Overview of the Russian Railway Market in October-November 2017
Volumes of main cargoes continue to grow
Rail freight market growth continued in October 2017: freight handling totaled 108.1 million tons (+4.6% year-on-year), and turnover of goods reached 214.8 billion ton-km (+5.9%).
As compared to the previous year there has been an increase in the transportation of coal (+11.4 %), ferrous materials (+6.9 %), timber freights (+10.0 %), fertilizers (+9.1 %), cement (+4.3 %) and grain (+31.6 %).
There has been a decrease in freight handling of crude oil and petroleum products (-1.0 %), construction freights (-3.3 %), nonferrous metal ore (-5.6 %) and charred coal (-10.0 %).
Coal: new records – wide prospects
Loading of coal in October 2017 set a record for this month of the year, reaching the level of 31.2 million tons (+11.4 % against October last year). A total 294.2 million tons of coal have been shipped by rail since the beginning of 2017, which is 9.6 % more than the same period of 2016.
In October domestic coal shipment witnessed an increase of 4%, while exports growth reached 16%. The biggest increases were in supplies to Poland (doubling of supplies), Japan (+ 18%), Romania (by 10 times), and Ukraine (by 1.5 times). Total coal export to these countries has grown by 370,000-570,000 tons compared to October 2016.
In mid-November Vladimir Putin approved the proposition of the Ministry of Energy to launch a ten-year investment programme for renovation of old CHP plants which will support the domestic demand for coal but will also lead to the redistribution of coal logistic flows while the upgraded plants are decommissioned. The Ministry estimates that the total amount spent for the renovation of 40 GW of plants during ten years will be at least 1 trillion rubles.
According to Aman Tuleyev, the Governor of Kemerovo Oblast, coal production in the region in 2017 will amount to record-setting 240 million tons (in 2016 – 227 million tons) which has been made possible as a result of investments made throughout this year. It is planned to spend 1 billion rubles more on the coal industry in 2018, so the total investment volume will amount to 64 billion rubles.
In 2018 it is planned to commission Ubinsky site in Guryevsky District and Gusinsky-Yuzhny site in Kemerovsky District which will allow to increase coal production by 3 million tons. Besides, next year the construction of three coal-preparation plants will begin: Uvalnaya plant and Taldinskaya-Energeticheskaya plant in Novokuznetsky District, and Taldinskaya plant in Prokopyevsky District.
In addition, at the moment the representatives of Kaychaksky-1 coal strip mine located in Tisulsky District are negotiating with Hungary about the start of brown coal supplies to the country. During 10 months of 2017 brown coal production output there has increased by 42%.
Over the long run Russia’s export potential is enormous, and this fact together with the support for coal-fired power generation allows to forecast sustainable growth of coal rail shipment.
Crude oil and oil products: yet another decrease
In October 2017 oil and oil products freight handling decreased by 1.0 % as compared to the previous year and reached 19.2 million tons. Since the beginning of 2017, the total of 194.4 million tons of oil and oil products were shipped by rail, which is 0.1% higher than in the same period of the previous year.
Therewith domestic shipment increased by 5% as compared to the previous year while the exports decreased by 8% mainly owing to the decrease of supply to the ports of Netherlands of cargo intended for further transportation.
At the end of October Russian Railways declared its intent to create conditions which will attract oil cargoes to the railway. First of all, this means targeted work in collaboration with oil companies. For example, in one case the companies are suggested to transport sour crude oil in railway tanks in order to prevent quality decrease in the pipe, in other case it is proposed to do just the other way around and to transport high quality oil products by rail. As explained by the company’s representative the net effect is that with an estimated outflow of approximately 8 million tons of such cargoes from the railway they will manage to additionally attract 5.5 million tons in 2018.
Also Russian Railways plans to set the rail freight tariff indexation to zero for oil cargoes and to gain the right to guarantee discounts within the tariff corridor for next ten years. However, from the point of view of the Federal Antimonopoly Service (FAS), the incentives oriented on oil companies are excessive.
Thus, the further decrease of oil shipments by rail is expected, however, the rate of decrease will depend on the agreements to be reached between Russian Railways, oil companies and FAS.
