By John Helmer in Moscow
Russia’s Black Sea strategy has been aiming to develop dry-cargo movements, both export and import, as the preferred direction for Russian oil exportsshifts eastward towards China, and from Arctic oilfields in the north, westwards into northern Europe. That was before theglobal financial crisis intensified in the autumn.
But the signs of trouble were already darkening by July. Container volumes into Novorossiysk, Russia’s leading Black Sea outlet, had been booming on the growth of Russian incomes and consumer demand; up 42% in the first five months of the year, compared to 2007. In July, however, the turndown was already visible. Novorossiysk reported for that month that container volume had slipped 10%, compared to the month of June; and by 33%, compared to July of 2007. Reefer volumes fell in parallel by 84% and 63%, respectively. Steel scrap, sugar, timber, and non-ferrous metals also fell sharply in the month, compared to the same period of last year. Crude oil, the mainstay of Novorossiysk, remained flat, June to July, and year on year.
The gloom had also started to descend on the Azov Sea ports, as the export of steel, aluminium, copper, and scrap began to suffer from falling global prices and falling export demand.
In their place, there was the Turkish cement boom. This had started in January of this year, after Moscow had eliminatedthe import duty, and encouraged Turkish imports to supply the burgeoning demand, especially in southwestern Russia, along the Black Sea coast, for construction materials. Import volumes of mineral construction materials (MCM), such as sand, gravel, and crushed stone, also skyrocketed.
Reports from the regional North Caucasus Railroad indicate a 30% jump in MCM tonnage transported, compared to the first half of 2007. Cement more than doubled to about 1.5 million tonnes in the same period.
At Novorossiysk, the tonnage of imported MCM reached over 700,000 tonnes, a fivefold jump over the same period of 2007. Cement tripled to 945,000 tonnes in the 9-month period to September 30. In the month of August, the MCM volume landing at Novorossiysk was ten times more than that of August 2007. At Taganrog, on the Azov Sea, the jump in MCM imports was fifty-fold in the six months to June 30.
Port sources and industry analysts now say this rate of growth is unsustainable, and the falloff in domestic demand for construction steels and other materials has already been felt across the country. The only hope in the Black Sea region, they say, is continuing Moscow capital spending, especially for the Sochi area, intended for the Winter Olympic Games scheduled in 2014. The price of domestic cement started falling in September, and accelerated downwards in October, as Russian construction companies began to feel the pinch. Import volumes of cement will follow. “This has all finished,” says one transportation industry source. “The demand for cement and MCM has been suspended, together with the new plans of the construction companies, due to the financial crisis.”
The government in Moscow had set out its Black Sea maritime strategy on May 20. According to the publicly released plan,a total of Rb631 billion ($23.4 billion at the current exchange rate) is to be invested between now and 2015; of that, Rb181 billion ($6.7 billion) is to come from, the federal budget. In the Black Sea region, the government said its priorities for spending are the construction of a new port, and new rail, power, and road infrastructure linking the ports of the Black and Azov coastlines to the inter-regional grid. Spending on the Sochi Olympic complex is counted separately and budgeted outside this plan.
What the May 20 strategy paper doesn’t say is that crude oil exports,the most important cargoes for both Novorossiysk and Tuapse, are expected to be stagnant, or declining in the long term. The immediate downturn in the economic growth prospects for Turkey and the Mediterranean region may sharpen this trend.
According to analyst Mikhail Perfilov of Petroleum Argus, Russian oil exporters are less interested in the southward direction for oil shipments, compared to the northern routes and northwestern shipments, which are more profitable. Competition from Kazakhstan and Azerbaijan in the southern oil markets has cut into the margins for crude oil shipped from Novorossiysk and Tuapse. According to 8-month figures for Novorossiysk, crude volume to August 31 amounted to 43.3 million tonnes, a drop of 5% year on year. Petreolum product shipments by contrast rose 19% in the same period, but volumes remain small — just 6 million tonnes. These products, according to Perfilov, are shipped by producers like LUKoil to refineries and distribution networks they have acquired in Turkey, Italy, and elsewhere in the region.
“Russian oil companies see the Black Sea as the second best option to Primorsk [Gulf of Finland],” Perfilov says. “Our latest outlook for the next decade shows that crude supplies through the Russian Black Sea ports will slow down, while export through Ukraine is expected to decline, or stop completely. China and the northern routes will become even stronger than now.”
There are two countervailing trends, but both remain on the drawing-boards. One is the plan, advocated by Chevron for an expansion of the capacity of the Caspian Pipeline Consortium (CPC) to ship crude at the CPC’s terminal at Novorossiysk. Current capacity of 661,000 barrels daily is to be expanded to 1.3 million bd, when and if the shareholders agree — but Transneft, the controlling Russian shareholder in the consortium, has been dragging its heels for several years. Transneft’s interest is in northwestern Russia, where it controls the oil port of Primorsk; and in the newly constructed East Siberian Pacific Ocean (ESPO) pipeline, which will start delivering overland to Daqing, China — if Moscow and Beijing can settle their differences.
