November: successful closure of the year

Transportation rates continued to grow in November 2018: loading amounted to 107.3 million tons, which is 1.5% higher than in November of the last year, and freight turnover amounted to 220.1 billion tariff tons-km (+4.3%).

The growth drivers were: coal (+1.6%), oil (+0.5%), iron ore (+7.4%), ferrous metals (+1.6%), timber freights (+24.1%), fertilizers (+8.7%), ferrous scrap (+ 15.4%) and coking coal (+11.1%). Transportation of construction cargo (-9.0%), non-ferrous metal ore (-6.3%) and grain (-4.0%) has decreased.

Coal: volumes of traffic to the West are growing

Coal loading increased by 1.6% in November as compared to the last year and amounted to 32.2 million tons. A total of 342.8 million tons of coal have been shipped by rail since the beginning of 2018, which is 5.2% higher than the value of the same period of 2017.

The growth of export shipment volumes continued and amounted to almost +7% as compared with November 2017. Strengthening of the positions of Russian companies on the European market has been noted. Supplies to Germany and Poland reached a historically highest level with a growth to almost 1.5 million tons in November 2018. In addition, the volumes of coal traffic to Belarus have increased by almost 200 thousand tons. According to experts, the coal is intended for reexport.

The increase of coal imports by Germany is caused by the closure of the last operating German mine at the end of December. As a result, the country has completely switched over to imported coal, which creates new opportunities for Russian export. Despite the development of the renewable energy sector, coal remains in the lead, meeting over a third of the demand for power generation in Germany. According to the estimation of the German government, the closure of about 120 coal-fired power plants can take over 20 years.

Contrary to the calls for decarbonization, President of Poland Andrzej Duda explicitly declared in early December that coal should not be abandoned. He noted that concerns for the environment should not contradict the interests of the population.

High demand for Russian coal on the European market will facilitate a further increase of the railroad traffic volumes.

Crude oil and oil products: RZD is attracting cargo

Loading of crude oil and oil products increased by 0.5% in November and amounted to 19.9 million tons. A total of 215.5 million tons of crude oil and oil products have been shipped by rail since the beginning of 2018, which is 0.6% higher than the value of the same period of 2017.

According to Alexei Shilo, Head of the Center for Corporate Transport Services, RZD has coped with the outflow of oil cargo from the railroad, and the railroad specialists, having gained an opportunity to establish a long term flexible tariff policy, have arranged regular activities on its implementation, building effective interactions with the customers and finding mutually beneficial solutions for the most complex issues. The flexible tariffs allow to increase the predictability of cargo transportation cost and, accordingly, the competitiveness of rail transport.

The stock exchange committee is currently working on the establishment of a trading system for railroad transportation by regular freight trains by means of organized trading at the Saint-Petersburg International Mercantile Exchange, which will aid in ensuring transparency in the realization of transport services. Anatoly Golomolzin, Deputy Head of the Federal Antimonopoly Service of Russia, Chairman of Methodological Council for Tariff Regulation of FAS Russia, noted that a special working group was created for this purpose in order to organize scheduled traffic of freight trains with oil products a pilot project.

RZD intends to continue providing discounts to increase the attractiveness of the shipment of crude oil and oil products by rail. Special tariff conditions for the export of diesel and fuel oil in tanks will become effective as early as on January 1, 2019. The discount will be 18% from Novokuibyshev, Kashpir, Kryazh, Syzran I stations of Kuibyshev Railway provided that the guaranteed volume of transportation of oil products and crude oil equal to at least 10.6 million tons annually is achieved in 2019-2020, including diesel fuel and fuel oil for export equal to at least 4.7 million tons annually (until December 31, 2020). A discount of 25% will be introduced for transportation from Neftyanaya and Knyazevka stations of Privolzhsk Railway provided that the guaranteed volume of transportation of oil products equal to at least 4.27 million tons annually is achieved in 2019-2020, including diesel fuel and fuel oil for export equal to at least 2.35 million tons annually (until December 31, 2020).

In the medium term, loading of oil cargo by rail will gradually increase due to of establishment of favorable conditions for cargo shippers by RZD.

Construction cargo and cement: infrastructure projects can become drivers for growth

Loading of construction cargo decreased by 9.0% in November as compared to the same period of the last year and amounted to 9.1 million tons, while the loading of cement remained at the level of the last year — 1.8%. Since early 2018, a total of 115.1 million tons of construction cargo and 23.8 million tons of cement have been shipped by rail, which is 6.8% and 6.5% lower than the values for the same period of 2017.

According to Russian Federal State Statistics Service, housing commissioning amounted to 6.8 million m2 in October, which is 4.5% lower than in October 2017. Over 11 months of 2018, housing commissioning decreased by 3.7% as compared to the same period of the last year.

