Overview of the Russian Railway Market in September-October 2018
September: construction cargo slows down the increase in freight handling
In September 2018 the increase in freight handling slowed down: loading amounted to 104.5 million tons, which is only 0.7% higher than the value of September last year. The cargo turnover continued to grow and amounted to 209.5 billion ton-km (+2.9%).
In September, transportation of all cargoes increased, except for construction materials (-10.3%), cement (-7.4%) and grain (-4.5%): coal (+2.4%), oil (+3.8%), iron ore (+1.1%), ferrous metals (+3.3%), timber freights (+2.9%), fertilizers (+4.4%), non-ferrous ore (+13.3%).
Coal: the growth of export will continue
Coal loading in September increased by 2.4% as compared to the last year and amounted to 29.3 million tons, setting a new record for this month over the last 15 years. Since early 2018, a total of 276.3 million tons of coal have been shipped by rail, which is 5.1% higher than the value of the same period of 2017.
The increase in freight handling was caused by an increase in export shipments (+5.0%), mainly to Germany and Poland — the volume of supply to these countries increased by 600-700 thousand tons as compared with September of the previous year. A minor slowdown in growth was caused by a decrease in shipments to Japan (-10%).
Based on the expert estimates, Germany is not going to stop using Russian coal in the near future. According to the Chair of Committee, Christian Democrat Ronald Pofalla, the last coal-fired power plant should be shut down in Germany between 2035 and 2038. At the same time, at the plenary meeting of the Russian-German business forum in October, the governor of the Leningrad Region announced his intention to cooperate with Germany in the field of coal supply. It has been planned to arrange coal flow to the German port of Rostock through the port of Primorsk after the commissioning of additional capacities.
The decline in coal exports to Japan can be caused by the gradual restoration of nuclear power generation in the country. According to a statement of the Japanese Institute of Energy Economics, seven power units of their own NPPs will be repeatedly put into operation by the end of 2018. Today, five power units are already operating in Japan, and in the nearest future the third and fourth units will be commissioned at Takahama NPP. However, a complete transfer to nuclear power has not been planned. It is expected that Japan will have more than forty newest coal-fired TPPs by 2030 in accordance with the state program.
Ukraine has announced their intentions to procure coal from Russia for almost three-quarters of the total procurements of this type of fuel in 2019. According to the fuel pattern of CHPs and TPPs published for 2019 by the Ministry of Energy and Coal Industry, the portion of coal from Russia will be 3 million 815 thousand tons. In October, coal supplies from Russia to Ukraine increased by 20% in comparison with the last year level.
According to Anatoly Yanovsky, Deputy Minister of Energy of Russia, this year the export of power generating coal will be 177 million tons, and the dynamics of its growth will remain positive until 2030. At the same time, the growth is mainly due to consumption by the countries of Asia-Pacific region and Africa in the future (Morocco and Egypt), where they prefer cheaper coal-fired generation of electricity.
A further increase in coal shipments by rail is projected due to the increase in export shipments against the background of a favorable global market situation and high demand for domestic coal.
Oil and oil products: a minor growth
Loading of oil and oil products increased by 3.8% in September and amounted to 19.2 million tons. A total of 175.9 million tons of oil and oil products have been shipped by rail since the beginning of 2018, which is 0.4% higher than in the same period of 2017.
The growth in transportation was caused by an increase in export shipments (+ 6.7%). The supplies to the Netherlands (+20%), Italy (+20%), Mongolia (+60%) and Azerbaijan (almost no deliveries were last year) have increased.
The State Oil Company of the Azerbaijan Republic (SOCAR) started to import Russian motor gasoline AI-92. According to the company representative, Baku Oil Refinery named after Heydar Aliyev annually produces a certain amount of fuel with a reserve aimed to meet the demands during the scheduled maintenance work at the enterprise. In addition, the plant is also carrying out modernization aimed at producing better fuel, and therefore, the period of maintenance activities can be extended. Thus, at the start of maintenance works, the demand for AI 92 gasoline in the local market is covered by its own reserves, and in the following days - by imports.
