THESE are difficult times for Britain’s rail freight industry. Statistics published by the Office of Rail and Road (ORR) on May 19 show the total amount of freight lifted in the 2015-16 financial year fell 22.2% to 86 million tonnes, its lowest level since 1984-85, when the Miner’s Strike led to an 85.5% drop in coal traffic. The total volume of freight moved in 2015-16 declined by 17.8 billion tonne-km, a 20% reduction.
This downturn has been fuelled by plunging demand for thermal coal, until recently the largest commodity group and a source of steady business for freight operators. For decades coal was the jewel in the rail freight crown and the power generators’ switch from domestic to imported coal in the 1990s and early 2000s helped to invigorate the newly-privatised rail freight industry with lucrative long-hauls from ports to power stations giving operators the confidence and the revenue to invest in new equipment, which in turn boosted productivity.
With the closure of many coal-fired power stations, the shift to renewable energy and the doubling of the top-up carbon tax from April 1 2015, the post-privatisation coal boom has come to a swift and abrupt end. The total amount of coal lifted fell 54.6% in 2015-16 to a 30-year low of 19.8 million tonnes and volumes plummeted 64.2% to 2.3 billion net tonne-km. Once by far the largest commodity group, coal is now a lowly third behind domestic intermodal and construction, accounting for just 13.1% of overall freight volumes. With the government planning to phase coal-fired plants out completely by the mid-2020s, most remaining coal traffic looks set to vanish over the next decade.
Founded in 2001, GB Railfreight (GBRf) was one of the new entrants that capitalised on the burgeoning coal business, and while the company has succeeded in building a broad portfolio across the full spectrum of commodity groups over the last 15 years, the loss of coal has still hit the business hard. In early July GB Railfreight coal traffic amounted to little more than 15 coal trains a week, a fraction of the activity recorded just a year ago.
Briefing journalists in London on July 5, GBRf managing director Mr John Smith said coal had helped to shape a competitive rail freight landscape in Britain, but admitted coal volumes have waned more quickly than many anticipated. “GBRf speculated in coal assets and built a relationship with [electricity generator] Drax, which encouraged us into the coal market,” he explains. “Coal traffic went through the roof during this period and the Indian Summer for coal rode us through the recession, providing us with the money to buy new equipment.”
The demise of coal has left both GBRf and its competitors seeking new uses for sunken assets which are underutilised or in some cases surplus. Greenbrier Europe has recently built a new fleet of open wagons for Freightliner using bogies from redundant coal hoppers, to provide rolling stock for a new aggregates contract. WH Davis, Britain, has converted former GBRf coal hoppers for the same purpose.
Construction is now the second largest commodity group, accounting for 22.4% of volumes in 2015-16. Smith sees potential for growth in this sector, and he believes major infrastructure projects could offer a significant boost to rail freight, provided they still go ahead in the wake of Britain’s decision to leave the European Union. “A lot of business models in the construction sector are based around big infrastructure opportunities,” he says. “For example, there are 16 million tonnes of earth to move out for High Speed 2 as well as all the materials going in. If we go through with Brexit we have to invest in the country, and this is hugely important to the construction market.”
Greenbrier Europe is currently building 50 aggregate wagons for GBRf at its plant in Swidnica, Poland, which will be delivered by next June. Smith notes with some frustration that the collapsing value of the British pound added around £10,000 to the cost of each wagon in just one day after the EU referendum, and such volatility does little to support the case for further investment in new equipment. “Financiers are not confident about the prospects for rail freight post-Brexit,” he says. “It may well come back - we believe we have a successful business model, and hopefully they can see that.”
While Brexit undoubtedly piles more uncertainty on operators at a time of turbulence in the rail freight market, Smith believes the opportunities for growth are still out there. In recent years both GBRf and DB Cargo have won contracts to move imported biomass from ports to Britain’s largest power station at Drax in North Yorkshire, where three generating units have been converted from coal to biomass and Drax has invested in new wagons and unloading facilities to handle the material.
Biomass offers several advantages for rail freight. Unlike coal, biomass stockpiles at power stations are small due to the volatility of the material, which means the demand for trains is constant. Train movements are therefore rigidly timetabled, making capacity allocation more straightforward.
In northeast England, GBRf has secured a 10-year contract to move biomass from the Port of Tyne near Newcastle to Lynemouth power station in Northumberland, which is being converted to burn biomass. The Port of Tyne is investing £100m in transhipment facilities and GBRf is buying 50 hopper wagons for the contract.
Smith notes that investment in additional biomass capacity could make rail freight operations in this sector more efficient, helping to offset the decline in coal volumes. “Rail freight operators are running at about 70% capacity with three generating units burning biomass at Drax,” he explains. “Converting a fourth generating unit from coal would make that figure 95% for GBRf.”
With Network Rail (NR) carrying out a significant programme of investment in the network, infrastructure renewals and enhancements are a key source of traffic for freight operators. However, here too there is uncertainty over whether the current level of activity, which accounts for a £100-150m chunk of the £800-850m rail freight market, will be sustained.
