Overview of the Russian Railway Market in September-October 2016
Loading decrease due to gondolas shortage
In September 2016 loading amounted to 102 million tons (-1.4% compared to the same period last year).
Decrease in loading was due to gondolas shortage: coal companies were unable to ship freights according to contracts, despite production growth (+10-15%).
Rail transportation of coal (-1.5%), oil and oil products (-6.7%), construction materials (-2.2%), ferrous metals (-5.2%) and cement (-3.4%) decreased. Rail transportation of iron and manganese ore (+2.2%), timber freights (+3.2%), fertilizers (+10.0%), coke (+11.1%) and ore of non-ferrous metals (+5.6%) increased.
Freight turnover in September 2016 amounted to 194.7 billion ton-km (+1.2%), having set a new freight traffic record for this month. At the same time, despite 6% decrease in loading in domestic directions, export freight traffic continued to increase (+3%).
Coal: gondolas shortage caused loading decrease
In September loading of coal on the Russian Railways’ network decreased by 1.5% compared to last year’s level and amounted to 26.5 million tons. A total of 240.5 million tons of coal was transported by rail since the beginning of 2016, it is by 2.7% higher 2015 level.
Coal mining in September, according to Rosstat, exceeded by 0.2% last year’s level, though, according to the Ministry of Energy, there was a decrease by 2.2%. Nevertheless, the Ministry of Energy predicts an increase by 4.9% of coal mining following the results of year, and an increase by 9% of coal export.
In September gondolas shortage and increase in electric power output of Far East hydroelectric power stations have caused a non-compliance, on average by 10%, with plans for coal mining and a decrease in volume of transportations. Domestic freight traffic decreased by 12%, while export growth continued and amounted to 9%. Export freight traffic to China (+40%), the UK (+15%), North Korea (there were no deliveries to that country last year) and to the Ukraine (+15%) increased.
Recovery of coal prices up to 79.2 $/ton convinced Russian Railways to make a decision to return an extra charge for export transportation of coal in the amount of 13.4%.
In the short-term, coal traffic can decrease due to a local gondolas shortage, despite record coal mining and great demand for the Russian coal in the world market.
Oil and oil products: low level of loading
In September loading of oil and oil products on the Russian Railways’ network decreased by 6.7% relative to last year’s level and amounted to 18.2 million tons. A total of 174.8 million tons of oil freight was transported by rail since the beginning of 2016, that figure is by 7.4 % lower than 2015 level.
Oil production in September was higher by 3.5% than last year’s level according to the Ministry of Energy data, and by 1.9% according to Rosstat data. At the same time primary crude oil processing increased by 0.6%.
Export decreased in the direction of the Netherlands ports (-14%), Turkey (deliveries to that country almost stopped), South Korea (by 3 times), Italy (-10%) and the Ukraine (two-times decrease). Deliveries to China (by 1.5 times growth) and to Kazakhstan (by 1.7 times growth) were still at a high level.
According to the forecast made by the Russian Ministry of Energy, made in September, oil extraction in 2016 will increase to 540-545 million tons (+1.3%-2.3% compared to 2015 level), export of oil will increase by 3.3%, while volume of crude oil processing will decrease to 277 million tons (-3.5%). In 2017 extraction of about 524-545 million tons of oil (from -2.8% to 0% relative to the estimation for 2016) is predicted.
According to Anatoly Krasnoschek, Vice President of JSC “Russian Railways”, a decrease in loading of oil traffic is due to three reasons. First, there is increasing pressure on the part of pipeline transport. According to his estimation, about 4.5 million tons of crude oil and 1 million tons of diesel fuel were switched to pipe over 9 month of 2016 due to this reason. Second, the implementation of a tax maneuver led to a reduction of volumes of oil processing at an oil-refinery: production and sell of mazut to a foreign market became economically unprofitable due to a drop in export prices for it. Thirdly, an additional decrease in export prices for petrol and diesel fuel was due to a stage-by-stage increase by 34.5% in excises size in 2016.