The supplies of oil cargo to Belarus decreased two months in a row - exports were less by 30% in September as compared with values of the last year. At the same time, the supply of gasoline, diesel fuel and fuel oil to Belarus have been planned to be stopped since November, and the restriction will be in force until the end of next year. According to estimations by the Ministry of Energy, the duty-free export of petroleum products to Belarus is inexpedient, as the country fully satisfies its demand for petroleum products by means of refining Russian oil.
By now, RZD was able to stop the decrease in freight handling of oil and oil products, bit no significant growth is expected. The further forecasts will depend on the progress of RZD in the establishment of attractive conditions for shippers.
Construction cargo and cement: recovery is still in progress
Loading of construction cargo decreased by 10.3% in September as compared to the same period of the last year and amounted to 10.5 million tons, and loading of cement - by 7.4%, amounting to 2.5 million tons. Since early 2018, a total of 95.7 million tons of construction cargo and 19.7 million tons of cement have been shipped by rail, which is 6.1% and 7.2% lower than the values in the same period of 2017.
According to the Federal State Statistics Service, housing commissioning amounted to 6.3 million m2 in September, which is 6.7% lower than in September 2017. Over 9 months of 2018, housing commissioning decreased by 1.9% as compared to the same period of the last year.
In October, Sberbank, the largest player in the mortgage market, raised the rates by 0.4 percent for the first time since 2014, while many banks have done so even earlier. At the same time, the weighted average mortgage rate might reach 10% by the end of the year. However, the experts of Dom.RF do not expect a significant reduction in the demand for mortgage loans. In their opinion, the level of rate which has been achieved is rather comfortable and will have little influence on the housing purchase decisions. At the same time, the total issued mortgage loans will amount to approximately 3 trillion rubles in 2018 (+50% in comparison with 2017). However, specialists of Expert RA have forecasted a record of 2.7–2.8 trillion rubles, and in 2019 the amount of mortgage loans will not exceed 2.5 trillion rubles even in case of a relative stability of macroeconomic conditions.
A study by the Rating Agency of Construction Sector estimated the level of inflation in the construction industry for next year, taking into account changes in the cost of materials, labor costs and other required resources. If at the end of the year the figure reaches 5.4–5.6%, then by 2019 the level will exceed 6.5% and can potentially rise to 9%. An inflation rise in the industry will occur against the background of increasing VAT and the transition of the market to project financing. And although housing is not directly subject to VAT, its increase will affect the cost of construction through the rising prices for construction materials. And due to the transition to project financing, the developers will have to increase the share of their own funds and bank loans, which will also affect the construction cost.
According to data provided by the Russian Federal State Statistics Service, Russia has produced 42.9 million tons of cement over the 9 months of 2018, which is 0.2% less than in the same period of the previous year. However, according to GS-Expert, the figure was 41.6 million tons of cement (-3.2% compared to the same period of the previous year). The reason for the discrepancies is associated with the accounting of the state service of bagged cement production by enterprises in the Moscow region. Thus, the outflow of cement to road transportation may be less than was earlier predicted.
The prospects of the construction industry in the Russian Federation are currently unclear. The process of adaptation of residential construction to new market conditions against the background of the completion of large projects (Kerch Bridge, preparation for the 2018 World Cup) can affect the volumes of freight handling. However, transportation of construction cargo will demonstrate a long-term growth as the governmental plans to increase construction and commencement of new projects are implemented.
Ferrous metals: tensions rise in the world market
Loading of ferrous metals increased by 3.3% in September as compared to the level of the previous year and amounted to 6.3 million tons. Since early 2018, a total of 58.8 million tons of ferrous metals have been shipped by rail, which is 9.9% higher than the value of the same period of 2017.
