Overview of the Russian Railway Market in November-December 2017
The railway transportation market continues to grow
In November, 2017, transportation keeps on growing: loading amounts to 105.7 mln tons (+3.5% compared to the same period of the past year), freight turnover amounts to 210.6 bln ton-km (+5.7%).
By the past year the following transportation areas had grown: coal (+8.9%), construction goods (+5.3%), iron ore (+4.4%), cement (+5.9%), ferrous scrap (+8.3%) and grain (+25.0%).
A decrease of loading volumes took place in the following areas: petroleum and petroleum products (-1.5%), lumber goods (-12.1%), fertilizers (-2.1%) and coke (-10.0%).
Coal: further growth in the setting of high global prices
Coal loading in November 2017 set another record for this month reaching 31.7 mln tons (+8.9% compared to November of the past year). In total, since the beginning of 2017, 325.9 mln tons of coal were shipped by railway which is by 9% more than the volumes of the same period of 2016.
In November domestic coal transportation grew by 3% while export increased by 12%. Countries showing the greatest increase of supplies from Russia are Poland (2.6 times), Romania (10 times) and Japan (+ 9%). Export to these countries had increased by 300-700 kton by November of the past year.
According to the forecast made by IEA in December, by 2022 the global demand for coal will have increased by 3% compared to the performance of 2016. In opinion of OPEC, the global coal consumption will have increased by 10%.
However, export of coal from Russia may grow faster due to the low original cost of the production. The program of development of the Russian industry implies that by 2030 export of coal to the Asia-Pacific Region (APR) will have risen to 83-115 mln tons, from 56 mln tons in 2015, while the volumes of export from the West will remain at the 70 mln ton level or drop to 52 mln tons.
Coal prices have been growing at the global market during the last six months. According to Bloomberg agency data, the price of coal is 95 $/ton. The analysts believe that the price growth is due to decrease of production at some Australian mines caused by cyclones at the beginning of this year as well as to shutdown of a number of cargo terminals at the ports of the Australian state of Queensland.
The tendencies which are expected to continue in 2018 are the currently high level of coal transportation by railway and the moderate growth resulting from unlocking the export potential and development of port capacity.
Petroleum and petroleum products: attraction of petroleum goods to the railway is efficient
Loading of petroleum and petroleum products in November, 2017, had decreased by the past year by 1.5% and was 19.8 mln tons. In total, since the beginning of 2017, 214.2 mln tons of petroleum and petroleum products were shipped by railway which is 0.1% lower than the performance of the same period of the past year.
In December Belarus signed a contract for shipment of a batch of petroleum products via Russian ports. According to estimates by Igor Lyashenko, Chairman of Belneftekhim Concern, the volume of transportation may reach around 1 mln tons of Belorussian petroleum products in 2018, under favorable conditions. The transaction became feasible thanks to the discount for the export of diesel fuel via St. Petersburg made by the Russian Railways in 2018. The discount for export transportation of diesel fuel from Bryansk-Vostochny station to Avtovo-Export station will amount to 49%, providing the transportation volume reaches minimum 500 kton.
Moreover, as stated by Arkady Dvorkovich, the Deputy Prime Minister of Russia, the surcharge to the railway tariff for petroleum goods transportation will gradually decrease and may become zero within two years.
The prospective decrease of petroleum goods transportation by railway in 2018 may be mitigated by the Russian Railways establishing more favorable conditions for the goods shippers.
Construction goods and cement: positive dynamics is observed
Loading of construction goods in November, 2017, had increased by the past year by 5.3% and amounted to 10.0 mln tons while cement loading had increased by 5.9%, up to 1.8 mln tons. In total, since the beginning of 2017, 123.5 mln tons of construction goods were shipped by railway (-6.8% compared to the same period of the past year) and 25.4 mln tons of cement (+0.2%).
The main growth of construction goods transportation in November is related with transportation to the Moscow Region: supplies to the region increased by over 500 kton, i.e. by 1.5 times compared to the same period of the past year.
Based on the Rosstat (Russian Statistics Agency) data, in November, 2017, around 7.1 mln m2 of residential space was commissioned in Russia which is 1.8% below the result of the same period of 2016. The cumulative value since the beginning of the year shows a 3.9% decrease in residential space commissioning. According to the estimate made by Mikhail Men, Head of the Russian Ministry of Construction, in December the gap with the past year performance may be decreased and, based on the year results, the forecasted commissioning of 76-78 mln m2 of residential space will be confirmed since the federal subjects undertook to have commissioned many problem facilities by the end of the year.
The growth of cement production in November, 2017, is by 11.8% higher than the performance of the same period of the past year. Alexander Cherepanov, the Vice President of Sibirskiy Cement Holding for investment development, believes that the results of the ending year may be considered positive. In the past year the Company analytics were expecting a decrease in cement consumption in Russia by 5-7%, however the actual situation shows no signs of decrease and the consumption will remain at 55 mln ton, i.e. at the level of 2016. At the same time, growth of the demand by 2–3% is expected in 2018.
The Housing Mortgage Lending Agency envisages an active growth of mortgage credits thanks to the currently low rates. The volumes are expected to increase more than twofold, up to 10 trillion roubles, within three years only. The historical minimum of the average weighted rate on residential mortgage loans was reported in October, 2017, at 9.95%. German Gref, Head of Sberbank, forecasts achieving 6.5% mortgage rate in 2019 at 4% of inflation.
In 2018 a moderate growth of construction goods and cement transportation is expected as the construction industry recovers and rolling stock availability improves.
