Overview of the Russian Railway Market in October-November 2018
October: construction cargo transportation will commence next year
In October 2018, transportation rates[1] continued to grow: loading amounted to 108.4 million tons, which is only 0.3% higher than in October of last year. The main reason of the slowdown in loading growth is a reduction in the transportation of construction materials (-11.2%), which were mainly transported to domestic destinations. The freight amounted to 222.2 tariff billion t-km (+3.5%), and its growth rates did not decrease.
Transportation of coal (+9.9%), oil and oil products (+2.6%), iron ore (+10.1%), timber freights (+9.1%), ferrous metals scrap (+6.3%) and charred coal (+11.1%) increased in October. Transportation of fertilizers (-2.1%), cement (-4.2%) and grain (-8.0%) slightly decreased.
In early October, Oleg Belozerov, Director General of RZD, said that the freight handling plan for 2018 was officially revised and its growth forecast was raised to +2.2%. At the same time, the increase over the 10 months of 2018 amounted to +2.7% as compared to the same period of last year.
According to the October forecast of the socio-economic development of the Russian Federation as per the version of the Ministry of Economic Development, freight handling in the RZD network is expected to increase by +1.5% in 2019. The major increase (+3.2%) will be in the exports. The largest increase in freight handling is expected for coal, which is estimated at over a half of the growth rate. In addition, loading of ore, fertilizers and construction materials will increase. The increase in freight turnover in 2019 is forecasted at +2.6% as compared to the level of this year. Freight handling in 2020–2021 is planned with an annual growth of +2.3%, and a total freight turnover of about +2.5% annually.
Coal: freight handling at a record level over the last 15 years
Coal loading in October increased by 9.9% as compared to last year and amounted to 34.3 million tons, setting a new record over the last 15 years. Since early 2018, a total of 310.6 million tons of coal have been shipped by rail, which is 5.5% higher than the value for the same period of 2017.
Export shipments continued to grow (+1.7%), while the major increase was still associated with the shipments was to Germany (7 times higher than the level of last year) and Poland (1.5 times higher). In addition, shipments to Lithuania significantly increased in October – the increase amounted to almost 400 thousand tons, while the supplies were at a low level of approximately 30 thousand tons in October of last year.
At the end of October, Krzysztof Tchórzewsk, the Minister of Energy of Poland, spoke in favor of resuming the domestic nuclear power plant construction project. The reason is associated with the plans of the European Union to raise the fines for thermal gas emissions, while 80% of electric energy in Poland is provided by coal-fired power plants. According to his estimate, if the issue of decarbonization of the energy sector is not resolved until 2025, the cost of electricity in Poland will grow by 30–40%. At the same time, the development of the energy sector on the basis of renewable sources cannot remedy the situation, as the portion of wind power plants in the energy balance of the current year will not exceed 4%, and the most suitable areas for their construction have been almost completely developed. However, as the nuclear power plant construction project has not yet commenced, the export freight flow of Russian coal to Poland will remain at the current high level.
In addition to external economic conditions, the growth of domestic coal transportation is also contributed by domestic initiatives. Thus, at the end of November, a concessionaire agreement was signed between the State Transport Leasing Company and the Federal Agency for Maritime and River Transport providing for an investment of 24 billion rubles for the establishment of new “Lavna” terminal in Murmansk. The first phase of the terminal with a capacity of 9 million tons is planned to be launched at the end of 2019, and after commissioning of the second and third phases in 2021 and 2023, the port capacity will increase twofold to exceed 25 million tons.
At the same time, according to a study by SUEK, the largest coal producer in Russia, prepared on the basis of data provided by BCG and McKinsey, new technologies, such as the wide spread of electric vehicles, will lead to an increase in coal demand for power plants to about 292–452 million tons by 2030, and 544 million tons by 2035.
The established conditions in the market will contribute to a further increase in coal freight handling by rail through increasing export shipments.
Oil and Oil Products: the growth continues
Loading of oil and oil products increased by 2.6% in October and amounted to 19.7 million tons. A total of 195.6 million tons of oil and oil products have been shipped by rail since the beginning of 2018, which is 0.6% higher than in the same period of 2017.
