Liner and Logistics Division

Global container transportation market

In Q1 2020, the business of sea carriers was under the positive impact of stable freight rates in the market and lower bunkering prices. As a result, market contraction in early 2020 was negligible.

Source: Bloomberg.

Sea lines worked to reduce their capacity and introduced blank sailings (cancellation of a sailing to skip certain routes or ports) in response to increased risks of lower shipments in Q1 and Q2 and as a way to avoid a subsequent plunge in freight rates.

For the first half of 2020, the negative forecasts did not materialise. According to Drewry, a maritime research consultancy, world container port throughput decreased by around 8% YoY instead of the earlier forecast of 16%. Capacity reductions in the market proved excessive, resulting in freight rates demonstrating a far less pronounced reduction than during the financial crisis of 2008.

In addition to capacity cuts, carriers also reduced their orders for container equipment in the first half of the year. In Q3, as demand for shipments surged, the industry faced reduced availability of containers. On top of that, a lot of ports in North America and the UK saw some strong congestion. This resulted in delays in shipping schedules reaching up to a week or more. Containers that had to be returned for reloading were waiting to be unloaded on vessels in destination ports.

Starting from October 2020, this resulted in slower circulation of containers and shortages of equipment, first in the northern ports of China (Ningbo and Shanghai) and then all across Asia. The container availability index (CAx) dropped to record lows, causing freight rates to spike.

Source: Container Xchange.

Source: Freightos.

Russian container market

The volume of the Russian container market has been growing for five consecutive years. This trend continued even in February despite China closing its borders amid the COVID-19 pandemic. By capitalising on its transit potential, accelerating the process of containerisation, and developing domestic routes, the market was able to expand by 11% even in a year marred by crisis developments.

Macroeconomic indicators

After positive economic sentiment seen in early 2020, PMI indices came to their record lows by May. Quarantine and lockdown restrictions across the world, ban on international air travel, and other measures to fight the spread of COVID-19 reshaped both consumer behaviour and the activities of industrial majors. As a result, the traditional link between shipment volumes and macro indicators was no longer in place.

Throughout the year, forecasts for Russia’s GDP varied from an increase of 1.7% at the beginning of 2020 to a contraction of 5% in July. The relatively low share of SMEs in the structure of the Russian GDP enabled the Russian economy to emerge from the crisis year with fewer losses as compared to European nations.

Improvements around COVID-19, including as a result of the start of the vaccination campaign, and gradual easing of the lockdowns caused business activity to recover by the end of the year. According to forecasts, economy might well recover to 2019 levels as early as next year.

Container transportation marke

In Russia, the container transportation market includes international and domestic maritime transportation, handling, and transit transportation the Russian Railways network.

The key trends in the container transportation market are:

• increased share of the Russian Far East in the structure of foreign trade turnover

As a result of global imbalances in the container market, routes to ship imported goods from Chinese ports via ports in the Primorye Territory proved not only faster but also cheaper than routes via St Petersburg. Cargo flows partly moving away from the Suez Canal increased the share of the Far East in container imports by 3% YoY to 27%.

The share of exports going through the Far East also grew to 21% as compared to 19% in 2019. This was driven by larger shipments by SIBUR Tobolsk, the largest container exporter, and increased deliveries of non-ferrous metals.

• Accelerated growth in Asia–Europe–Asia transit transportation volumes

The strongest growth was seen in routes from Asia to Europe and back that go across Russia. During COVID-19 restrictions in ports worldwide and resulting imbalances in sea and aviation logistics, railways provided freight owners with visibility in terms of both delivery schedules and availability of rolling stock. Also, the speed of delivery became of increased importance during the pandemic. In Q3, volumes of shipments from China to Europe more than doubled. Subsidies provided to support the new transit flow through the Far Eastern ports served an additional growth driver in this area.

• Further containerisation

Wider availability of specialised container equipment and improved logistics technologies to transport liquid and bulk cargoes in universal containers enhanced competition with transportation by road and helped attract new customers opting for railway. The segment of non-ferrous metals transportation delivered the strongest growth in the containerisation ratio. The share of container transportation increased by 13% YoY, reaching 56%.

In 2020, the Russian container market expanded by 11.5% vs 2019 to 5.8 million TEU.

Source: Russian Railways data, Morcenter-TFC

Import

Almost complete suspension of international tourism and transition to remote working led to a strong rise in demand for certain types of consumer goods. Money initially earmarked for holidays was spent on arranging home offices, purchasing sports equipment, and upgrading household appliances. Demand for laptops surged as universities and schools went online. Most of these goods are imported into Russia from abroad. As a result, import volumes grew despite the financial crisis. For the full 12 months, imports grew by 1.5% vs 2019 and reached over 2.158 million TEU.

Export

The gradual increase in duties on unprocessed timber exports and subsequent full ban starting 1 January 2022 are encouraging businesses to set up new facilities engaged in added value timber processing. The resulting sawn timber, wood-based panels, plywood, and pellet fuel require more care in transportation than pulpwood and logs and usually rely on containers when sent for exports. However, weaker demand in China caused export growth rates to go down in 2020. The expansion was driven by shipments of polymers, containerisation of metals shipments, and support for non-commodity exports. Goods from this category delivered a strong increase, with vegetable oils adding 271%, grains 235%, and other foods 323% YoY.

Domestic shipments

Shipments in the Russian Far East saw an increase in volumes on all fronts. Total shipments stood at 186 thousand TEU, an improvement of 8%. The growth was driven by shipments in the Magadan (up by 15%) and Arctic (up by 14%) routes.