Ferrous metals: 2017 as the turning point of the domestic market
Loading of ferrous metals in November, 2017, remained at the past year level and amounted to 6.1 mln ton. In total, since the beginning of the year, 65.8 mln tons of ferrous metals were shipped by railway which exceeds the performance of the same period of 2016 by 1.8%.
As estimated by Severstal Company, 2017 will result in a rise of the domestic demand for steel to 40 mln ton (up to +7% compared to 2016). It means that year 2017 will be a turning point of the domestic market of metal goods while the domestic consumption was decreasing over the previous years. The increase of demand for metal products in 2017 may amount to +1.6% in the construction segment, +3.9% in machinery production and +14% in the automotive industry.
In 2018 a moderate growth of domestic transportation of ferrous metals is expected as the construction industry recovers.
Ore: refocusing towards the domestic market due to the growth of production of rolled metal
Loading of ore in November, 2017, amounted to 9.4 mln tons which exceed the past year performance by 4.4%. In total, since the beginning of the year, 100.7 mln tons of ore were shipped which is by 0.2% more than the volumes of the same period of 2016.
In November domestic transportation increased by more than 10% while export decreased by almost 20%.
In 2018, providing the current tendencies persist, an increase in domestic transportation is expected due to the growth of demand by Russian metal producers.
Lumber goods: decrease of export caused by shortages of raw materials in the domestic market
Loading of lumber goods in November, 2017, decreased by 12% and reached the level of 2.9 mln ton. In total, since the beginning of the year, 39.6 mln tons of lumber goods were shipped which exceeds the performance of the same period of 2016 by 2.8%.
The drop in loading volumes in November is primarily due to a decrease almost by a third of non-coniferous lumber export to Finland. The possible cause of this situation is the shortage of raw materials in the domestic market reported by Russian manufacturers of plywood in the end of October.
In 2018 a moderate growth of lumber goods transportation is expected as the export potential of the Russian lumber industry is unlocked, however, a minor adjustment is possible related with introduction of limitations applicable to the round lumber export.
Grain and milled products: growth is expected thanks to support of shippers
Loading of grain in November, 2017, amounted to 2.5 mln tons (+25% compared to November of the past year). In total, since the beginning of the year, 19.6 mln tons of grain were shipped by railway which is by 15.7% more than the volumes of the same period of 2016.
In November the domestic transportation decreased by 6% while export grew by 50%, mainly due to the increase of freight traffic to Egypt (by 2.3 times) and Saudi Arabia (by 5 times). At the same time, the shipment volumes continue to grow in the direction which is new to Russian exporters, namely, shipments to China.
According to the forecast by the analytic center of Rusagrotrans Company, in December international shipments will set another record and may reach 5.3 mln tons thanks to the high demand and favorable weather conditions.
At the end of December it became known that the rules were introduced for receiving subsidies from the Russian Railways in 2017-2018 to compensate for losses of income related with grain goods transportation by railway, free of carriage charge. As the result, 13 Russian regions will get a support from the government in the form of subsidy of the infrastructural component of the tariff applicable to the grain delivery to sea ports by railway.
In 2018 a further growth of grain transportation by railway is expected enhanced by a high export potential and subsidies provided for transportation expenses incurred by shippers.
Chemical and mineral fertilizers: new facilities are about to be introduced
Loading of fertilizers in November, 2017, amounted to 4.6 mln tons (-2.1% compared to November of the past year). In total, since the beginning of the year, 51.3 mln tons of fertilizers were shipped by railway which is by 7% more than the volumes of the same period of 2016.
At the same time, domestic transportation decreased by 8% while export grew by 2% compared to the past year.
In the nearest future commissioning of a number of facilities is expected in large companies specializing in production of chemical fertilizers. Thus, Eurochem is planning to commission Usolsky Potassium Plant with the capacity of 2.3 mln ton of potassium chloride a year. Acron is planning to install a plant in the Smolensk Region to process 600 kton of apatite concentrate each year resulting in 0.5-1.0 mln tons of products. At the same time PhosAgro is implementing a project of a new 300 kton ammonium sulphate production site.
Moreover, new players are coming into the market. In 2018 construction of the Nakhodka Mineral Fertilizer Plant will be launched to produce up to 2 mln tons of carbamide a year.
In view of the favorable environment observed both in the domestic and in the international market further growth of mineral fertilizers transportation by railway is expected.
Rental rates: rates will be adjusted in the last six months of 2018.
Data on rolling stock sales and leasing rates are taken from the Russian industry periodical Rolling Stock Market.
In November, 2017, the sales of rolling stock by the CIS manufacturers amounted to 7.1 thousand units (4.6 thousand units are gondola cars) which exceeds the performance of November, 2016, by 41% (5.0 thousand units) and the performance of October, 2017, by 8%.
The demand for gondola cars significantly exceeds the disposal which was 1.7 thousand units in November. In total for the reported month 3.7 thousand units of rolling stock were disposed. In total, since the beginning of 2017, 45.6 thousand railroad cars were disposed, the forecast for 2017 is within 50 thousand units.
The fleet which is commercially suitable for transportation has grown to 1,010 thousand units while the defective fleet, as of the beginning of December, decreased to 51.1 thousand units (which is the minimum level since 2014). The resulting fleet surplus amounted to 52 thousand units while the surplus of gondola cars is close to the zero level.
The rental rates for gondola cars based on typical trucks in December are around 1,550-1,650 roubles/day. As estimated by Mikhail Burmistrov, Head of Infoline-Analytics agency, the deficiency in the market will have been successfully compensated by the third quarter of 2018.
Leysana Korobeynikova, Senior Analyst