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Making tracks

It supposedly took Marco Polo a quarter of a century to get to China and back. Today goods can be shipped to Europe in about two weeks by rail, and a little over a month by sea. But the reality of Belt and Road is that it isn’t a question of two routes, but many. A new wave of investment is starting to reshape the map as trade flows are redirected. At the forefront is rail freight, where new connections are springing up between China and Europe.

 

Trains and track

Most of the headlines about China’s railway ambitions have focused on bullet trains and the thousands of kilometres of high-speed track that now link the country’s major cities. For Belt and Road the agenda is different – more about freight traffic and cross-border rail.

Some of these routes pre-date the Belt and Road era, particularly Russia’s Trans-Siberian railway, which has carried freight for years. The first of the alternative routes through Kazakhstan, known as Yuxinou, started operating in 2011, also before Belt and Road was formally launched.

But the Chinese have been investing heavily in Eurasian rail connections and facilities since 2013, fostering alternative routings between China and Europe, as well as new linkages to some of the national networks in between.

The first Chinese freight train to reach Iran arrived in Tehran in February 2016 bearing goods from Zhejiang province, for instance, while another pioneering train arrived in Kabul from Jiangsu province in September.

600 metres

The length of the so-called ‘block’ trains carrying freight from China to Europe

Manufacturing businesses have been moving inland into China’s central and western provinces in search of lower costs and the investment in railway lines is accelerating the process. Rather than dispatching goods to the sea and transporting them by ship, the factories are sending them westwards overland, through Russia and Central Asia and into Europe.

Currently there are two main options for reaching Europe by rail: the northern route which runs through Siberia after crossing the Chinese border at Manzhouli in Inner Mongolia, passing through Belarus and reaching the border with Poland; and a more southernly link that leaves China at Alashankou in Xinjiang, heads through Kazakhstan, crossing back into Russia and down through Belarus, before also reaching Poland.

A third link was opened last year that traverses Kazakhstan before heading southwest through Azerbaijan and Georgia, crossing the Caspian Sea by ship, and arriving in Turkey, with onward travel by road into Europe.

Services on this route are less frequent but the trains that head southwest through Central Asia are starting to offer onward connections to the Middle East and the Persian Gulf too. Importantly, they provide an alternative route to Europe that doesn’t cross Russian soil.

The goods are carried on 600-metre ‘block trains’ capable of transporting 41 containers. The containers aren’t split up or stored en route and the trains don’t make stops to have their wagons decoupled along the way. However, the trains don’t travel the entire route. China, Europe and the former Soviet Union use different standards of gauge for their track. So two trains line up side-by-side at border points in Russia, Kazakhstan and Belarus and cranes lift the containers from one to the other. At its fastest the process takes less than an hour.

 

Cost versus speed

The efficiency of these transfers is important because the Silk Road railways are competing on the speed of their shipments. Typical journey times average between 12 and 16 days or less than half the time for ocean freight to complete the same journey.

Silk Route Rail’s Henrik Christensen

Silk Route Rail’s Henrik Christensen

“Our pitch is that rail is 3-5 times cheaper than air, 3-5 times faster than ocean and with 3-5 times better coverage than both,” says Henrik Christensen, chairman of Silk Route Rail, a logistics firm that sells space on block trains.

He estimates that, as a rule of thumb, each container costs about $8,000-10,000 to transport by rail, about twice the cost of shipping by sea. That means that the business case for rail transportation is strongest for higher-value goods shipped on a short order basis, reducing the need to tie up capital in inventory and warehousing nearer the destination market. The additional expense versus ocean freight is offset by the lower costs of financing the inventory if the contents of the containers are worth more than $1.5 million, according to Silk Route Rail’s calculations.

It’s no surprise that consumer electronics companies like Hewlett-Packard have pioneered the railway option, Christensen says, with Foxconn, Dell, Acer and Sony all sending shipments from China by rail as well.

 

Origins and destinations

In China most of the block trains are arranged by entities called platform companies, who sell the space on each journey, either directly or through third-party freight forwarders.

The platform companies are controlled by city governments, who contract with a single railway operator to arrange the full journey through the different countries along the route.

For example, in the case of the city of Chongqing, Kazakhstan Railways is the coordinator, arranging the trip and pricing the freight to cities like Duisburg, at the confluence of the Rhine and Ruhr in Germany.

Other cities in China have been offering block trains to Europe, with their local governments dangling the routes as part of the pitch to get companies to relocate to their cities. Chongqing and Chengdu were the most active at first. But interest spread to places like Changsha, Wuhan and Zhengzhou, and to cities like Harbin in the north.

magnifying glass

Even some of China’s coastal cities have been keen for their own rail links. That might seem counterintuitive – for them, the time saved on sea travel is less – but municipal bosses are keen to show their support for Xi Jinping’s Belt and Road priorities.