An increase in loading occurred in September due to both domestic (+1%) and export (+10%) transportation. Shipments have increased to Italy (2.5 times), Turkey (2 times), and Mexico (1.5 times).
Supplies to Turkey can decrease, as the country has introduced import quotas for steel since October 17. Import of metal in excess of an established quota will be subject to an additional 25% duty. The established restrictions are response measures associated with the introduction of a 25% duty on steel by President of the United States Donald Trump, which have resulted in a redirection of steel flows to Turkey.
According to forecasts of World Steel Association, in 2018 the global consumption of steel products will be 3.9% higher than the value of the last year, whereas the growth in 2019 is expected to decline to 1.4%. The demand for steel products will mostly increase in Asia (excluding China) - by 6.8% next year. The rise is expected mostly in India and ASEAN countries due to a revival in the infrastructure and housing construction. The situation with the demand for steel in China looks uncertain and will depend on relations with the United States and the policy of the national government.
In the USA, the analysts of Worldsteel have forecasted a slowdown in 2019, which will be caused by cessation of growth in the construction and automotive industries. A similar forecast has been made for the countries of the European Union, which are faced with another very serious risk of trade conflicts. For Turkey, Worldsteel predicts a recession in 2018, but over the next year the country's economy and steel market might recover due to the governmental anti-crisis measures. In Russia, according to the association, the growth of consumption will be moderate both this year and the next, despite the rise in global oil prices.
The Russian Steel Association announced that metallurgists are ready to increase the freight by 12 million tons per year. According to the association, the main constraint for the development of metallurgical enterprises is the existing railway infrastructure. Thus, the approach and transfer tracks at a number of stations adjacent to the enterprises should be reconstructed and electrified. Certain stations servicing Russian ports and approaches thereto require expansion of the train-handling capacity. In addition, it is necessary to extend and reconstruct the station tracks associated with the construction of new enterprises. At the end of September, Novolipetsk Metallurgical Plant, Pervaya Gruzovaya Komaniya (PGK) and UCL Holding group announced their readiness to invest 28.6 billion rubles in the development of their own transport infrastructure.
At the same time, the Moody's international rating agency has retained a stable forecast for the Russian steel industry over the next 1-1.5 years. Domestic demand for steel is expected to be stable or demonstrate a moderate growth due to the continued increase of the GDP, governmental infrastructure projects and the developments in the construction market which represent the primary steel consumer. Thus, the domestic freight traffic will be supported, whereas the exports of ferrous metals may decline due to the aggravation of the global market situation.
Ore: a slowdown in the growth of domestic transportation
Ore loading was 9.2 million tons in September, which is 1.1% higher than the values of last year. Since the beginning of 2018, a total of 86.5 million tons of ore have been shipped by rail, which is 5% higher than the values of the same period of 2017.
In September, domestic shipments grew by 4.4%, while the exports were 15% lower than the level of last year due to a reduction of shipments to China (-50%) and Poland, while the latter completely discontinued Russian imports in August. At the same time, the supply of ore to Germany and Slovakia increased 3-fold and 2-fold, respectively.
The slowdown in the growth rate of domestic shipments has also been caused by an aggravation of the situation at the world ferrous metals market, as a result of which less finished goods will be exported. In this case, an increase in export of ore by railroad is expected.
Timber freights: the industry is ahead of the schedule
Loading of timber freights increased by 2.9% in September as compared to the level of the previous year and amounted to 3.5 million tons. Since early 2018, a total of 34.7 million tons of timber freights have been shipped by rail, which is 4% higher than the value of the same period of 2017.
An increase in loading occurred in September due to both domestic (+20%) and export (+2%) transportation. The increase in shipments to Finland (+10%) and Kazakhstan (+35%) continued.