Head of Minstroy Vladimir Yakushev questioned the possibility of achieving the target level of housing commissioning of 120 million m2 per year by 2024, specified in the Presidential decree issued in May. Commissioning of housing is already short of the planned values: by December 31 the figure will only be 75-76 million m2, while the commissioning should have been at the level of 86 million m2 according to the datasheet of the national project. Industry experts are convinced that one of the main reasons for the shortage are reforms in the construction industry, which will slow down housing construction across the country for least another two years. However, Head of the Department mentioned that the Ministry is presently discussing the possibility of introducing a new program to subsidize mortgage rates for the purchase of primary housing, which can be implemented as a measure to support the developers in the current difficult period.

According to estimates of the management of Siberian Cement Holding, the demand for cement is stagnating, but a smooth growth is possible until 2025. According to the First Vice President, a growth of demand for cement in the Russian Federation “if any, will begin not earlier than in the fourth quarter of 2019”. A decrease in the solvency of the population, a ban on cooperative housing projects, a reduction of the insurance market, an increase of VAT and key rates of the Central Bank were listed among the limiting factors.

The Long-Term RZD Development Program until 2025 is expected to be adopted at the end of December, which includes the implementation of major infrastructure projects. According to the optimistic scenario, the total investment of the holding will be 5.8 trillion rubles until 2025, and about 9.8 trillion rubles taking into account the funds of outside investors.

In the long term, shipment of construction materials and cement by railroad will gradually increase along with implementation of the state support measures for the construction industry, its adaptation to the new market conditions and realization of infrastructure projects.

Ferrous metals: transportation volumes continued to grow

Loading of ferrous metals increased by 1.6% in November as compared to the level of last year and amounted to 6.2 million tons. A total of 71.2 million tons of ferrous metals have been shipped by rail since the beginning of 2018, which is 8.2% higher than in the same period of 2017.

Domestic shipments increased by 7%, while the export remained at the level of the previous year.

According to materials of the Moody's international rating agency, the domestic demand for steel in the Russian Federation in 2019 will remain stable or show a slight increase against the background of the rising GDP.

According to the Analytical Credit Rating Agency, a growth of rolled steel consumption to 44 million tons can be expected by the end of the year (compared to 42 million tons in 2017). If no recurrence of the crisis situation of 2008 will take place in the next five years, steel consumption in Russia can increase to 46–48 million tons by 2022. Domestic demand has increased due to activization of the construction industry. In addition, a consistently high demand for large diameter pipes is observed due to the following large-scale projects - Power of Siberia-2, TurkStream and Nord Stream gas pipelines. 2. In addition, domestic demand will grow due to the implementation of infrastructure projects in accordance with the investment program of RZD.

Experts note the stability of Russian companies on the world market due to a weak ruble, and a relatively low debt burden of the domestic metallurgical sector. The main stage of production capacity upgrade was completed as early as before the crisis of 2014.

A certain slowdown in the growth of ferrous metal transportation by rail is forecasted against the background of worsening global market conditions. However, transportation will be supported by the activization of the construction industry and the implementation of infrastructure projects.

Ore: loading is at a record level

Ore loading increased by 7.4% in November as compared to the previous year and amounted to 10.1 million tonnes, setting a transportation record for this month. Since the beginning of 2018, a total of 106.4 million tons of ore have been shipped by rail, which is 5.7% higher than the values of the same period of 2017.

In November, domestic traffic volumes increased by 5%, while the export growth exceeded 10%. The main increase in traffic flow was to Germany and Slovakia (more than 2.5-fold), as well as to Japan, the USA and Romania (to supply to these countries was carried out last year).

Experts note an increase in the global demand for high-quality iron ore. This was facilitated by the construction of large blast furnaces in Asian countries, which required more and more prefabricated iron ore pellets with a high iron content or a iron ore concentrate with a high metal content (62–67%).

A further growth in the volumes of railroad ore transportation in both domestic and export directions is expected.

Timber freights: new projects in the industry

Loading of timber freights increased by 24.1% in November as compared to the level of the previous year and amounted to 3.6 million tons. Since the beginning of 2018, a total of 41.9 million tons of timber freights have been shipped by rail, which is 5.9% higher than the value of the same period of 2017.

Loading increased in November due to both domestic (+41%) and export (+13%) transportation. Domestic freight flows have increased to Arkhangelsk Oblast (2.2-fold), Leningrad Oblast (+70%) and the Republic of Karelia (+55%). The main increase in exports was to China (+8%) and Finland (+58%).

New timber processing projects are initiated in the country. Segezha Group has presented the parameters of the investment project for the construction of a plywood mill in Galich with a design capacity of 130 thousand m3 per year. The investor is planning to invest almost 9 billion rubles in manufacture. Construction of the facility should begin as early as next year, and be completed in 2021.

A new plant for the production of CLT-panels ─ a modern building material manufactured from coniferous wood, widely used worldwide in wooden house construction will be commissioned in Sokolsky District of Vologda Oblast by 2020. It is planned that the total amount of investment in the project will be 1.7 billion rubles. After the plant reaches its design capacity, it will be able to produce over 35.4 thousand m3 of CLT-panels annually. Thickness of the panels can vary from 6 to 40 cm, and the length - up to 24 m, i.e. a single panel can be used as a house facade.

