By John Helmer in Moscow
The Russian Federation’s decade of rampant economic growth has been a boon to maritime activity and ports on the Black Sea. But the good times are coming to an end, writes John Helmer
Russia has been aiming to develop dry cargo movements, both export and import, as the preferred direction for Russian oil exports shifts eastward towards China, and from Arctic oilfields in the north westwards into northern Europe. Of course, that was before the global financial crisis intensified earlier in the autumn.
But the signs of trouble were there to be seen as early as July. Container volumes into Novorossiysk, Russia’s leading Black Sea outlet, had been booming on the back of growth in Russian incomes and consumer demand – up 42% in the first five months of the year, compared to 2007. By July, however, the turndown was already on the horizon. Novorossiysk reported for the month that container volume had slipped 10%, compared to June, and by 33% compared to July 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, both 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, which began in January this year, after Moscow had eliminated the import duty and encouraged Turkish imports to supply the burgeoning demand, especially in southwest Russia, along the Black Sea coast, for construction materials. Import volumes of mineral construction materials (MCM) 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 1.5M tonnes in the same period.
At Novorossiysk, the volume of imported MCM reached over 700,000 tonnes, a fivefold increase over the same period of 2007. Cement tripled to 945,000 tonnes in the nine-month period to 30 September. In August, the MCM volume landing at Novorossiysk was 10 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 30 June.
Port sources and industry analysts now say this rate of growth is unsustainable, and the falloff in domestic demand for construction steel and other materials has already been felt across the country. The only hope in the Black Sea region, they say, is continued capital spending by Moscow (especially in the Sochi area, site of the Winter Olympics 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 transport 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.”
Moscow set out its Black Sea maritime strategy on 20 May. According to the publicly released plan, a total of Rb631Bn ($23.4Bn) is to be invested between now and 2015. Of that, Rb181Bn 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 strategy paper doesn’t say is that crude oil exports, the most important cargoes for both Novorossiysk and Tuapse, are expected to stagnate or decline in the long-term. The immediate downturn in 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, they are much less 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 eight-month figures for Novorossiysk, crude volume to 31 August amounted to 43.3M tonnes, a drop of 5% year on year. Petroleum product shipments by contrast rose 19% in the same period, but volumes remain small – just 6M 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 exports through Ukraine are expected to decline, or stop completely. China and the northern routes will become even stronger.”
There are two opposing 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 661,000bpd is to be expanded to 1.3M bpd (if and when shareholders agree) and Transneft, the controlling Russian shareholder in the consortium, has been dragging its heels for several years. Transneft’s interest is in northwest 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 Bourgas, in Bulgaria, to Alexandro-poulos 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 throughout the eastern Mediterranean, and doesn’t want to compete against Russian crude available to its rivals.
In March of 2007, then-president Vladimir Putin overruled LUKoil, and gave the go-ahead for the Alexandro-poulos pipeline. The timing of the financial crisis, and falling demand for the oil, play into LUKoil’s hands. Nobody 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 said the Sochi cruise hub is “poorly organised, 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 Rb10Bn in Sochi port to achieve international cruise terminal standard.
Kristina Senko, spokesman for Novorossiysk port, told Fairplay that the total investment programme until 2012 is $20M, but she did not break this down into annual instalments or targets. She was not able to say whether the credit crunch would cause problems. Senko told Fairplay “we were not affected by financial crisis to date.”
At Tuapse, a port spokesman said the port’s investment programme for 2009-2010 amounts to Rb2.5Bn. The targets are the construction of terminals for butter and cement. “These plans have not yet changed,” the spokesman said.
The Russian Railways Company (RZD) is not conceding a significant impact either. Dmitri 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 31 October, the Black Sea and Azov Sea tonnage has dropped 1%, compared to last year, to 132.7M tonnes. This compares with a 1.6% increase in tonnage for all ports in the country to 380.5M tonnes. At 27.4 M 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 31 October; at 218.7M tonnes in they comprise 58% of the aggregate.
And where is the new port the federal government is promising to build by 2015? Apart from Sochi, the main contender for this port is Taman, a fishing base on Russia’s side of the Kerch Strait, which is intended as an outlet for Russia’s expanding grain and seed oil export trade.
According to two Russian companies specialising in seed oil, food fats and butter, Efko and Solar Products, they plan to spend $200M to build a grain elevator and loading facilities for up to 5M 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) and 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, which owns a 25% stake in the Russian company, to plan for the future.
The Kerch Strait connects the Azov to the Black Sea. Westwards across the strait lies Ukrainian territory. A year ago, local port captain Pyotr Parinov proposed a plan to build a new port for coal, chemicals, and containers, with a start-up price of Rb30Bn. Efko’s announcement in October improves the likelihood that something will happen at Taman. Bezborodov 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 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. It is the general strategy. And the aim is that it will be done.” But she added that Taman has not been chosen yet. Valery Filipov, the southern region director for Rosmorport, the federal ports agency, said recently that the plan for Taman calls for 30M tonne capacity to be built there by the year 2015. Bezborodov is sceptical. “There was an idea for a port at Taman. But now it looks dead.”