Within the next few months the periodic review process will begin, which will determine NR’s outputs and funding for 2019-2024 (Control Period 6). Since the last periodic review the situation for NR has changed radically - in 2014 the company was reclassified as a public body, adding its £38bn debt to the state deficit. Cost overruns on major projects led to a review of NR’s activities, with some schemes being pushed back into CP6. Add in the impact of Brexit on the economy and the public finances, and the investment outlook for CP6 looks decidedly murky.
This feeds into another big issue hanging over the future of rail freight in Britain - capacity. Many pin hopes of a rail freight revival on intermodal, a sector which has grown strongly since privatisation despite the impact of the global financial crisis on international trade. However, most of the key intermodal corridors also happen to be some of Britain’s busiest passenger lines - most freight trains from Felixstowe, the country’s largest container port, to central and northwest England and Scotland are routed via the Great Eastern Main Line, London, and the West Coast Main Line (WCML).
A pro-rail policy has yielded a significant improvements in facilities at Felixstowe in recent years. Hutchison Ports UK has invested in new cranes and extended sidings to create additional capacity at the South Terminal and in June 2013 the opening of a new £40m North Terminal, co-financed by the European Union Trans-European Transport Network (TEN-T) programme, doubled rail capacity at the port to 1.35 million TEU a year.
Unfortunately investment in terminal facilities has not been matched with enhancements to hinterland rail infrastructure, which is now severely constrained. Escalating costs have already put paid to track-doubling on the Soham - Ely line, a major capacity constraint for freight on the cross-country route between Felixstowe and the WCML at Nuneaton, which avoids the congested route via London. However, Smith believes the biggest obstacle to growth is the 19.5km line from Ipswich to Felixstowe.
In 2002, when GBRf began operating intermodal trains from Felixstowe, the largely single-track branch from Ipswich was used by 13 freight trains per day and an hourly passenger service. While the passenger service is still hourly, NR now has to find capacity for 33 intermodal trains a day, and operators are clamouring for more paths as the increasing size of container ships gives rail a competitive edge when it comes to getting “boxes off the dockside” as quickly as possible. “Forwarders are increasingly saying ‘we can’t get containers out quickly enough by road, so let’s buy a train,’” Smith says.
With £1.5bn being invested in widening part of the A14 highway, which roughly parallels the Felixstowe - Nuneaton route, Smith is vexed by the lack of progress on what is a relatively simple track-doubling project. “The key factor for intermodal is for the government to understand where the easy wins are,” Smith says. “The rail freight market has to grow - things will get nasty if we just fight between ourselves over what’s left. We need demand to increase and to do that we need capacity in intermodal. The government needs to understand the key corridors, and the need for intelligent, cheap investment in those corridors. Rail currently has 25% of the market out of Felixstowe, 10 more trains would take that to 35%, which is achievable if we have capacity.”
Smith welcomes NR’s decision earlier this year to create a virtual route for freight, with a dedicated managing director looking after freight interests at a national level, but he stresses the issue of freight-orientated capacity enhancement on one of the busiest passenger railways in the world cannot be dodged any longer.
One of the notable successes of GBRf has been its diversification into non-freight operations. The company’s portfolio has expanded in recent years to include mail trains; providing traction and drivers for London - ScotlandCaledonian Sleeper services and the Belmond Royal Scotsman luxury train; and supporting the introduction of new Hitachi trains on the Great Western Main Line.
As a subsidiary of Eurotunnel’s rail freight unit Europorte, GBRf would also appear to be in a strong position to develop rail freight through the Channel Tunnel, which accounts for just 2.7% of volumes in Britain. The recent migrant crisis has put further strain on a sector which has suffered almost continuous setbacks over the last 20 years, but Smith believes cross-channel rail freight will make a slow recovery, and there are already green shoots. On July 4 GBRf operated a train of Honda cars from Bristol to Ghent in Belgium, the first car train to traverse the Channel Tunnel in six years. The initial trial contract is for 10 trains, but Smith is hopeful this will become a regular flow.
Indeed, Smith doesn’t rule out establishing operations elsewhere in Europe, and with French and Belgian operators already in the Europorte portfolio, expansion into other markets looks a realistic prospect. “We have efficient freight operations in Britain and I think that is sellable elsewhere,” he says. “There is huge scope to diversify and I think we would go abroad.”
While the potential consequences of Brexit occupies the thoughts of many business leaders in Britain, Smith believes rail freight operators have little time to ponder the wider implications of this momentous decision. “Do we batten down the hatches and seek better productivity from people and trains?” asks Smith. “I prefer to carry on building up, but we have to be realistic about the future of the business. Change is never a bad thing for a business but with the current market situation we’re a bit less flexible than before, and the current political vacuum doesn’t help.”
Facing challenges on multiple fronts, there’s little doubt operators will have to adapt to survive, but there are encouraging signs of innovation and a willingness to diversify. However, this needs to be matched with a commitment from politicians and the infrastructure manager to ensuring track and terminal capacity meet the requirements of the industry. History and experience elsewhere in Europe show gaining that support won’t be an easy task.