Rail Transportation of Ferrous Metals (Expert Review)

Ferrous metals account for 6.4% of total amount of freight transported by rail in Russia. Volume of internal transportation of ferrous metals is 51 mln ton (56% of total volume). Transportation of ferrous metals for export accounts for 31 mln ton (34% of total volume).

Ferrous metals are among the most profitable freights transported by rail in Russia. In 2012 the share of ferrous metals in total profit of railway transport accounted for 9.6%. In first half of 2013 35.4 mln ton of ferrous metals were transported by rail, which is 5.9% less than in first half of 2012.

The decline is caused by the worsening of global market conditions, which leads to decline of export prices for steel. Producers had to decrease production of ferrous metals in order to respond to these changes. In January-March 2013 cast iron production accounted for 99.2% of January-March 2012 production, steel – 95.4%, rolled ferrous-metal – 97.2%.

However, the current situation in Russia is quite encouraging. Demand for metallurgical products is stable due to expected growth in construction sector, automobile and railway industry. For instance, reconstruction of the Baikal-Amur mainline will stimulate demand for rails. Today main suppliers of rails in Russia are Mechel JSC and EVRAZ.

Decrease of total amounts of rail transportation is caused mostly by transition of ferrous metals from rail to road transport.

Bulk freight became the main type of freight transported by rail while small amounts of processed freight are now mostly transported by other means of transport. Rail transport is losing high-profit and medium-profit freight - first of all, high-profit freight transported short distances or small amount of freight. Since 1990s distance of effective competition between rail and road transport had been increasing and reached 1500 km today.

We should note that there are several types of calculation of freight transportation costs for various types of freight which are fundamentally different. Current tariff system stimulates long distance transportation against short distance transportation.

Freight owners’ expenses on road transport consist of carriers’ services (similar to locomotive and car segments of railway tariff), while development and maintenance of road network is funded by state. Large number of road carriers and weak state regulation allows carriers to use various schemes for costs reduction. Implementation of such schemes reduces costs of road transportation.

Freight load of ferrous metals decreased by 12% in 2007-2012. If the volume of ferrous metals lost by railways was replaced by coal, then RZD JSC would have lost approximately RUB 4.8 bln of revenue as transportation of ferrous metals accounts for 20% of total high-profit freight transportation.

In 2008-2012 average expenses of freight owners on average distance transportation of 1 ton of ferrous metals increased by 14%. Expenses on RZD services increased by 8.1%, and at the same time expenses on services of railway operators increased by more than 40%. Such significant increase is mostly caused by gradual liquidation of RZD JSC inventory fleet. However in H1 2013 tariff rates on operators’ services decreased due to slowdown of Russian economy. It resulted in 6% decrease of freight owners’ total expenses on transportation of ferrous metals by rail.

Ferrous metals are generally transported in open cars, platforms and hopper cars. There are 530 000 units of open cars, 70 000 units of hopper cars, 96 000 platforms operating in Russia at the moment. Their average age is 11.8, 20.5 and 21.4 years respectively.

There has been a surplus of car fleet since January 2013, which led to decline of overall production of freight cars. In Q1 2013 production of freight cars decreased by 21.2% compared to Q1 2012. Thus, total amount of freight cars exceeds the amount of cars needed to transport goods produced by Russian industry.

According to Russian railway operators the surplus of car fleet is approximately 70 000 units (share of open cars is about 10-13%). But RZD JSC data shows that surplus of car fleet is 250 000 units.

Such difference in estimations occurs because there are two kinds of surplus distinguished - technological surplus and commercial surplus. Technological car fleet consists of cars sufficient for transportation of goods if railway operations are technologically optimized (whether there are multiple operators or inventory fleet). Thus technological surplus indicates the number of cars that is abundant if railway net operates optimally. Commercial fleet consists of cars needed to meet the current demand for rail transportations when there are many rail operators in the market. Thus, commercial surplus indicates oversupply of freight cars at particular moment. According to IPEM, current technological surplus is 230-250 000 units of cars; commercial surplus is 70-100 000 units of cars. Main Russian metallurgical plants (Magnitogosk Iron and Steel Works (MMK) JSC, Chelyabinsk Metallurgical Plant (ChMK) JSC, Ural Steel JSC) are situated in the operating domain of the South Ural Railway.

In 2012 total freight load of ferrous metals at this railway was 18 mln ton. In Q1 2013 its freight load decreased by almost 7%. Freight load at the South Eastern Railway in 2012 exceeded 15 mln ton. One of the largest metallurgical plants in the country – Novolipetsk Steel (NLMK) JSC – is situated at the operating domain of the South Eastern Railway.

Freight load of ferrous metals at the Sverdlovsk Railway exceeded 11 mln ton in 2012. However, since the beginning of 2013 freight load of ferrous metals at this railway has been declining. Most of the freight transported by the Sverdlovsk Railway is delivered from Nizhnetagilsk Metallurgical Plant (NTMK) JSC.

Last year the Far Eastern Railway started to direct ferrous metals to the port of Vanino. The transportation was restarted after the launch of Kuznetsovsky tunnel.

Main consumers of iron and steel products are machine engineering and construction. Steel is demanded by car manufacturers, e.g. GAZ JSC, KAMAZ JSC, Renault-Nissan Alliance, Hyundai-Kia Group and others.

In 2012 shipments of iron and steel to GAZ JSC plants were 356 800 ton, to KAMAZ JSC plants – 380 300 ton. Total volume of shipments of ferrous metals to these plants decreased by 5.7% and 11.7% respectively compared to 2011. This fact illustrates the current trend of restructuring of ferrous metals transportation system and increasing the share of road transport. Representatives of metallurgical plants confirm the existence of this trend stating that the load of their production at road transport increases.

Prospects for the rise of demand for iron and steel in global markets are quite vague as economic growth in developed countries has been insignificant, and there are no signs for any changes. Thus domestic producers will become main sources of demand. Consequently, unless main technological and operational principles of railway transport are updated and modernized, freight load at rail will continue to shink.

Alexander Slobodyanik, Expert-Analyst of Railway Transport Research Department

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