Construction materials and cement: shipment recovery is expected in 2018
Construction cargo shipment continued to fall in October 2017 and totaled 11.6 million tons (-3.3% compared with October last year). Cement shipment grew to 2.4 million tons (4.3 %). In total, 113.5 million tons of construction cargoes and 23.6 million tons of cement have been shipped by rail since the beginning of 2017, representing year-on-year declines of 7.8% and 0.2%, respectively.
According to Russia’s Federal State Statistics Service (Rosstat), in October 2017 approximately 6.9 million m2 of residential buildings were commissioned in the Russian Federation which is 13.4 % more than in October 2016. But year-to date rate of residential buildings commission fell by 4.3 %. According to Nikita Stasishin, the Deputy Minister of Ministry of Construction Industry, Housing and Utilities Sector, in 2017 rate of commission of residential buildings will reach the level of 2016 despite the fall witnessed in the beginning of the year.
Besides that, according to expert estimation, before the year is out 55 million tons of cement will be produced in Russia, which corresponds to the previous year level, while during several previous years demand for cement was decreasing. An upward trend may be already witnessed in 2018.
Recovery of construction volumes and cement production results from an increase in availability of credit loans to individuals. At the moment the key rate is 8.25 % while Elvira Nabiullina, Russian Central Bank Governor, estimates that within two years this rate will drop to 6-7%.
There are visible trends for upturn of construction freights and cement shipment. It is expected that from the beginning of the next construction season there will be shipment recovery due to the further decrease of the key rate and growth of the rolling stock availability.
Ferrous metals: growth driven by domestic consumption
Ferrous materials shipment totaled 6.2 million tons in October 2017 (+6.9 % compared to October 2016). A total of 59.7 million tons of ferrous metals have been shipped by rail since the start of the year, which is 2% more than in the same period of 2016.
Both export and domestic shipments were increasing throughout October. Export shipments to Taiwan increased (by 1.5 times), as well as those to the USA (+80 %) and Turkey (+30 %).
A forecast by the Russian Steel Association predicts that the growth of domestic demand for steel in 2017 will total 5.5 % due to the consumption increase in the engineering industry by 14 %, in the automotive industry – by 9 % and the consumption increase in the construction industry by 4 %. This recovery results from the price drop of credit resources and imported components which affects investment activity in these industrial sectors.
There was no chance to fully unlock this export potential on foreign markets due to the closed nature of most markets towards Russian produce and due to the high risk of implementation of restrictions on the remaining markets. At the moment more than 50 restrictive measures directed against domestic steel companies are in force, and 10 of them were introduced or adopted in the last year.
Due to the growth of domestic consumption the further increase of ferrous metals rail shipment is expected in the near-term outlook.
Ore: exports fall due to domestic demand growth
Ore shipment in October 2017 totaled 8.9 million tons which corresponds to the level achieved in the previous year. In total, 91.3 million tons of ore have been shipped since the beginning of 2017, which is 0.2% lower than in the same period of 2016.
Exports continued to fall due to growth in domestic ore consumption by the iron and steel plants. Export decreased as a result of halt in supplies to Netherlands, France and Czech Republic. Herewith, supplies to particular countries increased by 100,000-200,000 tons: China (by 1.5 times), UAE (no shipments during the previous year) and Turkey (by almost 2 times).
There may be a decline of ore shipment volumes in the medium term due to the appearance of new export logistics.
Timber freights: further achievement of export potential
Shipment of timber freights in October 2017 increased by 10.0 % and reached 3.3 million tons. In total 36.7 million tons of timber freights has been shipped since the beginning of the year which is 4.1 % more than the same period of 2016.
Domestic shipment of timber freights was unchanged year-on-year, while exports grew by 12%, mainly still driven by China (+22%) and Kazakhstan (+32%).
Within the framework of Strategy of the development of forest sector of the Russian Federation, the programme implemented by the Russian Government, and against the background of the existing significant export potential the moderate growth of timber freights shipment is expected.
Grain and grain mill products: new yield record will support freight market
Grain shipment in October 2017 was 2.5 million tons (+31.6 % as compared to October 2016). Since the beginning of the year a total of 17.1 million tons of grain have been shipped by rail, which is 14.5 % more than in the same period of 2016.
Domestic shipment of grain and milled products fell by 13%, while exports grew by 90%, mainly due to growth of supplies to Egypt (by 4.5 times) and Saudi Arabia (by 4 times).