In the second half of October JSC “Russian Railways” introduced a 25% discount for transit transportations of oil products from stations Barbarov and Novopolotsk (Belarus) in the direction of ports situated in the northwest of the Russian Federation until the end of 2018. This measure aims to stimulate the transfer of oil freights from the Baltic ports to the Russian ports.
Today, the transit of all Russian freights in the direction of Baltic ports is about 49 million tons per annum, including oil products. In the middle of September “Transneft” declared its intention to completely switch export of oil products from the Baltic States’ ports – Ventspils and Riga to the Baltic ports – Ust-Luga and Primorsk, and also to Novorossiysk Commercial Sea Port by 2018. Transfer of all volume of export of oil products to the Russian ports of the Baltic Sea can provide their operation with additionally 9 million tons per annum.
Therefore, in 2016 rail transportation of oil and oil products will remain at the current low level, and from 2017 traffic volumes can additionally decrease due to a possible reduction of extraction volumes. Besides, oil refining will also lead to an increase in a pipeline transport share and to a decrease in demand for rolling stock. From October 2016 a decrease in the transportation of oil transit on the Russian rail roads is likely to occur.
Construction materials and cement: multidirectional dynamics of non-metallic construction materials mining and transportation due to gondola cars shortage
In September loading of construction materials on the Russian Railways’ network decreased by 2.2% compared to last year’s level and amounted to 13.2 million tons. At the same time loading of cement decreased by 3.4% to 2.8 million tons. A total of 111.1 million tons of construction materials (+14.6% compared to 2015) and 21.4 million tons of cement (-5.4%) was transported by rail since the beginning of the year.
The main decrease in deliveries occurred to Moscow and the Moscow region (a drop of about 12% compared to September 2015), as well as to the Penza, Kaluga and Kirov regions (a drop from 30% to 50%). Freight traffic to the Leningrad (by 2 times), the Tumen (+30%) and the Perm (+75%) regions, as well as to the Republic of Bashkortostan (+70%) is increasing.
In September 2016 the production of cement decreased by 9.9% compared to 2015 in this country, the production of concrete products and constructions – by 14.2%, whereas mining of non-metallic construction materials increased by 6.8%.
6.7 million square meters of housing were constructed in Russia for September 2016, this figure is by 3.6% less than the result of this period last year, and relative to August 2016, it is by 20.4% more.
A construction budget of the second phase of the Vostochny Cosmodrome, or Eastern Spaceport (Eastern Spaceport) consisting of 21 facilities 238 billion rubles worth, was determined in October. Earlier, the Head of “Roskosmos” Igor Komarov said, that the investments would exceed 350 billion rubles. The plan includes the construction of a launch complex and a technical complex for launch-vehicles “Angara – A5”, “Angara – A5P”, the construction of infrastructure for the preparation of a pilot-controlled launch and facilities that will be providing preparation and conducting launches of heavy class rockets. The construction is scheduled to be accomplished by 2021.
Currently, the main drivers of growth of construction freights traffic are still infrastructure projects. Multidirectional dynamics of non-metallic construction materials mining and transportation is partly due to gondolas shortage.
Ferrous metals: the situation in the export market is getting worse
In September loading of ferrous metals on the Russian Railways’ network decreased by 5.2% relative to last year’s level and amounted to 5.5 million tons. A total of 52.8 million tons of ferrous metals was transported by rail since the beginning of 2016, that figure is by 1.9% lower than 2015 level.
In September domestic rail traffic decreased by 8%, whereas export traffic decreased by 3%. Main drop in traffic relative to last year was to Turkey (by two times) and the US (by 20%). A significant increase is noted in terms of freight traffic to Taiwan (+25%) and the beginning of steel billets supplies to Saudi Arabia and big diameter steel pipes to Finland.