The growth in transportation is still accounted for by an increase in export freight flow (+2%) to the Netherlands (+6%), Italy (+23%) and Azerbaijan (with almost no supplies during last year).
It became known in November that RZD prolonged a 50% discount for the transportation of oil products from Barbarov and Novopolotsk stations of the Belarusian Railway towards the port stations of October Railway for another 7 years. In addition, the monopoly has decided to reduce the prices for freight transportation within the “tariff corridor” in 2019. The discount will be 20.1% of the current tariff for the transportation of crude oil in tanks from Skovorodino station of Zabaikal Railway to Vanino station of Far East Railway. However, it will be in force in case of a guaranteed amount of transportation for each shipper in the amount of at least 600 thousand tons from January 1 to December 31, 2019.
In the medium term, freight handling of oil cargo by rail can moderately increase due to the establishment of attractive conditions for shippers by RZD, but the commissioning of new pipeline capacities will result in another decrease.
Construction cargo and cement: the sector will obtain state support
Loading of construction cargo decreased by 11.2% in October as compared to the same period of last year and amounted to 10.3 million tons, and loading of cement – by 4.2%, amounting to 2.3 million tons. Since early 2018, a total of 106 million tons of construction cargo and 22 million tons of cement have been shipped by rail, which is 6.6% and 6.7% lower than the values for the same period of 2017.
According to the Federal State Statistics Service, housing commissioning amounted to 5.9 million m2 in October, which is 14.7% lower than in October 2017. Over 10 months of 2018, housing commissioning decreased by 3.6% as compared to the same period of last year.
It became known in late November that the Government of the Russian Federation considers a possibility of introducing direct government support measures for housing developers in order to achieve the indicators envisaged in Housing and Urban Environment Project – 120 million m2 of housing to be built in Russia in 2024 at the current level of about 80 million m2 per year. The procedure of state support will be determined after the adjustment of the project charter due to changes in market conditions, including the inflation rate.
According to an estimate by the Executive Director of Soyuzcement, implementation of the project can lead to a 1.5-fold increase in cement consumption for housing construction (up to 35 million tons of cement per year). At the same time, if the renovation is extended to every region, the volume of transportation, including railroad, can grow even higher. Large-scale national construction projects, such as the construction of Moscow-Kazan high-speed railway, can also contribute to the growth of cement consumption.
The investment program of RZD for 2019–2021, approved by the Russian government, which includes reconstruction of 17,000 km of railway tracks, can become a significant driver for the transportation of construction cargo.
The loading of construction materials and cement by railroad will depend on the determination of state support measures for the construction industry, its adaptation to the new market conditions, the implementation of infrastructure projects, and the general economic situation in the country.
Ferrous metals: a slowdown in the growth of demand
Loading of ferrous metals remained at the level of the previous year and amounted to 6.2 million tons. Since the beginning of 2018, a total of 65 million tons of ferrous metals have been shipped by rail, which is 8.8% higher than in the same period of 2017.
In October, domestic shipments grew by 4%, while the exports decreased by 5%. A decrease in cargo flow to Turkey was an expected result of the introduction of import quotas for steel in the country.
In November, Russian Steel Association, comprising the largest Russian producers of ferrous metals and pipes, lowered the forecast for steel consumption in Russia in 2018 to 1%, which is lower than the previous forecast of 2.6%. At the same time, according to the association, exports in 2018 will remain at the level of last year. However, due to a wave of protectionist measures in various regions after the introduction of a 25% duty on metal products by the USA in addition to the existing protection measures in 2018, the share of semi-finished products (steel feed) in the exports will increase.
At the same time, Severstal forecasts a recovery in the demand of the construction industry in 2019, after a reduction by 2% in 2018. The demand of the automobile industry in 2019 will rise by 5%, having increased by 9% this year, while the demand of heavy machinery will decrease by 4% in 2019 after a 7% increase in 2018. The increase in demand from the manufacturers of large diameter pipes will amount to 10% next year after the level of 15% in 2018. According to the company, Russia will be able to reach a slow growth of 1% per year over the next five years, and after 2023 it will accelerate against the background of large government expenses on infrastructure projects and the demand from the energy sector.
