Albert Vygovsky: Russian market of river traffic is the most stable market of shipping industry

The round table "Maritime and Inland Waterways Transport. Outlook of Development” held at the exhibition “MIR” (World), was organized in the framework of the project "Russian Shipping.” Managing Director of North-Western Shipping Company Albert Vygovsky in his speech delivered at the round table told about prospects of development of different segments of shipping business in Russia. PortNews gives the speech text.

- "North-Western Shipping Company, as a Russian shipping company that operates vessels flying the Russian flag and employing Russian crews, enthusiastically greeted the appearance of federal law promoting Russian shipbuilding and shipping industries. It is very important that the government understands the need for development of the domestic shipping, which position has considerably weakened in the last twenty years. Nevertheless, we can expect to see in the next ten or fifteen years a growth in demand for transport of Russian goods. As the Russian railways and road transport are troubled with congestions, the water transport will be able to handle the demand for shipping more cargo volumes.
 
Currently, there are three segments of the shipping business in the Russian market.

The first of these is an ocean segment, the ‘deep sea’. This is a highly competitive market with a nearly "perfect competition", where the share of Russian operators is very small.
The second segment is transportation by inland waterways. Because of some limitations for operations on the inland waterways of Russia, this segment is represented by Russian carriers, and Volga Shipping Company is the undisputed leader here.

The third segment is cargo transportation by mixed sailing river-sea-going vessels, as well as the European coastal traffic, ‘short sea shipping’. In the case of mixed river-sea shipping, in the segment largely Russian companies dominate there. As to the short sea, both Russian and foreign companies operate in the market segment.
 
Now I will briefly touch on each of the segments of the shipping business. I will try to prove that we will see growing demand there and that each segment should develop, although in some areas the development capabilities are doubtful."
 
Ocean market
 
"Today, there is a demand for iron ore transportation on the market of ‘deep sea’ shipping of dry and bulk cargoes, mainly due to the growing Chinese economy.
After the crisis of 2008-2009, we have seen positive changes in the BRIC economies (Brazil, Russia, India and China) and this trend is significantly higher than that in Europe. Let me say that many European experts are trying today to exclude Russia from the BRIC list and rename it as BaCIs (Brazil, China, India).
After last year's earthquake in Japan, we saw the emergence of another big player - Korea, which managed to substitute the production capacities of Japan, as well as to clinch a significant volume of industrial orders from the portfolio of China at the expense of a higher quality of their products.
 
Now I’ll try to assess the supply of the fleet in this segment.

The outlook of decommissioning of the fleet by 2014 is (in DWT) 121 million tons. Slightly less than half of them (44%) are vessels with capacity of 10,000-50,000mt, 21% - 50,000-80,000mt vessels, 13% - 80,000-150,000mt vessels and 22% - the ships of capacity of more than 150,000 tons.
 
Considering the forecast of the fleet upgrade until 2014 we see that it will be mostly due to vessels with a capacity of over 50,000mt. In the segment of small dry bulk carriers (10,000-50,000 tons) in 2011 the shipyards saw a significant decline in newbuilds number.
 
Returning to the freight shipping by ocean vessels from Russian ports, we may state that this type of fleet will be a priority for a long time in cargo transportation, there is no alternative to this segment in the market. In the next five or seven years, cargo handling at Russian ports will increase by 30 - 40%, and major volume of the traffic will be moved by ocean-going vessels. It is clear that the increased demand for transportation of the cargo may be easily supplied by foreign carriers. But we hope that federal law encouraging Russian shipbuilding and shipping (305-FL), which has come into force, should increase in the medium term the share of Russian companies in this niche more significant. Obviously, the segment of 50,000ton-bulk carriers may become the most attractive for Russian investors."
 
Inland waterways transportation.
 
The Russian market of river transportation is the most stable market for the shipping industry, characterized by low competition and the oldest fleet. The freight volume moved on inland waterways significantly creates demand, outpacing supply, and this trend will persist in a long-term period. It is assumed that the demand in the market of goods carriage on inland waterways will be up to 7% annually, depending on the cargo shifting from railways to fluvial transport.

The rate of return on long-term investments in the river transportation is relatively not too high, but the average profitability of the business on these goods in the long run is offset by steady growth of cargo base and tariffs.

The key question here is what to do with the low-margin transportation of goods (mainly building materials, largely sand) in the future? Today the effectiveness of these shipments does not allow investment in new ships. In five or ten years, when the existing fleet will begin decommissioning, it means the transfer of these cargoes to the market of road transport. In 2010, fluvial transport moved 56 million tons of cargo and the demand for such transportation is growing steadily.

Mixed river-sea transportation, European short sea shipping

The basis of business of shipping companies operating river and sea-going vessels is shipping of Russian export cargo and services between European ports. One of the fundamental factors that determine the existence of this niche is a demand for transportation of small shipments.
This is proved by our shipping company’s cargo traffic. For example, in the north shipments of black metal, fertilizer and forest constitute major volume, in the south - grain and scrap metal. The shipment is formed according to transport logistics, aimed at minimizing warehouse inventory, and therefore there is a demand primarily for consignments of 3000 - 5000 tons. For example, in the northern basin of the size of timber shipment rarely exceeds 3000-3500 cbm, and of fertilizer cargo - 3000 - 5000 tons.
 
For Russian river-sea vessels, shipping lanes largely depend on characteristics of vessels and their ability to enter those ports that have limitations on depths or length of quay walls. Most of the Russian companies are engaged in transportation of cargo to / from the ports having restrictions on the vessels’ draft. This helps Russian shipping companies to have competitive advantage over foreign companies and allow them to be in demand in the market of water transport.

The last decades we see that the whole industry is gradually moving towards increasing tonnage in each of the segments of shipping, whether vessels are engaged in deep sea shipping, or they are small coasters. This is also true for mixed river-sea shipping. If we compare the average capacity of a 10-year old Russian river-sea-river cargo ship with newbuilds, we see that their capacity has grown and will likely to increase further.

All this means that the market for sea-river shipping is in demand and is important for cargo owners and will grow further. The only problem is that the effectiveness of this business is not so evident for shipowners. Yes, the owners are booking newbuilds of ‘river-sea’ class, but quite often the projects have big risks, given the market volatility and a low level of return.

The project of deepening the waters to 4 meters across the entire deep-waterways system of Russia could be an option for increasing efficiency of cargo transportation by such fleet. Such measures may increase supply and can help cut the cost of building of this ship.

I would like to summarize that the basic ways of development of Russia’s dry cargo fleet could be, firstly, the river boats, the second segment, important for the country’s economy - the vessels of mixed ‘river-sea’ class, and finally - the sea and ocean-going ships.

In the process of the fleet upgrade we need to pay attention to existing projects, as well as to the development of innovative new types of vessels. In the segment of river-sea vessels it is necessary to focus on more competitive and energy efficient solutions. In the segment of sea and ocean ships we need to build modern fleet of average tonnage that can provide benefits to domestic exporters.