The list of destinations is growing in Europe as well, as private operators begin to offer a wider range of onward destinations from the Polish border with Belarus. “The routes from Chongqing to Duisburg and Hamburg in Germany are probably the most developed so far,” Christensen reports. “But after crossing the frontier at Brest, hundreds more destinations are becoming possible, including cities like Nuremberg, Paris, Vienna, Warsaw, Madrid and Budapest.”

 

Hub and spoke

Most of the rail routes are still at an early stage of commercial development and few of them would survive without financial subsidies being provided by the platform companies.

City authorities look at the expense as part of a broader investment in their local manufacturing base, hoping that the job creation and tax revenue will offset the costs of the subsidies themselves.

Christensen acknowledges that the transport routes aren’t economic without government support, but he thinks that this will change as larger volumes of freight start to filter through some of the key trans-shipment points. “Subsidies are critically important at the moment and the railway wouldn’t run without them,” he says. “But this is going to change once the hub-and-spoke system develops. Every city in China will get the opportunity to book a few services a week, running through hubs like Khorgos and then onward into Russia, Europe, Central Asia and the Middle East.”

In this vision all of the major cities will have their own block trains running to trans-shipment points on the Chinese border. There, the goods will be consolidated and reloaded onto onward trains, before heading further west to hundreds of points in Europe and the Middle East.

Silk Route Rail is particularly focused on developing Khorgos, a special economic zone on the border with Kazakhstan, as one of the trans-shipment hubs. Another of the cross-border hubs is Manzhouli in Inner Mongolia, this time for the more northernly route into Russia, where there has been substantial investment in bonded warehouses and industrial parks.

In each of these ‘land ports’ there has to be a delay because of the different types (i.e. width) of track on either side of the border. That’s giving each location the chance to make its claim as a hub for transferring shipments to onward destinations, rather like the competition between cities such as Hong Kong, Dubai and Singapore for connecting air traffic.

 

Traffic flow and weather

One of the challenges for the railway firms is that there’s more traffic leaving China for Europe than vice versa. That mirrors the situation at sea, where empty containers are often shipped back from Europe. But it also lowers the sea freight costs from Europe to China, making the train trips look more expensive in comparison. None of the same subsidies are available from points of origin in Europe either, diluting some of the interest from potential customers.

A link between Madrid and Yiwu carried only eight trains worth of goods in its first 15 months in operation, the Spanish newspaper El Pais reported earlier this year. That was because ocean-freight rates were much cheaper than rail, the newspaper said. Even an offer of free advertising on Chinese television for customers hadn’t sparked much interest.

Another possible beneficiary of the new rail routes: fruit from the Philippines

Another possible beneficiary of the new rail routes: fruit from the Philippines

Another difficulty is that the block trains don’t run a year-round schedule because there are challenges keeping the containers cool enough in summer and protecting them from freezing in the winter. Shipments of consumer electronics stop in the depths of winter because the goods start to crack when it gets colder than -15 degrees celcius, while extreme heat damages pharmaceutical products, as well as perishables like wine, cheese, flowers and beer.

Christensen says that temperature-controlled transport will help eastbound traffic from Europe to grow and some of the freight operators have invested in climate-controlled containers. But they need to be managed professionally for the duration of the trip, ensuring the same quality of service along the entirety of the journey. In a few early cases, some of the reefers were refuelled with dirty diesel along the route, corroding the cooling systems and spilling fumes back into the containers. “The pharmaceutical firms in Europe won’t send more exports by rail until more of these journeys are temperature-controlled or the shipments could be spoiled. Some of these containers hold $4-5 million in goods, so they have to be looked after,” Christensen says.

 

New horizons

There were more than a thousand train journeys on the new rail routes last year, carrying about 47,000 containers. Volumes were a 40-fold increase on five years ago and more connections between Chinese cities and Europe are being launched all the time.

The rail network’s capacity is dwarfed by seaborne shipments, however. Last year’s train freight volumes were the equivalent of three full loads on the world’s largest container ships. But the backers of the railways have turned that into a positive, claiming that their industry only needs a tiny shift from shipping to get to profitability. Perhaps just 1% of the seaborne market would be sufficient.

The railways will open up a new world of trade in markets that are thousands of miles away from traditional Silk Road routes, like the New Zealand sheep farmers, who have shown interest in moving meat by sea to China and across the Eurasian landmass by rail to Europe.

“Slow steaming to their European markets takes 70 days and the lamb only has a couple of weeks of shelf life once it arrives in the UK,” Christensen explains. “We can help the meat get there two weeks faster, which helps the farmers to get a better price from the retailers.”

The story is similar for fruit producers from the Philippines wanting to target the Middle East and Central Asia. Previously they have been forced to ship westwards into Europe and then send their goods back east by road and rail. “In future these shipments will be sent from the Philippines to one of the Chinese ports and then directly by rail into Central Asia,” he says. “The railways will open up markets that couldn’t be reached quickly or cost effectively in the past.”


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