According to an estimate by NLMK, the global growth in demand for steel will slow down in 2019 as compared to 2018 and will amount to 1.4%. Next year, in the countries of Asia and Oceania, EU, USA and the Russian Federation, the growth in demand will remain at the level of 2018. In the countries of Central and South America, as well as in the Middle East and Turkey, the forecasted demand will grow by 1%.
Thus, following the demand for metal products, the growth of ferrous metal transportation by rail will slightly decrease, although a moderate growth is expected in the medium term.
Ore: manufacturers expand the capacities
Ore loading was 9.8 million tons in October, which is 10.1% higher than the values of last year. Since the beginning of 2018, a total of 96.3 million tons of ore have been shipped by rail, which is 5.5% higher than the values for the same period of 2017.
In October, the domestic shipments increased by 13%, while the exports dropped by 7% due to a decrease in the supplies to Turkey (two-fold) and China (-25%). At the same time, exports increased by 15% as compared to the previous month due to an increase in the supplies to the Netherlands and France.
It became known in October that Severstal JSC, which controls the capacities of Yakovlev Mining and Processing Plant in the Belgorod Region, intends to invest 25 billion rubles in its modernization by 2023. The volume of ore mining is planned to be increased from 878 thousand tons to 5 million tons per year. By the end of 2018, the of production at the plant should increase to 1.315 million tons, which would require 2.87 billion rubles of investments.
In addition, Evraz intends to invest about 6.8 billion rubles in the reconstruction of Tashtagol mine in Kemerovo Oblast and complete the work by the second half of 2019. The company is reconstructing the stowage facilities to double its capacity, and renovating the mine water treatment plant and the administrative and household plant. The project will allow to increase the amount of iron ore mining at the facility by 1.5 times — from 2.2 to 3.25 million tons per year.
In the medium term, the transportation of ore by railroad will moderately grow against the background of the development of domestic mining capacities and a stable demand for metal products.
Timber freights: the focus is on exports
Loading of timber freights increased by 9.1% in October as compared to the level of the previous year and amounted to 3.6 million tons. Since the beginning of 2018, a total of 38.3 million tons of timber freights have been shipped by rail, which is 4,6% higher than the value for the same period of 2017.
The increase in freight handling occurred in October due to both domestic (+25%) and export (+8%) transportation. The increase in shipments to Finland (+25%) and Kazakhstan (+40%) continued.
The timber industry of the Russian Federation can obtain additional state support. According to Alexei Kozhevnikov, Vice-President of JSC Russian Export Center, six-year long-term exporter support programs will be introduced for the first time in Russia with funding in the amount of 750 billion rubles. Funding will be provided within the framework of the national export development program. At the same time, the priority sectors will include those where a success has been achieved over the recent years in terms of import substitution, including the forest industry.
ULK Group (Arkhangelsk Region) and ZHEJIANG MATERIALS INDUSTRY SENHUA GROUP CO., LTD (China) have concluded an agreement on the supply of 220 thousand cubic meters of timber per year. The contract price is 50 million dollars. Two more Chinese companies expressed an interest in the Russian pulp and paper industry. The Yibo Foundation Group is considering the possibility of investing in the construction of a pulp and paper mill in Lesosibirsk (Krasnoyarsk Krai), and the Shanghai Association of Timber Products Trade informed about the need for importing Russian pulp.
Timber freight transportation by rail will continue to grow along with the development of the RF timber industry, and an increase of non-resource exports is expected.
Grain and grain mill products: an expected decrease in freight handling
Grain loading in October amounted to 2.3 million tons (-8.0% as compared to October of last year). Since the beginning of 2018, a total of 22.3 million tons of grain have been shipped by railroad, which is 30.8% higher than the value for the same period of 2017.
The decrease in transportation occurred due to a reduction in the exports mainly to Saudi Arabia (minimum supply level), Egypt (-10%) and Azerbaijan (-70%).
According to Head of the Rusagrotrans Analytical Center, the grain exports can reach 4.5 million tons in November as compared to 5.5 million tons in November 2017, including wheat – 3.8 million tons as compared to 4.4 million tons of last year. The cause of the decrease is the effect of a high baseline figure of the record-breaking last year, as well as the impact of weather factors (recurring storms and winds impacting the shipments). In addition, the expert acknowledged a moderate demand for wheat – its supply currently exceeds the demand.