Timber freight transportation by rail will continue to grow along with the development of the RF timber industry, and at the same time, an increase of non-resource exports is expected.

Grain and grain mill products: an expected decrease in freight handling

Grain loading in November amounted to 2.4 million tons (-4.0% as compared to November of the last year). Since the beginning of 2018, a total of 24.7 million tons of grain have been shipped by railroad, which is 25.9% higher than the value of the same period of 2017.

The decrease in freight volumes occurred due to a reduction in the exports mainly to Azerbaijan (-70%), Saudi Arabia (-65%) and Mongolia (-70%).

The demand for Russian agricultural products will remain high in the next year. Gross harvest amounted to 110.5 million tons of grain this year, as reported by Alexander Korbut, Vice-President of the Russian Grain Union. It is slightly less than the last year's record of 135.4 million tons, but the country's crop yield has been above 100 million tons over the last five years, allowing to satisfy all domestic and export needs for grain crops. Taking into account the carryover stocks, it is possible to export about 42 million tons without any risks in terms of meeting the demands of the domestic market.

Exports will mostly be determined by the conditions of spring sowing. According to Arkady Zlochevsky, President of the Russian Grain Union, winter sowing was successful and amounted to 17.6 million hectares, which is almost 500 thousand hectares higher than in the previous year.

According to Igor Pavensky, Director of the Strategic Marketing Department of CJSC Rusagrotrans, the volumes of railway transportation of grain will increase due to an increase in export shipments from central Russia, the Volga Region, the Urals, and Siberia. He noted that similar trends will also be observed in the future. In the southern regions, from which grain is delivered to the port by road, the capacity for expanding the areas is almost exhausted, and the crop yield cannot be substantially increased, as it already is at a high level. At the same time, there is room for growth in terms of crop yield in the Central Black Earth Region, the Volga Region, and the eastern regions.

In the current conditions, grain transportation by rail will decrease in comparison with the level of the last year, but will remain at a high level.

Chemical and mineral fertilizers: the growth continued

Loading of fertilizers in November amounted to 5.0 million tons (+8.7% as compared to November of the last year). Since the beginning of 2018, a total of almost 53.9 million tons of fertilizers have been shipped by rail, which is 3.8% higher than the value of the same period of 2017.

In November, domestic traffic volumes increased by 12.5%, while the exports dropped by 2% due to a decrease in the volumes of traffic to Ukraine (-80%). At the same time, the volumes of traffic to China (+18%), the USA (2-fold) and Brazil (+8%) have increased.

Uralkali will send the products previously intended for India and China to more profitable markets. According to the main shareholder of the company Dmitry Mazepin, the company has signed a contract with China for a small amount of potassium chloride at $290/t, and a contract with India might not be signed at all. The company will send the available unused potassium to the African market. Fertilizer prices are above $320/t on that continent. Uralkali’s share of sales in Africa is currently lower than 2%.

PhosAgro can increase the capacities of its enterprise Metakhim (Volkhov, Leningrad Oblast) from 150 thousand tons of phosphate fertilizers to 1 million tons annually. Investment in the project is estimated at 25 billion rubles. In addition, the Russian Academy of Sciences and PhosAgro signed an agreement on cooperation in the development of highly effective phosphorus-containing fertilizers for agriculture on Wednesday. The company plans to undertake deeper and more complex processing of mineral raw materials, starting with phosphate ore.

In the medium term, a further growth of fertilizer transportation by rail is expected due to a high global demand for Russian products, as well as the planned commissioning of production facilities in the Russian Federation.

Record production of cars by Russian plants over the past 25 years

The source of data on rolling stock sales and rental rates is Rynok Podvizhnogo Sostava (The Rolling Stock Market) journal.

The commercially usable fleet is 1,044 thousand units, whereas the defective fleet remains at a low level of about 50.7 thousand units as of the beginning of December. As a result, the surplus of the fleet was 47.8 thousand units. The idle fleet is expected to increase due to seasonal factors over the next 2 months.

In November, the sales of cars by the CIS plants amounted to 8.0 thousand units, which is 13% higher than the results of November 2017 (7.1 thousand units). The RF plants have sold a record number of cars over the past 25 years - 6.7 units. At the same time, only 1.7 thousand cars have been decommissioned. At the beginning of December, the fleet of new generation cars manufactured by various companies was almost 120.3 thousand units.

A total of 4.7 thousand gondola cars were sold, which significantly exceeds the amount of their decommissioning (0.4 thousand units). The rental rates for standard gondola cars increased to 2,000 rubles per day in December, and there is still no surplus in the segment.

According to Argus Media, in December the coal-mining enterprises lack at least 25–30 thousand units of rolling stock to transport the entire volume of fuel declared for delivery to customers before the end of the year, as per the estimates of market participants. One of the other reasons of the deficit is a slowdown in the turnover of gondola cars, the rate of which has decreased by 6-7% on average in the current year as compared with 2017.

Leysana Korobeynikova, Head of Research