal suppliers (while in the world markets the growth amounted to +50%), but in the tariffs this growth will be partially taken into account – only by 6-7%.
In the medium term, so far as new coal-mining and railway capacities are commissioned, it is expected that coal transportation will increase, mainly as far as coal export is concerned.
Oil and oil products: doomed to decrease
In November loading of oil and oil products on RZD network increased by 3.8% compared to last year’s level and amounted to 21.0 mln t. A total of 214.3 mln t of oil freights was transported by rail since the beginning of 2016 that is by 6.4% lower than the level of 2015.
Oil production in November was by 3.9% higher than last year’s level, according to the Ministry of Energy of Russia, and by 3.2% according to Rosstat. Primary oil refining increased by 2.8% and by 2.1% respectively.
The drop in rail freight traffic is seen in all directions: domestic freight traffic decreased by 3%, export freight traffic – by 6%. The export to the Netherlands (-8%), to Belarus, Turkey and South Korea (two times decrease) decreased again.
According to the Ministry of Energy, the shipments from oil-refineries decreased by 11.8% over ten months, down to 152.7 mln t of oil products, volumes of supplies by rail decreased by 15.1%, down to 102.7 mln t, pipeline transport increased pumping by 5.3%. The share of the pipeline in the transport balance has grown from 16% to 19%, whereas the share of the railroad transportation, still remaining as the main type of oil products transportation, decreased from 70% to 67%.
In conditions of the stagnation of the market of oil products rail transportation the operators turned to the state for help. At the beginning of December the Association of carriers and operators of the rolling stock and the Union of operators of railway transport sent the appeal to the Deputy Prime Minister Arkady Dvorkovich and the Energy Minister Alexander Novak asking to develop the scheme of balance for three-five years with plans for volumes of transportation and their distribution between the railroad and pipelines of “Transneft”.
However, according to experts, the situation regarding loading of oil freights will not improve after the creation of transport balance. JSC “RZD” plans that in 2017 the loading of oil freights will decrease by 4.5%, and freight turnover – by 2%. The head of “Infoline-Analitiki” Mikhail Burmistrov considers this option excessively optimistical. This option does not include agreements with OPEC and a possible impact on the logistics of the transfer of gas condensate and liquefied hydrocarbon gases from the first and the second tariff class from 1 January 2017 (with the prospect of cancelling of special discounts on tariffs in 2018).
In the medium term, improvements in the segment of railway transport of oil and oil products are not expected.
Construction freight and cement: “even lower than bottom”
In November loading of construction freights on RZD network dropped to a minimum value for the last 15 years for this month – down to 9.5 mln t (-11.2% compared to November 2015). Loading of cement was also at a record low level for November –1.7 mln t (-5.6%). A total of 132.6 mln t of construction freight (+9.2%) and 25.4 mln t (-6.4%) of cement was transported by rail since the beginning of the year.
Moscow and the Moscow region saw the main drop in deliveries (about 15%), freight traffic decreased by 30-40% in terms of transportations to the Tyumen, Rostov, Saratov and Astrakhan regions.
In November 2016 the production of cement decreased by 9.7% compared to November 2015, the production of reinforced concrete products and structures – by 4.8%, and the mining of nonmetallic construction materials – by 0.7%.
The reason is low demand for construction materials amid a weak provision with rolling stock. 7.3 mln square meters of housing were constructed in the Russian Federation in November, this figure is by 7% less than the result of this period last year. Operators direct gondolas to more marginal segments: for the transportation of coal, ore and ferrous metals.
In the short term the low level of construction freight traffic is still predicted, due to both a sluggish activity in terms of laying of new construction objects, and a seasonal recession in construction.
Ferrous metals: transportation growth due to the recovery of freight traffic to Turkey
In November, the loading of ferrous metals on RZD network increased by 8.9% relative to last year’s level and amounted to 6.1 mln t. A total of 64.7 mln t of ferrous metals was transported by rail that is by 1.2% lower than the level of 2015.
Export to Italy (by 7 times), to Finland (there were no deliveries to that country last year), and also to Belgium (+50%) and Kazakhstan (+60%) continued to grow. At that, there was a sharp increase in supplies, compared to the previous month, to the largest importer – to Turkey (+75%) – up to last year’s level.
The growth of steel production is a global trend. According to World Steel Association (WSA), 132.4 mln t of steel were smelted in November 2016 in 66 countries, which submit their statistics to that international organization, that is by 5.0% exceeds the indicator of November 2015. In the Russian Federation the smelting of steel increased by 0.7%, production of finished rolled steel increased by +1.3%, production of pipes decreased by 2.1%.
In the short term ferrous metals traffic will increase given that the tendency for the recovery of export freight traffic is maintained.
Iron and manganese ore: export freight traffic priority remains, but the growth of domestic supplies for the backing of growing production of ferrous metals for export is likely to occur
In November the loading of ore on RZD network reached last year’s level and amounted to 9.0 mln t. A total of 100.5 mln t of ore was transported by rail since the beginning of 2016 that is by 0.6% higher than 2015 level.