The Ministry of Agriculture expects an amount of grain harvest in Russia of 110 million tons in 2019. The values of grain harvest in 2018 amounted to 114.3 million tons. Next year, the total crop area will be 80.5 million hectares, which is 1.3 million hectares (1.6%) higher than in 2018. Spring sowing will be carried out on the area of 52.9 million hectares, which is 0.8% higher than the level of this year. Spring grain and leguminous crops are planned to be cultivated on the area of 30.3 million hectares, which is 2.2% higher than in 2018.
In the current conditions, grain transportation by rail will decrease in comparison with the level of last year, but will remain at a high level.
Chemical and mineral fertilizers: the decrease is short-term
Grain loading in October amounted to 4.7 million tons (-2.1% as compared to October of last year). Since the beginning of 2018, a total of almost 48.9 million tons of fertilizers were shipped by rail, which is 3.5% higher than the value for the same period of 2017.
In October, domestic shipments grew by 10.5%, while the exports dropped by 8.5% due to a decrease in supplies to China (-20%), Ukraine (-85%) and Brazil (-20%).
According to Director General of PhosAgro, the global fertilizer market is on the verge of changes. The stage of high capital costs associated with the introduction of new products to the market has ended, while the global demand for fertilizers has significantly increased. In addition, the strengthening of environmental requirements in Europe for cadmium content in phosphate fertilizers will favorably impact the quality of agricultural products, at the same time representing a challenge for their producers. Severe restrictions in terms of the purity of fertilizers have already been introduced in 21 European countries. At the same time, the products of Russian phosphate fertilizer manufacturers already meets these requirements.
New markets also look promising. Uralkhim JSC and Uralkali PJSC announced their intention to enter the African market in the next 7-10 years. It can be one of the largest market for fertilizer producers and reach China and India in term of consumption volumes, purchasing 7 and 4.8 million tons per year, respectively.
Additionally, in November Director General of Uralchim voiced the plans to increase the share of mineral fertilizer supplies in the domestic market by up to 50%. He mentioned that the company currently ships 65-70% of its output to foreign markets, and the remaining 30-35% are distributed in the domestic market, respectively.
In the medium term, an adjustment of fertilizer transportation by rail is expected due to the high global demand for Russian products, as well as the planned commissioning of production facilities in the territory of the Russian Federation.
Further growth of the railway market is expected
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 1040 thousand units, whereas the defective fleet remains at a low level of about 51.5 thousand units as of the beginning of November. As a result, the surplus of the fleet was 42.6 thousand units.
In October, the sales of cars by the CIS plants amounted to 7.6 thousand units, which is 16% higher than the results of October 2017 (6.6 thousand units). At the same time, only 2.4 thousand cars have been decommissioned. A total of 4.8 thousand gondola cars were sold, which significantly exceeds the amount of their decommissioning (0.8 thousand units). The rental rates for standard gondola cars increased to 2000 rubles per day in November, and there is still no surplus in the segment.
At the beginning of November, the fleet of new generation cars by different manufacturers reached almost 118.3 thousand units. In November, Uralvagonzavod announced its intention to return to the production of new generation cars after the completion of the current order, but not earlier than May 2019.
According to Deputy Director General of the Institute of Natural Monopolies Research (IPEM), Vladimir Savchuk, the car builders of the Russian Federation will produce up to 65 thousand cars in 2019. At the same time, the most promising demand behavior can be expected in the segment of fitting platforms. According to IPEM estimates, their deficit has a long-term nature, and within 3 years the supply rate can increase by over 20%. In addition, about half of the market participants surveyed by IPEM are expecting a growth in the car supply rates in 2019 for the remaining rolling stock. The highest rate growth is predicted for box cars (indicated by 69% of respondents), fitting platforms (66%), grain carriers (54%) and gondola cars (44%).
Leysana Korobeynikova, Head of Analysis
[1] Since October 2018, freight handling includes the data of JSC AK Railways of Yakutia, where RZD is a carrier.
