Overview of the Russian Railway Market in 2016
Record breaking year of 2016
2016 ended on an upbeat note: in December, loading increased by 0.9% and freight turnover set a new long-time record rising by 2.9% to 208.2 billion ton-km. Key indicators rose for the entire 2016: loading by 0.6%, freight turnover by 1.6%.
Loose and bulk cargoes contributed to increase of loading in 2016 the most: construction materials (+7.9%), coal (+1.7%), timber (+6.9%), fertilizers (+4.0%), non-ferrous metal ore (+3.1%), coke (+5.5%), iron ore (+0.5%), grain (+1.5%) and ferrous metal scrap (+0.3%).
Drop of loading as compared with last year was demonstrated by ferrous metals (-0.5%), cement (-6.9%) and petroleum cargoes (-6.1%) only.
In 2016 both increase of export loading and refocusing of export flows from Europe to APR markets which enhanced average transportation distance by 0.9% contributed to increase of freight turnover.
Coal: exports rises irrespective of global prices
In 2016, coal occupied the second position on absolute growth of loading, thus, breaking records set in the past. A total of 328.6 million tons of coal was dispatched by railway, a 1.7% above the level of 2015. The trend remained in December as well: loading eased up by 0.3% YoY to 31.0 million tons.
Exports became a key growth booster: in 2016 domestic transportation of coal slipped back by 4% while export transportation ticked up by 9%. Meanwhile, export transportation of coal grew in H2 2016 with high global prices as well as in H1 with low prices.
Main importers that drove up coal shipment from Russia in 2016 as compared with the previous year became China (1.5-fold), South Korea (+40%), Ukraine (+30%), and India (two-fold).
In the mid-run, coal transportation will remain high if global market conditions favor. It is worth mentioning that global market becomes more and more demanding setting high requirements which Russian products meet.
Oil and oil products: successful manoeuvre, transportation drops
Transportation of oil and oil products decreased second year in a row. A total of 235.8 million tons of oil cargoes was dispatched by railway in 2016, 6.1% below the level of 2015 and 8.1% below the level of 2014. In December, loading of oil and oil products within Russian Railways network dropped by 3.2% YoY to 21.5 million tons.
Heavy fuel oil contributed the most to transportation drop: its loading within Russian Railways network reduced by 12 million tons pro rata to production drop. Such situation was caused by tax maneuver which made exports of dark oil products from Russia less advantageous while exports of crude oil through pipilines increased.
The objective for oil companies is to improve refinery yield to 90% by 2020. As assortment of high quality oil products in the market is extending, railway will be able to return a part of oil cargoes back. Tank cars will be used for maintaining basic properties of cargoes in order to avoid loss of quality caused by mix in pipeline.
The existing fleet of oil tank cars was purchased mostly in the 2000 years and is already free from cost loading. Thus, railway operators are able to reduce lease rate for oil tank cars which may improve savings from railway transportation of oil cargoes. Nevertheless, in the mid-run, railway transportation of oil and oil products is not expected to show significant improvements.
Construction freights and cement: “fat and slim”
In 2016 construction cargoes topped absolute growth of loading: construction cargoes increased by 7.9% to 141.0 million tons while cement transportation fell by 6.9% to record-breaking minimum for the last 15 years 26.7 million tons.
Transportation of construction cargoes within Russian Railways network grew by 20% YoY in H1 2016. However, challenging situation with availability of freight cars in autumn caused its contraction as compared with volume of 2015. In December, loading of construction cargoes fell to the 15-year minimum for last 15 years for this month,i.e. by 8.4% YoY to 8.4 million tons. Cement loading was also at record-breaking minimum for December: 1.3 million tons (-13.3%).
In 2016, growth of transportation of construction cargoes as compared with the previous year was due to a nine-million-ton increase of domestic transportation. One of growth factors was introduction of compulsory certification of imported construction materials and as a result a two-million-ton reduction of imports. However, implementation of the following large infrastructure projects contributed the most to increase of loading: the Kerch bridge, M-11 Moscow - St. Petersburg highway, railway line bypassing Ukraine etc.
In the short run, loading of construction cargoes is expected to grow as compared with last year. This will be contributed by increase in supply of gondolas thanks to two-fold improvement of their production in late 2016.
Ferrous metals: exports are the king
In 2016, flow of supply as compared with last year varied each month from -15% to +10% depending on global political situation and introduction of restrictive measures by importing countries. A total of 71 million tons of ferrous metals was transported by railway in 2017, a 0.5% above the level in 2015.
Within 2016, export transportation grew by 4%, mostly thanks to supply to Italy. However, we lost the Turkish market an numerous duties and restrictions of importing countries regarding metal products hindered the further growth of transportation. In many respects, exports focus did not compensate for a 5% drop of demand in the domestic market. However, the situation started improving in late 2016. In December, loading of ferrous metals within Russian Railways network advanced by 5% YoY to 6.2 million tons.
