ONE of the defining rail freight trends of recent years has been the spectacular rise in the volume of intermodal traffic between China and Europe. In November, China Railway Corporation (CRC) reported that more than 3000 container trains had run between the two continents since the start of 2017, exceeding the total for the previous six years combined, with services connecting 35 cities in China with 34 destinations in Europe. In Russia, TransContainer reported a 19% increase in the number of containers crossing the country by rail in the first 11 months of the year.
For Far East Land Bridge (Felb), the growth of the market last year exceeded all expectations. “2017 has been a crazy year,” CEO Mr Wilhelm Patzner told IRJ at the company’s offices in Vienna in November. “We doubled our volume compared with 2016, and we’re up to about 70,000 TEU, which was incredible. We certainly didn’t expect to see that dynamic.”
Felb aims to compete directly with both sea and air freight, offering door-to-door rail-based services, including the provision of containers, in both directions between South Korea, China and Europe. The company operated its first pilot service in 2007 and has since acquired more than 7000 containers while increasing the frequency of its services from one to six trains per week. Two Block Train Centres (BTCs) have been established in Asia and Europe to consolidate consignments from multiple points of origin into long trains for the journey across Russia.
Transit times fell from 25-28 days in 2009, when Felb launched its first regular services, to less than 17 days in 2016. The continuous reduction in transit times was broken last year when engineering works on the Polish side of the Malaszewicze (Poland) - Brest (Belarus) border crossing generated operational challenges for Asia - Europe rail freight operators at a time when they were grappling with a sharp upturn in traffic.
“For us transit time is the key selling point,” Patzner says. “We promise our clients door-to-door transit times of 14-17 days, and the average in 2017 was 21 days. These problems arose from three major issues - the construction works in Poland, the enormous growth in the market for all participants, and also because of our operational concept. Our strength is that we have a big network in Europe and a big network in China, consolidate our volumes on the borders, and run long, heavy trains across Russia for a good transit time. It was always our advantage to be able to cover the whole of China and Europe with our solutions.”
Felb adapted its operating concept with only one consignee per train to reduce shunting and minimise the disruption to its customers while the works were being carried out. “Fortunately we are back to normal transit times now, but a lot of customers are very dissatisfied with the performance - and I understand why,” Patzner says.
Around 90% of the containers handled by Felb travel via the Trans-Siberian Railway, with the remainder transiting through Kazakhstan, but last year the company ran its first train via Mongolia, and Patzner can see the potential for development on this route. “By going this way you can reach new regions of China and it takes the pressure off the Manzhouli [China] - Zabaykalsk [Russia] border crossing, where there are issues with congestion,” he says.
Patzner is extremely satisfied with the reduction in transit times that have been achieved in recent years, particularly in Russia. Of the 11,000km haul, 9000km is in Russian territory and trains often cover more than 1000km a day on this section of the route. In Europe however the situation is more challenging, particularly around infrastructure performance. “The Russians are very efficient and they are working on being more efficient,” he says. “I believe they could reduce transit time even more - perhaps by a day or so - but Europe is the biggest challenge. Despite the recent upgrade there won’t be any more big capacity jumps at Malaszewicze - Brest, so the challenge is to find new border crossings. I would be happy if we get back to the transit time we had in 2016, so we can offer reliable door-to-door solutions between 14 and 17 days. If we get back to that standard we don’t need a further reduction in transit time - we need solid performance, quality, predictability. That’s more important than whether it takes 14 days or 13 days.”
With the break-of-gauge at both the European and Asian ends of the Russian leg of the journey, efficient transhipment of containers between 1435mm-gauge and 1520mm-gauge wagons is crucial to maintain fluid operations. However, with traffic growing rapidly, these terminals are becoming bottlenecks. “If there’s an obstacle to further growth it’s transloading and the congestion it creates at borders,” Patzner explains. “If we want to see growth in the future we need either new border crossings or more capacity the existing crossing points. But investing in capacity isn’t something you can achieve in a matter of weeks. The Russians and the Chinese have recognised that this is a problem, the Europeans less so. The good thing in Europe is that you have more options for border crossings.”
Another issue for all actors in the Asia - Europe rail freight market is the huge disparity between eastbound and westbound volumes. This has resulted in an equipment imbalance which is growing more acute as the volume of westbound traffic continues to rise steadily. “The challenge for the whole market is that we have two-thirds westbound, one-third eastbound,” Patzner says. “The key for further growth is finding European goods that you can put on the train to help equalise westbound and eastbound traffic. Empty containers have also become scarce in Asia - two years ago we paid around $US 300-400 for a container one-way to Europe. Now the market rate is $US 1200.”
The price for an eastbound container is currently only around half the westbound rate. “It’s a pricing issue on one hand, but it’s also a question of new technology,” Patzner explains. “We’re working on refrigerated solutions, and there are some products from Europe which are in demand in China, but you need reefer supply. There is potential in markets such as foodstuffs, but there is the question of who will invest in the containers.”
Patzner also sees air freight as a potential target for growing rail’s business between Europe and Asia. “If our transit time comes down to 12 days we start to be attractive to air freight customers because with customs, loading and unloading, we are not so far from air freight transit times,” he says. “Our price is 25% of air freight so if the transit time disadvantage decreases, there’s potential for rail to break into the air freight segment for eastbound traffic.”
The rapid growth in the market during 2017 was driven to a certain extent by Chinese provincial governments offering subsidies for the movement of containers by rail to Europe. The price of these incentives ranges from $US 1000 to $US 5000 per 40 foot container. Patzner believes that significant reductions in these subsidies will come in 2018, or at the latest in 2019. “Chinese subsidies have pushed the market, but it’s only a temporary push,” he says. “We don’t believe that this policy of subsidising containers to Europe will go on for more than 3-5 years. We think subsidy policy will be centralised and prices will be reduced. At the end of the day that’s good for us because most of our products are not based on subsidies, while many of our competitors’ products are.”
Looking beyond China, Patzner sees opportunities for growth through the expansion of the Felb network to other countries. “We see a lot of demand from Vietnam to Europe, where transit time could matter,” he says. “South Korea is already a big market for us because of the electronics industry, and India is also a potential new market for us. We see potential for importing goods from these countries to the Moscow region. Sooner or later, I see potential for Chinese investments in Africa, perhaps via Italian ports to northern Africa.”
After the surge in volumes in 2017, Patzner predicts a less frantic year ahead, although the story remains one of growth and Felb is still aiming to move 100,000 TEU in 2020. Rumours in the Russian press at the end of 2017 indicate that the government may be about to sanction the sale of part or all of RZD’s controlling stake in TransContainer, with Mediterranean Shipping Company (MSC) and UCL Holding, Russia, reportedly expressing an interest. TransContainer accounts for around half of container movements in Russia, and any change in ownership in such a dominant player is likely to have repercussions for the Asia - Europe rail freight market.
“I don’t expect growth to continue like it has,” Patzner concludes. “As a company ruled by economy, if we can keep profitability and price at the current level, I’m more than happy because competition is increasing and that’s putting pressure on prices. But a lot depends on Chinese policy - if they want to push Asia - Europe freight, the prospects are going to be good.”