Second year in a row the grain yield hits a new record – in 2017 the yield will amount to approximately 130 million tons. Shipment growth may continue provided that the current trend remains on the global market, while other exporting countries are not so favored. For example, due to the drought and snowstorms the wheat yield in the USA will decrease by a quarter against the previous year. According to the estimation made by the US Agricultural Department American wheat share on the global export market will fall to 15 %, while Russian yield in this season will be two times higher than that in the USA. Furthermore, it is now known that the U.S Wheat Associates is closing its office in Egypt. This makes Russia the main grain supplier on the Egyptian market; last year nearly a 70 % share of the suppliers to the Egyptian market was occupied by Russian companies. It is expected that Russia will maintain its leadership on the Egyptian market since Ukrainian suppliers have higher delivery costs, and as to Romania and France: due to mediocre yield levels these countries didn’t even bid for the latest Egyptian tenders.
Grain shipment will be also backed up by a freight rate discount valid from October 1, 2017 through June 30, 2018 which was adopted by Russian Railways for export grain freights heading from several regions distant from marine ports. The discount will amount to approximately 10.3 % from the grain export freight rate from stations located within Voronezh Oblast, Orlov Oblast, Tambov Oblast, Orenburg Oblast, Saratov Oblast, Novosibirsk Oblast, Omsk Oblast, Kursk Oblast, Lipetsk Oblast, Penza Oblast, Samara Oblast, Ulyanovsk Oblast and Kurgan Oblast for shipments heading through Russian ports.
Chemical and mineral fertilizers: yet another record
Fertilizer shipment in October 2017 was 4.8 million tons (+9.1 % against October 2016) which is a new record for this month. In total, 47.3 million tons of fertilizers have been dispatched by rail since the beginning of the year, which is 7.9% more than in the same period of 2016.
Therewith, domestic shipment remained on the same level as in the previous year while the exports increased by 10 % against the same period of the previous year. There was an increase of supply of Russian fertilizers to Brazil (1.5 times), China (+11 %), and Lithuania (by 1.5 %).
The domestic market has a capacity for growth in fertilizer demand. According to Andrey Guryev, the President of the Russian Fertilizer Producers Association (RFPA), Russia has passed from the minimum fertilizer application to the today’s level of 40-50 kg of fertilizers per hectare. For reference: European farmers apply 200 kg of fertilizers per hectare, while Japanese farmers apply 300 kg per hectare.
On the global market Russian fertilizer producers have huge price advantage based on the high level of low-cost raw materials availability in comparison with other manufacturers. According to expert estimations, by 2021 the price for Russian gas on domestic market will grow by 20 % as compared to 2016, but however, global rates of gas price growth will outstrip these numbers which will allow Russian producers to maintain their price advantage.
Due to the favorable conditions set on both domestic and export markets the further growth of mineral fertilizers rail shipments is expected.
Leasing rates: correction expected as the rolling stock is expanded
Data on rolling stock sales and leasing rates are taken from the Russian industry periodical Rolling Stock Market.
In October 2017 the sales of cars by CIS plants amounted 6.6 thousand units (4.2 thousand units are gondola cars), which is 46 % more than in October 2016 (4.5 thousand units), and which is also by 11 % higher than the results of September 2017.
Demand for gondola cars is significantly higher than their number being written off which amounted to 590 units in October. In total 2.8 millions of rolling stock were written off in the reporting month. In total 41.8 thousand cars has been written off since the beginning of 2017, while the annual forecast for 2017 states that the number of write-offs will total 45-50 thousand units.
Commercially feasible rolling stock increased to 1,008 thousand units, while the number of cars out of service fell to 56.2 thousand units (the lowest level since 2014). As a result, rolling stock proficit totaled 54 thousand units, although gondola cars proficit is close to zero point.
Daily November leasing rate for gondola cars on standard bogies has increased to up to 1,650 rubles. Based on the evaluation made by the Consumer Council on the Activities of Russian Railways, lack of gondola cars is not systemic, and according to the Ministry of Transportation in 2018 the adjustment of leasing rates is expected progressively as the new rolling stock is released for operation.
Leysana Korobeynikova, Senior Analyst