In the short run, transportation of ferrous metals may grow if the exports recovery trend remains.
Iron and manganese ore: loading is determined by flow of ferrous metal
Ore shipment in 2016 depended on exports shipment of ferrous metals. A total of 109.5 million tons of ore was dispatched by railway in 2016, 0.5% above the level of 2015. Russian companies tried to export finished products with increased added value, but, when it was not possible, excessive ore was exported. In the same months when export freight turnover of ferrous metals grew, ore loading increased within the domestic network. In December, loading within Russian Railways network contracted by 2.2% YoY to 9.0 million tons.
in 2016 domestic transportation retreated by 2% while export transportation moved up by 10%. The countries that increased imports of Russian ore were Italy, Finland, and Poland.
At present, there are no preconditions for significant increase of iron ore loading. A slight improvement within the domestic network is possible to ensure exports of ferrous metals.
Grain and milled grain products: Record breaking harvest failed to have a serious impact on transportation
Despite the largest harvest in Russian history in 2016, i.e. 119 million tons, transportation from the beginning of the current harvest year (Q3 and Q4 2016) remained the same as last year. In 2016, 19 million tons of grain, 1.5% above the level of 2015, was dispatched by railway. In December, loading of grain and milled grain products within Russian Railways network also remained the same as last year and totaled 2.1 million tons.
Meanwhile domestic transportation in 2016 escalated by 5% as compared with the level last year and export transportation edged down by 1%. Producers postponed sales expecting rise of global prices and favorable weather conditions for sea transportation and hoping to strengthen their position in APR markets (growth of grain exports to China).
In the short run, increase of exports both due to shift of transshipment in December and with the consideration for the necessity to sell excessive grain.
Chemical and mineral fertilizers: growth in all directions
Transportation of fertilizers as well as their production was at the record breaking peak for the last 15 years. In 2016, 53.5 million tons of fertilizers were dispatched by railway, 4.5% above the level of 2015. In December, loading of fertilizers within Russian Railways network grew by 6.4% YoY to 5.0 million tons setting a new record for this month.
Domestic transportation rose by 9% in 2016, exports by 3%. Exports grew to Brazil, Ukraine, and the USA.
In the mid-run transportation of mineral fertilizers may remain high thanks to consistent demand both in the domestic and export markets and even improve as new production facilities will be introduced.
Recovery of freight car market in 2016
The source of data on sale of the rolling stock and rent rates – the magazine “Rolling Stock”
In 2016 freight car market recovered both thanks to increase of freight turnover (up 1.6% as compared to 2015) and due to intensive disposal of freight cars: around 112,000 pcs. (5,000 pcs. in December 2016).
Meanwhile, a significant part of disposed freight cars were not used within the network (was idle or defective) or was used inefficiently. As a result, at the beginning disposal of freight cars was compensated by increasing efficiency of use of the fleet: Thanks to new generation freight cars and optimizing logistics of typical freight cars. But since autumn deficit of freight cars was posted locally due to new export logistics in the Far East.
As production of gondolas was growing and defective fleet was being disposed (it totaled about 26,000 pcs in late 2016 versus 40,000 pcs in early 2016), the situation was improving. Thus, in late 2016, fleet of gondolas was extremely close to balanced condition and proficit decreased to historically registered minimum (about 1-2% of the fleet). Increasing efficiency of the network use enhanced competitive features of railway transport and will additionally contribute to rise of loading and freight turnover within Russian Railways network.
In early 2016, lease rate in the market often does not allow in a timely manner to perform maintenance of freight cars, to make payments for credits which made the defective fleet increase, caused default of payments under financial leasing contracts and default of contracts with banks. Withdrawal of excessive fleet from Russian Railways started recovery of freight car lease rates in Q3 2016 already. As of late 2016, lease rates grew to RUR 900/day which gave a boost to purchase of new generation freight cars. Production of freight cars by the CIS countries increased by 40% YoY to 5,300 freight cars in December 2016. A total of about 40,000 freight cars was produced in the CIS in 2016, 30% higher than in 2015.
In 2017, demand and supply are expected to balance in the freight car building market while this balance will be long-term.
Peak of disposal of gondolas ended in 2016. Disposal will total an average of 30,000-40,000 freight cars per year in 2017-2019. Freight car builders will be able to cover this disposal level and additionally produce freight cars to ensure the growth of freight turnover planned by Russian Railways (1.0-1.5% per year).
The market shifted from quantitative growth to improvement of quality of products. The number of freight car manufacturers decreased almost two-fold as compared with record breaking 2012. First, those companies that did not specialize in freight car manufacture left the market, followed by those that failed to master production of innovation freight cars.
In 2017, the market will have new types of innovation rolling stock that as expected may occupy 100% of production in their market segments: specialized flatcars, boxcars, several models of tank cars for chemicals. The gondola segment has already posted the similar situation: production of new generation models rose in 2016 accounting for 100% as innovation freight car production facilities grew.
Leysana Korobeynikova, Senior Analyst