China–Europe rail network evolves to the next level (JOC) 05/02/20




China–Europe rail network evolves to the next level

The free-for-all growth period that has characterized the rapid development of China-Europe rail since 2013, sent volume soaring, and saw cities across Europe and China jostling for position as rail hubs, appears to be over. China subsidies are to be scaled down in 2020 and the focus is shifting toward creating a more efficient hub-and-spoke system at each end of the network.

Not that the volume growth has slowed. In 2018, the number of trains increased 73 percent year over year, to 6,363, with volume growing 35 percent to 370,000 TEU, according to Swiss consulting firm Prognos.

More than 7,500 trains are expected on the China-Europe network this year, connecting 56 Chinese cities and 50 hubs in Europe. But it’s an inefficient system on both sides, especially when it comes to the growing demand for less-than-containerload (LCL) cargo that requires consolidation points, according to Wubbo Mossing Holsteijn, business development manager for Nunner Logistics.

“The problem for LCL is that every city’s rail platform in China has its own targets, and each is required to handle a certain number of trains,” Holsteijn told the European Silk Road Summit in Venlo, Netherlands. Only full trains qualify for subsidies, so consolidation points near rail hubs are crucial for LCL service providers.

Holsteijn said there is space for four or five hubs in China. “We think Xi’an will have the role as the major hub, as most trains pass through there. Xi’an will play a greater role as a main hub for Central and South China, with a fast shuttle network to all cities in the country,” he said. “There will be other endpoints, but their locations will be decided by the central government, and those hubs will be where the trains are built and consolidated. They will connect the trains and make the system and planning more efficient.”

Having trains filled with mixed LCL cargo rather than block trains would make more sense, said Dariusz Stefanski, president of the board at PCC Intermodal.

“It is more sensible for a daily train of mixed cargo traveling to Europe, with transshipment at the borders where the train has to change tracks anyway,” he said. “What is the sense in having to wait one week at Małaszewicze on the Poland-Belarus border to consolidate, and then sending one train to Hamburg or Duisburg? Half of the train should be distributed to the south of Europe or to Poland. The train passes Poland anyway on the way in, and then the cargo must be trucked all the way back.”

Looming reform

Trains travel from terminal in China to terminal in Europe because only block trains qualify for subsidies, an area that is being reviewed as China reforms its rail network.

Kateryna Negrieieva, project manager of Russian rail carrier RTSB, said China Railways since late 2018 has been centralizing rail operations under its control, only subsidizing full trains, placing ceilings on the subsidy levels, and not allowing empty containers on trains leaving China.

“We know there will be less subsidies for next year,” Negrieieva said, confirming what many logistics providers and rail operators have heard from their Chinese partners.

The market has been given no definite time frame, however, and there is no direct contact between companies outside China offering rail transport and the local authorities in various Chinese cities that approve subsidies.

“Building up relations and connections with officials in various cities in China is difficult to do from the outside,” Holsteijn said. “You need to do that with a Chinese partner that can talk to the local government.”

No one really knows the subsidy levels, said Peter Pardoel, board member for Cabooter Group, pointing out that the rail network has several departure terminals, and each one has a different subsidy deal with the Chinese government.

“It is a mystery how this mechanism works, but the Chinese have announced that subsidies will be scaled back, and in some cases some regions and terminals are already factoring in those increased prices,” he told The Journal of Commerce.

“Every forwarder will get its own rate. If the subsidies go, then the cost price will be immediately affected, and if you have a train that does not have an east-west cargo balance, then you have a problem. Those trains are either in exit mode already, or they are looking for solutions to stay in business. Finding that balance is the most important challenge they face.”

Some are concerned that scaling back the subsidies too quickly will stomp hard on the volume brakes. Markus Bertram, managing director of multimodal operator LTE Netherlands, said that with the subsidies at maybe half the transport value, if the rates increased by 50 percent, rail would immediately lose significant market share.

“Expensive cars and wine will continue to use the route, but the question is, how much business will be left?” he said.

That question may find its answer in the lifting of the Russian embargo on food and agricultural products, which have been banned from transiting the country since 2016. The sanctions were lifted on July 1, after being in place since 2014 when they were imposed in retaliation for European Union sanctions.

Negrieieva believes that move could increase the rail freight market on the northern route to China by 50,000 to 80,000 TEU a year.

“The market could be immense,” she said. “Forwarders need to be prepared for this. China is the biggest importer and exporter of pork meat, but a disease affecting pigs has led to a big shortage of pork in China, and the price has increased by 40 percent. China is looking for other sources of meat in Europe and other countries, so the demand is high.”