Railway container transportation within Russia also grew by 14%. Shipments for the full year exceeded 827 thousand TEU. As the nation’s key distribution centre, Moscow still accounts for almost half of the market. Consistent drivers in the market are routes to Novosibirsk, Khabarovsk, and Primorye Territory, which are all expanding nicely. An additional impetus comes from increased transition from carload shipments to full train shipments as a result of regular high-speed railway services.

Transit shipments

In 2020, the volume of transit rail transportation across Russia grew by 52%, with a total of around 743 thousand TEU transported. The growth was driven by shipments along the Asia–Europe–Asia routes, with the other routes, except shipments from Central Asia to the US, demonstrating a reduction in volumes.

The share of refrigerated transportation across the Russian Railways network increased by 7% to 62 thousand TEU vs 58 thousand TEU in 2019. The segment undergoes the process of containerisation. In total refrigerated transportation volume, the share of refrigerated container transportation across the Russian Railways network grew to 23% vs 20% in 2019. The share of Dalreftrans in total shipments across the Russian Railways network was 20% vs 19% in 2019.

Key industry trends:

• exports of livestock products from Russia continue on the rise (up 37-fold YoY), encouraging the development of cross-border refrigerated transportation by container trains. So far it is multimodal schemes via Far Eastern ports that account for 100% of the volume. In 2020, direct cross-border trains from Russia to China were not yet in place, including as a result of a shortage of matching cargo flows coming in from China;
• in 2020, the government provided subsidies for railway transportation of vegetables from Siberia and the Urals to the Far East, contributing to wider use of railway for this category of shipments;
• late last year saw the introduction of limitations on the use of diesel generator cars with KVZ-I2 bogies: their depreciation and disposal drives market participants either to renew the fleet or to switch to new technologies, including the acquisition of autonomous mounted diesel generator sets (jensets), which requires substantial investment;
• in 2021, the share of shipments of processed fish products to the Russian market may grow as a result of China’s restrictions on seafood imports from Russia amid the coronavirus outbreak, a move expected to spur domestic processing.

The top ten trends in the 3PL market that we see are:

• manufacturing moving away from China to Southeast Asia. For 3PL providers, this is an opportunity to build new supply chains. However, this entails increased complexity of logistics as more nations, suppliers, and means of delivery become part of the chain;
• diversification of routes and types of transport. Last year demonstrated that relying on just one route to deliver cargoes is exposed to increased risks. A lot of companies now make use of different transportation corridors and means of transport in order to reduce the risk of delays in deliveries. In turn, customers are now more ready to switch between modes of transportation as needed;
• in response to tougher restrictions on trade and enhanced sanctions introduced against many nations, companies were forced to expand their product range and had to be ready to quickly adjust to the ever changing market environment while also embracing the need to potentially move their assets whenever long-term restrictions are put in place;
• surge in e-commerce amid the COVID-19 pandemic, which on the one hand resulted in subdued activity in brick-and-mortar stores and on the other hand spurred demand for last mile delivery services;
• transition from Just-in-Time (JIT) to Just-in-Case (JIC) models as a way to mitigate risks. The main different between Just-in-Time and Just-in-Case is that JIT operations receive inventory only as it is needed for production, whereas JIC stocks up inventories ahead of time based on expectations
• and demand in line with forecasts and transport availability;
• increased demand for warehousing properties. According to Knight Frank, Moscow and the Moscow Region saw a record volume of deals signed for warehousing facilities in 2020: 2.1 million sq m. The key drivers included expansion of e-commerce and retail food sales, switch to the JIT model, goods returning to warehouses during periods of sluggish demand, and need to plan for considerable inventories to hedge against increased risk exposure in supply chains; There was also stronger demand for B/B+ class warehouses designed for cargo sorting, cross-docking services, and handling of less-than-container-load (LCL) deliveries;
• expansion of national chains into Russian regions, giving rise to new supply chains and increased demand for warehousing facilities in the regions;
• environmental friendliness as a consistent focus in supply chains. Freight owners tend to pay more attention to how green their supply chains are, with a lot of tools now available to assess the environmental footprint of a specific route of delivery;
• increased cooperation and expansion into unconventional segments by 3PL providers;
• enhanced role of 3PL and supply chain management providers as freight owners have to dramatically change their supply chains while lacking internal resources to quickly find new logistics solutions.

In 2020, the market for project logistics came under pressure from flailing investor sentiment in the first six months amid the COVID-19 outbreak. Businesses were forced to revise their investment programmes in response to major uncertainties and a pronounced reduction in commodity prices starting February 2020. A positive impetus came from stronger demand and prices for precious metals in the first half of 2020.

For the full year, the market was able to avoid a protracted downturn, with all commodity prices recovering as early as Q3 following the plunge seen at the beginning of the year. By early 2021, crude oil prices tripled from their April lows, driven by the OPEC+ production cuts. Prices for ferrous and non-ferrous metals were quick to rebound in response to faster than expected growth in China’s industrial activity.

Further economic recovery across the globe will be largely linked to the rate of vaccination against COVID-19 and government support and relief measures. Projects will continue, albeit adjusted for the market conditions in a specific country.

Project logistics will be driven by:

• green energy;
• increase in domestic tourism in Russia;
• surge in LNG and gas processing projects;
• export projects by Russian EPC contractorsEngineering, procurement, and construction (EPC) contracts stipulate that contractors are fully responsible for engineering, procurement, construction and commissioning, as well as strict compliance with schedule and budget irrespective of the selection of subcontractors or suppliers or other terms and conditions.;
• development of Central Asia;
• development of the Northern Sea Route.

Risks to project logistics in 2021–2022 are:

• sanctions;
• new waves of COVID-19 and reintroduction of lockdowns;
• armed conflicts;
• protectionism.