According to the director of the Department of Light Industry and the Timber Processing Complex of the Ministry of Industry and Trade of Russia, some indicators in 2018 are ahead of the level provided in the Development Strategy for Forest Complex until 2030, approved by the Russian government. Over the last 8 months, the growth of wood processing amounted to 8.4%, furniture production - 6.6%, pulp and paper industry - 10.6%. The amount of exports of the Russian timber processing complex is expected to reach $12 billion by the end of the year.
Timber freight transportation by rail will continue to grow along with the development of the RF timber industry and wooden housing construction.
Grain and mill products: a drop in exports for the first time over the last 20 months
Grain loading in September amounted to 2.1 million tons (-4.5% as compared to September last year). Since the beginning of 2018, a total of 20 million tons of grain were shipped by railroad, which is 36.9% higher than the value of the same period of 2017.
Domestic shipments declined by 10% as compared to the last year, and for the first time since March 2017, exports decrease by 2%. The export to Egypt (-10%) and Azerbaijan (-60%) has decreased.
The reduction of shipments is associated with the strengthening of ruble and a drop in export prices by almost 6% to $218 per ton over the last one and a half months. In October ─ December the situation can become more favorable for active trading, unless the weather has a negative impact on the situation. However, the achievement of the record figures of last year is unlikely. According to Dmitry Rylko, Director General of the Institute for Agricultural Market Studies, more than half of the entire wheat export potential has already been exported to the south, plus about 20% has been contracted, and nine more months remain until the end of the season. Other regions are facing problems with the yield and quality of grain. Experts note that the geography of export demand is shifting to the center of the country and the Volga region.
According to the Minister of Agriculture Dmitry Patrushev, the grain harvest of this year will be more than planned: 109, not 106 million tons, and grain exports will increase to 39 million tons. In addition, poor yield in other countries increased the demand for Russian products.
Thus, the forecast for grain transportation by rail will be retained against the background of improved forecasts for crop volume, as well as the high carryover stocks of the previous season.
Chemical and mineral fertilizers: the growth continues
Loading of fertilizers in September amounted to 4.7 million tons (+ 4.4% as compared to September last year), setting a new record for the month. Since the beginning of 2018, a total of almost 44.2 million tons of fertilizers were shipped by rail, which is 4% higher than the value of the same period of 2017.
In September, exports increased by 2% due to a growth in supplies to Brazil (+ 30%) and the USA (a two-fold increase).
PhosAgro together with the Russian Direct Investment Fund (RDIF), the Sovereign Fund of Russia and the Indian company IndianPotash have agreed to conclude a contract that provides joint investments in the production of mineral fertilizers in Russia and India. The contract provides for long-term deliveries of PhosAgro products to India, which can amount to 2 million tons from 2019 to 2021, and their total value is estimated at $1 billion.
Fertilizer transportation by rail will continue to grow against the background of high global demand for Russian products, as well as planned commissioning of production facilities in the territory of the Russian Federation.
The demand for gondola cars continues to grow
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 1038 thousand units, while the defective fleet remains at a low level of about 51.9 thousand units as of the beginning of October. As a result, the surplus of the fleet was 48 thousand units.
In September, the sales of cars by the CIS plants amounted to 6.8 thousand units, which is 15% higher than the results of September 2017. (5.9 thousand units). At the same time, only 2.4 thousand cars have been decommissioned. A total of 4.5 thousand gondola cars were sold, which significantly exceeds the amount of their decommissioning (0.6 thousand units). The rental rates for standard gondolas increased to 1900 rubles per day in October, and there is still no surplus in the segment. At the beginning of October, the fleet of new generation cars by different manufacturers reached almost 116.5 thousand units.
The Institute of Natural Monopolies Research has forecasted that the implementation of programs for the development of railway transport will require a 20% increase in the operational fleet of freight cars by 2025, i.e. over 370 thousand new freight cars in the amount of over 1 trillion rubles. Accordingly, within the framework of the implementation of strategic programs for rail transportation, the loading of Russian car-building enterprises can reach the production level of over 50 thousand cars per year until 2025.
Leysana Korobeynikova, Head of Analysis