The other plan to sustain or increase Russian crude shipments on the Black Sea is the proposed pipeline to run from Burgas, in Bulgaria, to Alexandropoulos, in Greece. That plan was opposed for several years by LUKoil, the second largest of Russia’s producers and exporters, which is building a downstream network of refineries and petrol stations throughout the eastern Mediterranean, and doesn’t want to compete against Russian crude availableto its rivals. In March of 2007, then President Vladimir Putin overruled LUKoil, and ordered the go-ahead for the Alexandropoulos pipeline. The timing of the financial crisis, and falling demand for the oil, play into LUKoil’s hands.
“The CPC may be an exception to the forecast decline for the Black Sea, if the pipeline shareholders agree on expansion, and if the Burgas– Alexandroupolis pipeline is built,” Perfilov comments.
Noone in Moscow is sure in the current circumstances what will happen to the planned construction of a new Black Sea port. Sochi port sources are reluctant to answer questions about the current planning for new passenger and cruise facilities. Moscow maritime analyst Alexei Bezborodov says the Sochi cruise hub is “poorly organized, and not very comfortable for European tourists who are used to absolutely different level of service than Sochi can offer, for the time being.” The federal Transport Ministry is promising to invest Rb10 billion ($370 million) in Sochi port to achieve international cruise terminal standard.
Kristina Senko, spokesman forNovorossiysk port told Fairplay that the total investment programme until 2012 is $20 million, but she did not break this down into annual instalments or targets. She said she is not able to say whether the current credit crunch would cause delay or cancelation of these plans. “We are still working in the normal mode,” Senko told Fairplay. “We were not affected by financial crisis to date.”
At Tuapse, a port spokesman said the port’sinvestment programme for 2009-2010 amounts to Rb2.5 billion ($93 million). The targets are the construction of terminals for butter and cement. “These plans are still alive and have not yet changed,” the spokesman said. He refused to say what impact the financial crisis will have.
The Russian Railways Company (RZD) is not conceding a significant impact either, at least not yet. Dmitriy Pertsev, head of press at RZD, told Fairplay: “We don’t have forecasts. For now, the results are fine in the south. Cargo is still moving. We may register a drop of 1% to 5% in general, but that is predictable.” The Russian Association of Sea Ports say that in the ten months to October 31, the Black Sea and Azov Sea tonnage has dropped 1%, compared to last year, to 132.7 million tonnes. This compares with a 1.6% increase in tonnage for all ports in the country to 380.5 million tonnes. At 27.4 million tonnes, containers represent just 7% of the aggregate, but the trend, though slowing, remains up by 10%, year on year. Bulk cargoes are down 1.2% for the year to October 31; at 218.7 million tonnes they comprise 58% of the country-wide aggregate.
And where is the new port the federal government is promising to build by 2015?
Apart from Sochi, one contender is Taman, which is intended as an outlet for Russia’s expanding grain and seed oil export trade. According to two Russian companies specializing seed oil, food fats and butter, Efko and Solar Products, they plan to spend $200 million to build a grain elevator and loading facilities for up to 5 million tonnes of grain per year. At present, the leading ports in the region for grain shipments from Russia and the Ukraine are Novorossiysk, Rostov,and Tuapse (Russia), Odessa, Ilychevsk and Kherson (Ukraine). The main destinations for the exports are Egypt, southern Europe, and India. Five and six-month shipment figures indicate that virtually all of the Russian Black and Azov Sea ports have seen their grain export volumes shrink this year significantly.
But Efko has the backing of the international grain trader Bunge, whichowns a 25% stake in the Russian company, to plan for the future.
Taman is a fishing base on Russia’s side of the Kerch Strait, which connects the Azov to the Black Sea. East, across the strait, is Ukrainian territory.A year ago, the local port captain Pyotr Parinov proposed a plan to build a new port for coal, chemicals, and containers, with a start-up price of Rb30 billion ($1.2 billion). Efko’s announcement in October of this year improves the likelihood that something will happen at Taman. Alexei Bezborodov, a maritime analyst in Moscow, said the grain terminal is “a good idea, save for one thing — Taman doesn’t have any infrastructure, and huge investments are necessary. As for the prospects for grain cargo, this is fine. There are almost enough shipping capacities in the south, but more will be appreciated.”
Lyubov Britvina, spokesman for the federal Transport Ministry, told Fairplay: “For now there is no exact place selected for the new port; no investments have been assigned. It is the general strategy. And the aim is that it will be done.” But she added that Taman has not been chosen, at least not yet. Valery Filipov, the southern region director for Rosmorport, the federal ports agency, said recently that the plan for Taman calls for 30-million tonne capacity to be built there by the year 2015.
Bezborodov is skeptical. “There was an idea for a port at Taman. But now it looks dead.”