According to Rosstat, production of steel in September decreased by 2.1% compared to 2015 level, of cast iron – by 9.9%, and output of rolled ferrous metal products increased by 0.3%.
Erdemir Group, the largest Turkish producer of flat-rolled products and a number of local metallurgical companies lodged a complaint to the government of the country, asking to initiate a new anti-dumping investigation against hot-rolled flat products import from China, Russian and the Ukraine. Currently Turkey holds the second place in terms of ferrous metals volumes of import from Russia.
Further growth of ferrous metals export traffic from Russia is hampered due to the existing and planned restrictive measures on the part of the EU and other countries.
Iron and manganese ore: increase in traffic due to export
In September loading of ore on the Russian Railways’ network increased by 2.2% compared to last year’s level and amounted to 9.4 million tons. A total of 82.6 million tons of ore was transported by rail since the beginning of 2016, that figure is by 1.5% higher that the level of 2015.
According to Rosstat, ore mining increased by 4.5% in September. In total by 0.8% more ore, compared to last year’s level, was mined since the beginning of the year.
At the same time, domestic traffic decreased by 3%, and export traffic increased by 30%.
In September 2016 supplies to China (+20%) and Poland (+65%) increased, deliveries to Italy and Trinidad and Tobago began as well.
According to the analyst Julius Baer, demand for metals should weaken, taking into consideration the approach of seasonal slowdown in the construction sector and industrial production in the fourth quarter. Amid the weakening demand from steel foundries of China and increase in production volumes of inexpensive resources in Australia and Brazil, an oversupply is again forming on the iron ore market, and that will hamper further export from the Russian Federation.
Therefore, an increase in freight traffic is occurring mainly due to export freight flow growth. The situation can change if a new export logistics of ferrous metals is created or if some restrictions, which are influencing the Russian steel products, are cancelled; in this case, ore traffic will increase in internal directions. But gondolas shortage may have a negative impact on iron ore traffic.
Grain and milled grain products: incomplete harvest of the current season already exceeded record harvest 2008.
In September loading of grain and milled grain products on the Russian Railways’ network remained at last year’s level and amounted to 1.9 million tons. A total of 13 million tons of grain was transported by rail since the beginning of the year, it is by 4.3% higher than 2015 level.
In September, domestic freight traffic increased by 4% compared to last year’s level, and export traffic decreased by 11%. Freight traffic to Saudi Arabia (-75%), Yemen (supplies to that country almost stopped) and to Egypt decreased. It is worth mentioning that supplies to Turkey (by 2.4 times) and to India (there were almost no supplies to that country last year) increased.
Wheat harvest in Syria turned out to be the lowest this year in the last 27 years – 1.3 million tons, due to military operations and rare rains. This figure is two times less than last year. As a result, local agricultural industry was unable to feed the country. That is why Syria's state grain buying agency Hoboob purchased 1 million tons of the Russian wheat by tender in the middle of October.
Russia already broke the record of 2008 in terms of grain harvest (108.2 million tons) – 108.7 million tons from 92.7% of treated areas for sowing were already harvested as of the middle of October, 2016. The Ministry of Agriculture expects that about 116 million tons will be harvested in this season, having said that, analysts predict a higher amount: according to “SovEcon” it is 119 million tons, “Rusagrotrans” – 118.2 million tons, the Ministry of Agriculture of the US (USDA) – 111.5 million tons (however, the Ministry does not take into account Crimea data (1.4 million tons) and some leguminous data (peas, buckwheat, etc. – totally about 4 million tons)).
“SovEcon” analysts lowered the forecast in terms of Russian grain export in this season from 40.7 million tons to 40.2 million tons. According to experts, Russian grain export volumes are influenced by the ruble becoming stronger and by a minimum, for three years, world price for wheat.
In general favorable conditions are created on the grain market for grain export.
