© Tomas1111rail
© Tomas1111

Rail freight demand from China to Europe is going through the roof, and projections for further growth are bullish. However, the drumbeat of rising volumes carries some ominous undertones.

There has been tension in Russia over Chinese moves to develop more southerly routings, and now Beijing is allegedly mulling cuts to subsidies, which could drive up the cost considerably.

Both volumes and the network have grown rapidly: in January, the UK was brought into the fold when a train completed the 18-day journey from Yiwu, and service in the opposite direction started in April.

And logistics firms keep adding services. Panalpina launched its first LCL service out of Shanghai in September 2016, which yielded over 1,900 shipments in 170 40ft units between January and October this year, and in September the company inaugurated a second route, from Shenzhen to Warsaw. This generated over 110 shipments in its first two months.

Now, Panalpina plans to strengthen its services and optimise distribution in Europe to bring more countries into the fold, said Slawomir Krysow, business development manager, rail Europe.

Dachser, which feeds its Shanghai rail hub from 12 origins in China for a weekly consolidation service and slots the cargo into its European distribution network in Hamburg, is also looking to develop this mode.

Thomas Reuter, COO of Dachser Sea & Air Logistics, said rail traffic had worked well and largely replaced sea-air flows out of China.

Last year, 185,000 teu were moved by rail to Europe on 1,800 trains and, according to projections from the Chinese government, this will grow to 5,000 trains in 2020.

There have been concerns that this growth might overwhelm the system, especially bottlenecks like border crossings where cargo has to be shifted because of different rail gauges. Uwe Glaser, CEO of Cargomind, noted that there had been problems this year that led to delays, but on the whole, these had not been intractable, he said.

To alleviate some of the problems, the Russian, Chinese and Mongolian railways agreed in November to simplify transfer procedures and use a single consignment note to speed up handling at border checkpoints.

But, more ominous than these issues have been political tensions. In the summer, rumours surfaced that the Russian authorities were frustrated by the lack of investment and implementation on the Chinese side for the northern routing and were considering ending cooperation with China’s Belt & Road programme. Apparently there is concern in Moscow that the Chinese government favours the southern route, through Baku, Tblisi and Kars.

More recently there have been allegations that the leadership in Beijing is thinking of cutting subsidies for the programme, which would have serious ramifications for users of the service.

According to some observers, subsidies cover 40-50% of the cost, which is estimated at $8,000-$9,000 per teu. Currently users pay between $4,000 and $6,000, depending on the origin point.

“We believe customers would only be willing to pay more, for example if subsidies were cut, if the transit time improved to a maximum 7-10 days between terminals,” said Mr Krysow.

Mr Glaser noted that the subsidies were largely meted out by provincial authorities, so a move by the central government may have only limited impact.

In light of Beijing’s efforts to develop Belt & Road, Mr Reuter doubts the central government would cut subsidies altogether. While it is the declared goal to make the service profitable in the long run, Beijing aims to move 25% of China’s exports to Europe by rail, up from less than 1% at the beginning of this year.

He said: “Perhaps they will cut subsidies at some locations. Maybe they won’t support all origins, going forward.”

For now, most logistics providers remain focused on expanding their use of rail links out of China.

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