THE session on the new Silk Road between China and Europe during the UIC’s Global Rail Freight Conference in Genoa led to some lively discussion among the speakers and some telling revelations about the state of the market.
“There are no freight trains from China to Europe,” was the somewhat surprising opening statement by Mr Ewe Leuschner, senior vice-president, business development Eurasia, with DB Cargo. He went on to explain that there are three independent groups of rail freight services: China on standard gauge, the 1520mm-gauge network covering Mongolia, Kazakhstan, Russia and parts of Eastern Europe, and standard gauge in the rest of Europe.
However, Leuschner says there is huge disparity between each group in terms of operation and rates. Trains travel an average of 1100km per day in Asia compared with just 250km in Europe. The number of containers per train ranges from 41 in China and Europe to 120 in Russia. There is also disparity in the price per kilometre per 40ft container ranging from €0.23-0.32 in Kazakhstan, to €0.66-0.72 in Russia, €0.58-0.70 in Belarus, and €1.12-1.30 in Europe.
Despite these disparities, Leuschner says this is one of the main growth markets for rail freight, a view shared by Mr Andreas Schwilling, partner with Roland Berger’s transport competence centre. “We are talking about one of the few success stories in rail cargo, and we expect further growth,” says Schwilling. “Rates for container shipping have dropped significantly. Economic growth in China is not as high as it used to be, but rail has grown nevertheless.”
According to a study by Roland Berger for the UIC, container traffic from China to Europe has risen from 25,000 TEU in 2014, to 145,000 in 2016 and 240,000 last year.
Ms Natalia Stepanova, deputy secretary general of the International Coordinating Council on Trans-Eurasian Transport (CCTT), says the total volume of containers travelling by rail between China and Europe was 118,900 between January and May this year, indicating that the growth is continuing this year.
Schwilling cites several reasons for the rapid turnaround in the fortunes of China - Europe rail freight. These include:
- reduced transit times and improved punctuality
- an increase in the number of destinations served (currently 15 in Europe and at least 16 in China)
- a reduction in freight rates thanks to the introduction of Chinese subsidies through its “One Belt One Road” initiative
- improvements to border crossing procedures through the introduction of a common consignment note and the Eurasian Customs Union, and
- improvements to infrastructure, particularly in Kazakhstan.
However, China - Europe rail freight is not without its challenges. “When our trains come from China, the problems start in Europe,” Schwilling says, and he lists four main areas of concern:
- construction works on main lines in Poland lasting several years
- growing Eurasian transport flows concentrating traffic on lines through Brest/Malaszewicze on the Belarus/Polish border, resulting in capacity constraints
- frequent locomotive changes, resulting in waiting times for drivers at national borders, and
- low and changing prioritisation accorded to rail freight when passing through countries.
He adds that the conflict in Ukraine makes it impossible to use alternative routes and terminals which have sufficient capacity. In addition, the terminal at Zabaykalsk on the Russian-Chinese border has insufficient capacity, and the development of border terminals into intermodal hubs is lagging behind the needs of operators.
Leuschner says DB has been talking to Russian Railways (RZD) about running some trains through Kaliningrad to avoid the congestion further south in Poland. “Russia is not yet willing to send freight through the Baltic states and will not offer its best rates unless we go through Kaliningrad,” he says. DB plans to start using this route in the third quarter of this year, but there is a proviso. “The Kaliningrad route is almost ready, but it will only start if the Chinese agree a subsidy for the route as this will affect the price.”
Schwilling says that various Chinese authorities are subsidising rail container traffic to the tune of $US 2000-2500 per TEU. This has enabled rail freight rates to be cut since 2011 so that they are now only three or four times higher than ocean shipping rates. However, the subsidies might be discontinued in 2020. “We believe rail freight between China and Europe can survive without subsidies, but growth rates will be significantly lower,” Schwilling predicts.
Leuschner says the Chinese subsidies are designed to reduce internal migration to the crowded east of the country and to relieve the pressure on the eastern seaboard ports by sending freight from western China directly to Europe. He says a group of Chinese logistics platforms receives the subsidies from three or four different ministries. “We cannot influence this group from the outside,” he observes. “In contrast, there are 75 rail freight operators in Europe, but DB Cargo and PKP Cargo are the biggest. We need a European voice.”
Schwilling says the balance in China - Europe rail freight traffic is two-thirds westbound from China to Europe and one-third eastbound.
Leuschner disagrees with this assessment. “This is not true,” he says. “Eastbound it is 20% loaded and 80% unloaded, compared with 89% loaded westbound.
“We have to reduce the number of empty containers, but nobody is addressing the problem sufficiently. This corridor will only exist if clients request services. We need to meet demands for speed and low prices.”
Most of the China - Europe traffic passes through Russia, with very little freight passing through the southern routes via Iran and Turkey as the infrastructure will not support it yet.
Stepanova gave some insight as to why shippers are switching to rail. “Many forwarders believe rail is a good alternative to ships,” she says. “Integrity, price and sticking to delivery times are important. Ten years ago, price was important to be competitive, but when you have high volumes integrity is more important especially for spare parts. We use tags on the containers and electronic tracking to guarantee punctuality.”
Security is also a key concern among shippers. “We sometimes use escorts to ensure security, and an electronic seal (e-seal) to prevent containers from being opened en route. Customers are willing to pay more to protect their goods by using electronic locks and e-seals, but it is difficult to integrate all the different security systems. We can’t use devices in Kazakhstan, but we are working on a solution. E-seals will enable us to cut the transit times by five days or 34% because we won’t need escorts or guards for the trains. Insurance costs will also be 5-7% lower using an e-seal.”
Finally, Prorail’s CEO, Mr Per Eringa, questioned whether the time has come for the rail industry to start talking about “Silk Rail” rather than the Silk Road, in view of the recent growth in rail freight between China and Europe. Is this premature? Will the bubble burst if the Chinese discontinue their subsidies to Chinese logistics platforms? The sensible policy would be to phase out the subsidies rather than turning off the tap abruptly.