Overview of the Russian Railway Market in September-October 2017
Rail freight market continues to grow
Rail freight market growth continued in September 2017: loading volumes were 103.8 million tons (+1.8% year-on-year), and cargo turnover was 203.3 billion ton-km (+4.2%).
There was year-on-year growth in transportation of coal (+7.9%), oil and petroleum products (+1,6%), ferrous metals (+10.9%), timber freights (+6,2%), fertilizers (+2.3%), grain (+15.8% ) and ferrous scrap (+14.3%).
There was a decrease in transportation of construction materials (-11.4%), iron ore (-3.2%), cement (-3.6%), non-ferrous ore (-21.1%) and coke (-10.0%).
Coal: growth was mainly driven by exports to Japan, Poland and Romania
Loading of coal in September 2017 set a record for this month of the year, reaching a level of 28.6 million tons (+7.9% against September last year). A total 262.96 million tons of coal have been shipped by rail since the beginning of 2017, which is 9.3% more than in the same period of 2016.
In September domestic coal shipment matched its level in the same period of 2016, while exports growth reached 12%. The biggest increases were in supplies to Japan (+ 15%), Poland (doubling of supplies) and Romania (by 6 times). Total coal exports to these countries were up by 300-450,000 tons compared with September 2016.
The IEA expects that coal market share in the global energy balance will decline by 2040 from current 35-40% to 25%. However, Russian companies believe that global demand for its domestic coal will grow.
For example, as estimated by the SUEK, China, India, Malaysia, Vietnam, Taiwan and Indonesia are likely to increase their coal-fired power generation. At the same time according to the SDS-Ugol calculations, current production capacities will allow available coal stocks to last for 500 years, while China will run out of its domestic coal in 34 years, Indonesia – In 65 years, India – In 83 years. Moreover, apart from using coal in power plants, China intends to increase coal-based synthetic motor oil output (to 50 million tons by 2020).
The only obstacle on the way to further growth of coal-fired power generation is the global trend for the carbon dioxide emissions decrease, but this issue is settled through advanced coal and coal-fired power plants cleaning, where the emissions are recovered. In mid-October, the Russian President Vladimir Putin said that ultimately treatment of this mineral to obtain pure coal requires financial investments, but this does not interfere with technological development.
Over the long run Russia’s export potential is enormous, which allows to forecast sustainable growth in coal rail shipment.
Oil and petroleum products: slight increase in cargoes
Crude oil and petroleum product shipment increased by 1.6% year-on-year in September 2017 and reached 18.5 million tons. In total 175.2 million tons of crude oil and petroleum products have been shipped by rail since the beginning of 2017, which is 0.2% higher year-on-year.
Trends in cargo structure were unchanged: shipment of fuel oil continued to decline (-20%) and there was growth in shipment of diesel fuel (+27%) and gas condensate distillates (+30%).
According to the State Statistics Service (Rosstat) in 2017 within a 9-month window gasoline output decreased by 2.1% year-on-year, fuel oil decreased by 7,5%. However, diesel fuel output increased by 2.1%. A forecast by the Russian Ministry of Energy, given in September, predicts that demand for gasoline and diesel will grow steadily and by 2020 growth in domestic consumption will reach 5.9% and 6.9%, respectively. Considering the refinery upgrade program, which aims at oil processing enhancement, the processing enhancement to 84.6% is predicted.
Currently there are no factors for oil and petroleum product rail shipment increase, however with increase of light oils shipment share some structural changes are possible.
Construction materials and cement: shipment recovery is expected in 2018
Construction cargo shipment continued to fall in September 2017 and was at a level of 11.7 million tons (-11.4% compared with September last year). Loading of cement fell to 2.7 million tons (-3.6%). In total, 101.9 million tons of construction cargoes and 21.2 million tons of cement were shipped by rail since the beginning of 2017, representing year-on-year declines of 8.3% and 0.7%, respectively.
According to the Russian Federation Federal State Statistics Service, about 6.7 million m2 of new housing (measured by floor space) was completed in September 2017, which is 0.2% more than in September 2016. Cement production growth also indicates the ongoing positive dynamics: it is 1.5% higher year-on-year. However, total completions since the beginning of the year are down by 6.3% year-on-year.
As estimated by the Minister of Construction and Housing Mikhail Men, financial support of infrastructure construction will ensure completion of additional 8 million m2 of new housing in 2018.
Construction materials shipment recovery is likely to happen with the start of the next construction season. It is also ensured by low mortgage interest rates, lowering of the real estate prices and rolling stock availability increase driven by the growth in gondola cars production.
