Rail shipping volumes in August 2020 jumped by 66 percent over the same period in 2019, reaching 113,000 TEUs. Extrapolating, container volume will probably top one million TEUs this year.
Not long ago, ships delivered about 98 percent of all China-EU cargo, while air and rail accounted for only 1.5 ̶ 2 percent and 0.5̶ 1 percent, respectively. However, recent exponential growth in rail freight volumes, with its twofold increase every two years, has changed the universally accepted standards. Considering that annual China-Europe trade volumes are estimated at about 20 million TEU, the current share of freight rail traffic is 6 ̶ 8 percent of the overall volume. In an effort to promote shipments to Europe, most landlocked Chinese provinces have been subsidising domestic rail freight rates. However, many factors indicate that China is becoming aware of the fact that this situation cannot last long.
The sustainable development of commercial ties with Europe need to depend on market mechanisms; the subsidies need to stop. The Chinese media reports that state subsidies for European-bound railway traffic was as high as 50 percent in 2018. However, subsidies were reduced to 40 percent last year and are about 30 percent this year. The authorities expect that all subsidies will end by 2022. According to logistics analysts, rail traffic volumes need to reach about 1.5 million TEUs to feasibly end government support.
This strategy is feasible because of lower shipping costs due to considerably higher volume. Most logistics management companies believe that, whereas in 2018 it cost about $9,000 ̶ $10,000 to deliver one forty-foot equivalent unit (FEU) from terminal to terminal via the China-Europe railway route in 2018, these costs have been almost halved to $4,500 ̶ 5,500 since early 2020.
There is no official information on the number or amounts of Chinese government subsidies. Our estimates show that the total volume of railway subsidies for 2020 from various Chinese provinces will be about $800 million, a significant amount, but negligible compared to the $100 billion-plus that China spends annually on developing its national railway system.
Given this impressive increase in China-Europe freight rail traffic, it’s only natural to study its future prospects. It is important to understand the route’s bottlenecks and other factors that might hamper further traffic increase. Most logistics analysts agree that there are two main challenges in the mid-term. First, how to balance China-Europe and Europe-China cargo volumes. Second, how to boost the limited capacity of the Belarusian-Polish border crossing.
Today, of all freight volume on this route, about two-thirds move west and only one-third goes east. This situation is unlikely to change in the near future. A rapid increase in Chinese consumption volumes could become the most positive change in this respect. Increased consumerism would create additional demand for high-quality European goods.
As for the Polish border, a map of China-Europe railway routes shows that virtually all trains are running through the Brest (Belarus)-Malaszewicze (Poland) checkpoint today, partly because Russia is avoiding running these trains through Ukraine for political reasons. It appears that this situation will persist for the foreseeable future.
Another bottleneck is that Russia, Kazakhstan, Belarus and Mongolia use wide-gauge (1,520 mm) track while Europe and China use standard gauge (1,435 mm). So containers need to be transloaded to another rolling stock on the route, or wheel set gauge change technology needs to be used.
Logistics analysts like to point out that the change in railway gauges is a major obstacle to increasing volume and decreasing shipping times. But this may not be so. With the introduction of new technology in Khorgos, the time needed for transloading containers from one train to another has decreased from several hours to as low as 47 minutes.
It may seem strange, but the EU countries encounter serious problems with both cargo handling and the capacity of railway networks. It turns out that the European railway network is obsolete and has basic constraints that reduce its capacity. Logistics problems make Malaszewicze on the Belarusian-Polish border the main bottleneck on the entire China-Europe route. The border crossing is currently being upgraded which should boost the train handling capacity in this sector from 14 trains to 55 trains per day. Poland and the EU allocated 700 million euros for this project. The new Malaszewicze transport hub, with an area of 30 sq km, will be completely rebuilt. The project will modernise the hub’s railway infrastructure and thus drastically increase the speed of trains as well as the axle load on tracks.
European railways stipulate preset maximum container train length requirements that limit freight volumes and increase operational expenses. An average Russian train has 71 standard wagons, and a Belarusian train from 57 to 65 wagons. However, EU regulations limit train length to 43 wagons. Consequently, trains entering Europe via Malaszewicze must have no more than 43 wagons with 86 TEUs. After a freight train arrives at the border with Poland, it has to be split: in Brest, containers are transloaded and used to make up a 43-wagon freight train. The rest of them remain at the border “waiting” for the next train.
Bureaucratic factors, including the standardisation of customs clearance procedures, the minimisation and simplification of administrative processes for freight clearance at the border and other details have to be improved to increase average train speeds, including border processes, which require international agreements.
There are the reasons behind the significantly increased freight rail traffic on the China-Europe route. First, the Chinese economy is becoming more competitive, and the country is thus exporting more to European markets. Second, China is exporting more expensive goods that can justify the cost of faster rail shipping over sea shipping. Third, the Chinese government has been relocating production inland and has been focusing on the development of the landlocked central and western provinces that facilitate cheaper and faster rail traffic to Europe. Fourth, the people of China are becoming more affluent; more consumers want expensive, high-quality European goods, including wine, food and cars. Again these products justify faster but reasonably priced deliveries to the Chinese market. Fifth, the establishment of the Eurasian Union has facilitated the free movement of goods, and logistics management companies now have access to reliable, fast and cost-effective rail shipping.
Most analysts believe that container volumes will continue to increase in the near future. Experts from the Eurasian Development Bank estimate that, given the current infrastructure, maximum rail freight volume from China to Europe will amount to about two million TEUs annually. This shipping mode will then reach a practical capacity, where still lower rates will be needed to expand freight volumes further. It will also be necessary to invest in the physical infrastructure, the development of transport and logistics centres, more efficient locomotives and the automation of border-crossing procedures, as well as to digitalise documentation with block chain and smart contract technology, to standardise the regulatory legal framework and more effectively coordinate freight rates between partners.
Overall, there is every reason to believe that the Eurasian railway revolution will continue in the near future. The factors for developing the New Silk Road continue to fall into place.
Beyond the above technical improvements, expanding the capacity of current routes and building new routes, including a new and shorter southern route from China to Europe via Kyrgyzstan, Uzbekistan, Turkmenistan, Iran and Turkey, will definitely add to these successes.
III. What Russia is doing
The considerable increase in China-Europe railway shipping volumes has positively influenced the development of the entire Russian transport system over the past few years.
Further expanding the share of China-Europe transits via Russia is the next step. There are plans to increase volumes to an impressive 10 ̶ 15 percent of the freight traffic by 2025. This goal will be achieved by boosting the competitiveness of rail transport versus sea routes, by subsidising rail.
Russian Prime Minister Mikhail Mishustin signed a government resolution on subsidising container shipping via Russian Railways for this purpose on August 21. Subsidies will be approximately 25,000 to 27,000 roubles per container, depending on the type of container and the destination.
These subsidies are needed to make the country more competitive on the transport-logistics services market. This would make it possible to further reduce national rail freight rates, bringing them closer to sea-based shipping rates.
Oleg Belozyorov, Russian Railways Chief Executive Officer – Chairman of the Executive Board, recently said that it was possible to deliver two million TEUs annually and even more in freight transshipments between China and Europe. For this purpose, Russian Railways is planning to reduce container delivery schedules from Russia’s Far East to its western borders, to seven days. The railway also plans to implement ambitious projects, including rebuilding the Baikal-Amur Mainline (BAM) and the Trans-Siberian line. This will make it possible to increase the average speed of container trains allowing them to cover from 1,150 km to 1,500 km daily.
Enhancing Russia’s transport and transit potential will increase the revenue of manufacturing/processing companies, the budget and the income of employees and have major geopolitical implications.