Russian metals firms seeking to increase exports to China and other Asian buyers face an uphill struggle as they grapple with infrastructure constraints on Soviet-era rail lines in Siberia and the Far East. Russia's two main rail lines in the region, the Trans-Siberian and the Baikal Amur Mainline (BAM) are becoming overburdened as freight shipments increase.
The problem could worsen as Russia boosts shipments of copper, iron ore and coal to China, its largest trading partner and the world's second largest economy. "You have no sophisticated road links between Russia and China, that means you have to use the railway and you have to improve the railway quality," said Maria Leenen, chief executive of Hamburg-based SCI Verkehr international rail consultancy.
"There is no real alternative." While the RZhD state rail monopoly has mooted a series of ambitious plans to overhaul the rail network in Russia's vast interior, including the $16 billion construction of a second track for the 4,324 km BAM, Leenen said the immediate priority should be improving existing assets.
"They have very old locomotives, and they are really not reliable any more," she said. RZhD plans to spend more than 112 billion roubles ($3.74 billion) on 1,250 new locomotives between 2011-13, but Leenen said actual purchases often fall short of the initial goals. Rail lines were seriously overstretched in the 2009-10 winter, when extreme temperatures and unloading problems at ports delayed shipments of coal and other products by several weeks.
Capacity on the lines will need to increase after more Russian metals firms bring export-oriented mines and smelters on line in the Far East, where executives are lobbying the government to develop transport infrastructure. "In the coming decades the main sources of global demand for key industrial resources will be the countries of east Asia, starting with China, Japan, Korean and then India," Oleg Deripaska, chief executive of aluminium producer RUSAL said earlier this month.
"Business forms the demand, and it is the task of the government to guarantee growth opportunities. For example, we need acceptable transport and logistics infrastructure." Increasing the number of rail borders with China is another way to relieve congestion on Russia's railways.
Hong Kong-listed iron miner IRC, developing several mines in the Amur Region bordering China, wants to build a bridge across the Amur River that will allow it to ship iron ore concentrate to Chinese steel mills about 500 km distant. The new bridge will be the only freight crossing for about 3,000 km. IRC currently ships iron ore concentrate via the two existing crossings at Grodekovo and Zabaikalsk.
IRC estimates that this new route will allow it to reduce its per tonne iron ore shipping costs delivered at frontier (DAF) by $6 per tonne to $12 per tonne. Company Chairman Jay Hambro is optimistic that the project will proceed, thanks in part to high level backing on both sides, but a lengthy approval process means that construction is unlikely to start for at least another 12-18 months.
"The important thing to remember is that you have an opportunity that is there," Hambro told Reuters. "The possibility for the bridge construction is incredibly exciting." IRC hopes the bridge will go into operation by 2015, and Hambro said other miners, including Mechel are in talks to join the project. The mining and power conglomerate is developing the Elga coking coal mine in the Sakha Republic (Yakutia) as well as a 315 km railway to transport output to the BAM. The project's total cost is $2.8 billion.
Mechel declined to comment when contacted by Reuters. RUSAL, Metalloinvest and Evraz are also planning major new projects in Siberia and the Far East. Despite current obstacles, the potential for increased rail traffic between resource-rich Russia and raw materials-poor China is huge. Annual turnover rose 50 percent in 2010 to reach $59 billion, according to Russian customs data.
Though energy imports are likely to account for the bulk of increases in 2011 thanks to the new ESPO oil pipeline, analysts also expect Chinese purchases of metals, iron ore and coal to increase more as its economy grows. "They are short of those raw materials like copper concentrate and iron ore, so they are always going to be requiring those," John Johnson, chief executive for consultancy CRU's China operations, told an industry conference in February.
CRU said iron ore exports from the Commonwealth of Independent States (CIS) exceeded $3 billion in 2010, up from $500 million in 2007. Chinese purchases of CIS copper concentrate approached $1 billion last year, from well below the $500 million level four years ago. It also said Chinese steel demand could exceed 1 billion tonnes by 2020, while analysts at Bateman Beijing Axis note that China imported 70 percent of the iron ore it used to smelt its 2009 output of 568 million tonnes.