Ferrous metals: growth driven by domestic consumption
Ferrous metal shipment totalled 6.1 million tons in September 2017 (+10.9% compared with September 2016). A total 53.5 million tons of ferrous metals have been shipped by rail since the start of the year, which is 1.2% more than in the same period of 2016.
Shipment growth is still driven by domestic freight growth (+20%), whereas export matches the level of 2016 (although doubling of shipments is reported in the USA – about 300,000 tons of Russian goods). Domestic shipments show growth in loading of the track grid (it doubled year-on-year), sheet steel (+15%), rolled ferrous metals (+15%) and slabs (by 2.4 times).
Apart from the development of rail car building (+57% in the course of 9 months, 2017 year-on-year for passenger cars and +78% for freight cars) and motor vehicle industry (+22%), the largest smelting plants (Severstal, MMK, NLMK) and industry experts name the following reasons of domestic consumption growth: piping companies increased their demand for slabs, longer construction season owing to weather conditions and export prices correction.
Due to an increase of domestic consumption and Russian railways tracks repairs, 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 September 2017 was 9.1 million tons (-3.2% compared with September 2016). In total, 82.4 million ton of ore have been shipped since the beginning of 2017, which is 0.2% lower than in the same period of 2016.
Exports decreased significantly due to growth in domestic ore consumption by the smelting plants. Most of the decline in exports was due to lower supplies to Slovakia (-60%), Poland (-50%) and China (-20%). However, there was growth in shipments to some regions: about 200,000 tons to the UAE and about 120,000 tons to Japan. Last year there were no supplies to these countries.
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 September 2017 increased by 6.2% and reached 3.4 million tons. In total, 33.4 million tons of timber cargo has been shipped since the beginning of the year, which is 3.8% more than the same period of 2016.
Domestic shipment of timber freights was unchanged year-on-year, while exports grew by 9%, mainly still driven by China (+22%) and Kazakhstan (+25%).
Experts believe timber freights to have a substantial potential. Current timber loading level is still half as high as the levels of 2007-2008. Besides, as per the 2030 Russian Timber Complex Development Strategy, which has been recently adopted by the Government, timber harvesting shall be increased by 1.5 times, lumber production – by 2.3 times, wood boards production – by 1.5 times.
Grain and milled products: continued growth
Shipment of grain in September 2017 totalled 2.2 million tons (+15.8% against September 2016). A total 14.6 million tons of grain have been shipped by rail since the beginning of the year, which is 12.3% more than in the same period of 2016.
Domestic shipment of grain and milled products fell by 15%, while exports grew by 50%, mainly due to growth of supplies to Egypt (by 2.8 times).
The Ministry of Agriculture of the Russian Federation predicts that this year’s grain harvest is expected to reach 128 million tons of grain, 81.4 million tons of wheat (net weight). This is a harvest record for Russia: last time it was reached in 1978.
To avoid prices fall due to abundant harvest Russian Government intends to support the farmers. This support shall be carried out in two ways: funding of lending interest rates and funding of grains rail shipment tariffs.
Chemical and mineral fertilizers: stronger export positions
Fertilizer shipment was 4.5 million tons in September 2017 (+2.3% against September 2016), and it’s a new record for this month of the year. In total, 42.5 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.
Domestic transportation increased by 6%, and export growth was 1% year-on-year. There was an increase in supplies of Russian fertilizers to China (+8%), Ukraine (+17%) and Syria (by 2 times).
In October EuroChem holding company purchased Emerger Fertilizantes, the Argentinian premium and standard fertilizers distributor. Company representative said, that this deal would ensure significant strengthening of EuroChem position in Latin America, as 11% of fertilizers, manufactured by the holding company, is now sold to this region.
With stronger export positions of Russian companies and Russian agriculture development there is a solid base for further export freight increase.
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.
CIS manufacturers sold 5,900 rail cars in September 2017, including 3700 gondola cars, which is 62% more than in September 2016 (3,700 cars) and 15% more than in August 2017.
Demand for gondola cars is twice greater than the number being written off (there were 900 gondola write-offs in September this year). The total number of cars of all types removed from the Russian fleet in August was 3,500 units.
The share of the fleet in working order was at a high level of 1,005,000 cars at the start of September, while the number of cars out of service had fallen to 57,400 (the lowest level since 2014). As a result, the fleet had a “surplus” of 64,000 units, although the balance for gondolas is close to zero.
Average October daily lease rates for gondolas on standard bogies were at about 1500 rubles. The growth is driven by consignors’ high demand based on rolling stock dynamic growth. Should current rail car building rates remain unchanged, rolling stock balancing is expected in spring 2018 based on seasonal shipment decrease, which might lead to older gondola cars daily lease rates decrease to 1,000-1,200 rubles.
Leysana Korobeynikova, Senior Analyst