According to Rosstat, mining of ore decreased by 1.0% in November. In total by 0.5% more ore was mined since the beginning of the year compared to last year. At that domestic freight traffic decreased by 5%, and export traffic increased by 5%.
In November, 2016 the main increase in export was to those countries to which there were no deliveries last year: to the Netherlands, Italy and Serbia.
The growth of import freight traffic is worth noting as well. “Magnitogorsk Iron & Steel Works” (MMK) and Kazakhstan-based Eurasian Resources Group agreed about deliveries more than 30 mln t of iron ore, including pellets and concentrate, manufactured by “Sokolovsko-Sarbaysky mining and processing production association” to MMK for the period until the end of 2020.
As of today, there are no preconditions for a significant increase in iron ore loading. A small increase on domestic directions for the provision of ferrous metals export is possible.
Grain and milled grain products: entering new export markets; weather does not contribute to export growth
In November loading of grain and milled grain products on RZD network reached last year’s level and amounted to 2.0 mln t. A total of 16.9 mln t of grain was transported by rail since the beginning of 2016 that is by 1.9% higher than 2015 level.
In November, export freight traffic almost recovered to the last year's level whereas transportations on domestic directions grew by 5%.
Main growth of export was to Egypt (+70%), Turkey (+80%) and Israel (+70%).
At the beginning of December Indonesia, after having coordinated requirements to the Russian wheat with the Federal Service for Veterinary and Phytosanitary Surveillance (Rosselkhoznadzor) and after the certification of the Russian laboratories, held the third place in the rating of the largest importers of the Russian grain. According to assessment made by Igor Pavensky, Deputy Director of the Department for strategic marketing at CJSC “Rusagrotrans”, nearly 10% of grain export fell to its share for the period from 1-14 of December.
However, the export forecast for December is lowered for the second time – from 3.5 mln t to 3.2 mln t (in December 2015 it was 3.84 mln t) despite the fact that demand for deep-water ports exceed by 13.4% last year’s level. The reason lies in the adverse weather conditions, which hinder shipping in the ports.
In January 2017 a record level of export for January is expected both due to the transfer of December’s transshipment, and taking into account already concluded contracts for the delivery in January.
Chemical and mineral fertilizers: export contributes to freight traffic setting a new record
In November loading of fertilizers on RZD network increased by 9.3% compared to last year’s level, and amounted to 4.7 mln t, having set a new record for this month. A total of 48.5 mln t of fertilizers was transported by rail since the beginning of 2016 that is by 3.7% higher than 2015 level.
In November, according to Rosstat, production of fertilizers increased by 7.1% compared to last year.
Domestic freight traffic increased by almost 10%, and export traffic by 7%. The Ukraine accounted for the main export growth (by 2 times). In addition, Brazil (+20%) and China (+10%) increased the supplies of fertilizers from Russia.
In the medium term mineral fertilizers traffic can remain at the current high level due to a stable demand for fertilizers both in domestic and external markets, as well as to grow so far as new capacities are commissioned.
Following gondolas the balance also comes to other segments of the fleet
The source of data on sale of the rolling stock and rent rates – the magazine “Rolling Stock”.
In November 2016 the demand for freight cars reached its peak level. High volumes of write-offs of previous months significantly reduced the surplus of not only gondolas, but also of specialized rolling stock.
Write-off in November amounted to 7.7 thsd. of freight cars (of which 4.1 thsd. are gondolas). The total write-off for 11 months of 2016 amounted to 106.5 thsd. of freight cars (+18% compared to the same period of 2015).
As a result, the sale of freight cars by plants of the CIS countries amounted to 5.0 thsd. units, that is almost two times higher than the value of November 2015 and by 12% higher than the previous month. This is the maximum level of a monthly production since 2015. Key drivers of growth – multi-purpose and specialized platforms, which production increased by 0.4 thsd. units by October. In the segment of new generation freight cars the sale increased by 2.2 times by November 2015.
Operational use efficiency (an average freight turnover of a loaded freight car per month) of UWC innovative freight cars still remains at the high level: in November it amounted to 479 thsd. t-km, that is by 95% higher than the efficiency of outdated freight cars.
The rolling stock commercially suitable to be utilized on RZD network remained at the level of 983 thsd. units. The real surplus of the fleet amounted to 67 thsd. units (of which gondolas – only 6 thsd. units) – it is a minimum level for the last 3 years.
At that, faulty rolling stock fleet decreased to 80.4 thsd. of freight cars as of the beginning of December – to the level of the 1st quarter of 2014. To the knowledge of the Research Institute of Railway Transport Issues, the volume of repair of freight cars in the third quarter increased by 20% compared to the same period of 2015. In the Institute they believe, that that is the market’s reaction to the growth of rent rates for freight cars, as before that freight cars were not repaired, but they were just left off track, and now a demand for additional rolling stock appeared.
Leysana Korobeynikova, Senior Analyst