Chemical and mineral fertilizers: traffic reached its peak
In September, loading of fertilizers on the Russian Railways’ network increased by 10.0% in comparison with last year’s record level and amounted to 4.4 million tons. A total of 39.4 million tons of fertilizers was transported by rail since the beginning of the year, that is by 3.2% higher that the level of 2015.
In September, domestic freight traffic increased by 10.5% compared to last year’s level, while export traffic increased by 7%.
Brazil (+40%), Germany (by 2.3 times), the US (+20%), the UAE (by 2.3 times) and Belarus (by 2 times) increased fertilizers supplies from Russia.
In October, the Russian Association of Fertilizer Producers (RAPU) asked Prime Minister of the Russian Federation Dmitry Medvedev not to allow the introduction of the Russian Railways export extra charge for mineral fertilizers and ammonia transportation during 2017-2019, as well as not to index railway tariff for this kind of freight higher than 4.5% in 2017. Producers explain that their stand is based on the fact that prices for ammonia and mineral fertilizers, supplied abroad, in September decreased by 40%-70% compared to January 2015. Such situation with a further positive dynamics can maintain for the next 3-4 years.
In the medium term mineral fertilizers traffic can remain at the current high level due to a stable demand both on internal, and external markets, and it can also increase in the process of new capacities’ commissioning.
Normalization in the railway market continues
The source of data on sale of the rolling stock - the magazine “Rolling Stock Market”.
In September 2016 the sale of freight cars made by plants of the CIS countries amounted to 3,657 units, and it is by 35% higher than the figures of September 2015 and by 4% lower than the previous month level.
Sales of freight cars set on bogie 18-100 or its analogues decreased by 20% compared to 2015, while sales in new generation freight cars segment increased by 2 times.
Efficiency of operational use (average freight turnover of a loaded car per month) of UWC innovative freight cars amounted to 497 thsd. ton-km in September, that is by +104% higher than standard freight cars efficiency.
A write-off in September returned to a high level – 10.3 thsd. freight cars (6.1 thsd. – gondolas). A total write-off for 9 months of 2016 amounted to 91 thsd. freight cars (+19% compared to similar period of 2015).
The rolling stock commercially suitable to be utilized on the Russian Railways’ network remains at the level of 988 thsd. units. Faulty rolling stock fleet decreased to 90 thsd. units as of the beginning of October. The real surplus of the fleet amounted to 74 thsd. units (of which gondolas – only 6 thsd. units).
Rolling stock surplus decrease allowed enhancing the Russian Railways’ network operation efficiency. For example, freights delivery average speed on the Russian Railways’ network grew by 12% in 9 months compared to a similar period of 2015, and reached 381.3 km a day. At the same time average loaded freight cars delivery speed increased by 9.3% to 409.8 km a day, of empty freight cars – by 14.9% to 348 km a day. As a result since the beginning of 2016 average delivery speed of full train shipment amounted to 552.3 km a day (+7.4% compared to the level of January – September 2015), of container shipment – 520.1 km a day (+12%), of collective shipment – 333.8 km a day (+10.7%), of single car load shipment – 284.9 km a day (+10.4%).
Russian Railways came up with proposals for a targeted change of tariffs. The management of the company propose to implement one of two options: either to introduce a direct governmental price regulation in terms of services for freights loading and unloading in sea ports, or remove restrictions on establishing of export freight traffic tariffs, including within the tariff corridor. In the second case the tariff for export freight traffic can increase by 19.6%.
According to the Federal antimonopoly service, the proposals of Russian Railways “taken as a whole, may lead to an increase in tariff burden on consignors in 2017 in the amount of 12%”. The Federal antimonopoly service also points out that cumulative export traffic load is currently “all-time high”, wagon tariff component (a rent rate) multiplied “due to artificially developing deficit” because of freight cars write-off; prices for stevedoring services increased due to exchange rate differences. In this regard, the agency found it “inappropriate to compensate a decrease in volumes of marginal freights transportation on account of tariffs increase”.
Leysana Korobeynikova, Senior Analyst