China-Europe rail freight surges

Rail freight volumes on the corridor linking China and Europe have surged from April onwards, with tonnage ex-China up by as much as 142% in June, according to analysis from Cargo Facts Consulting. Long viewed as a middle mode that is cheaper than air and faster than airfreight, the overland path is being traversed by an evolving set of commodities that now includes automotive parts and electronics. In this episode of Cargo Facts ’ monthly webinar series, Industry Pulse, Frederic Horst, managing director of Cargo Fats Consulting, discusses just how much of a threat this rising China-to-Europe mode poses to airfreight. Industry Pulse : Frederic Horst The accompanying presentation is available for download here . In the coming months we will roll out the full Cargo Facts Premium Plus product, which encompasses registration to all our live events, exclusive monthly webinars, like Industry Pulse, access to an archive of our event recordings, and a premium subscription to Cargo Facts . Transcript A transcript is available below. This transcript has been generated by software and is being presented as is. Some transcription errors may remain. Frederic So normally we'd be talking about planes. However, given what’s been going on in the rail sector, it's probably an opportunity time to talk about growth in the rail sector, specifically, China to Europe route. So there are a few things I want to talk about today, one, taking a look at what's actually happened in the last five years between 2014 and 2019, what's been happening throughout the pandemic? Get a bit of a sense of, of what moves by rail, which commodities aren't. And then the fourth point, really, the question that's probably dearest to us is, is rail actually a threat to air on the China to Europe lane. have a look at rail imports and exports by value. And rail imports, as it stands in tonnage terms are about twice as high as well as rail as a rail exports, you can see that on this chart here is as well, the value gap is even bigger due to the commodity mix that's in there. But on average, over the last five years, imports grew by 35%. In value terms, exports grew by 25%. And it doesn't really look like, like growth has been coming down, although last year in the year before were quite as high as for the very small base. We look at that in terms of in terms of tonnage average growth rates on both imports and exports have been 25% per year. Last year, 2019 didn't grow quite as strongly as the previous years on the input side, and we actually saw somewhat of a decline in exports. So now we see the rail from China to Europe, it's very much driven by imports from China, into Europe, and by exports from Europe, into China and everything that moves East bounders really more filled traffic than anything else. So look at this year, what we what we saw at the beginning of the year, I'm grateful wasn't looking, it'd be good. But we did see things pick up quite substantially on the import, as well as on the export side. Starting in April, and that's a trend that's continued all the way through to July August data will be available next week, but I'm expecting to see a similar picture. similar picture there. And June was a really big month for rail exports into China. And surprisingly enough that was driven by automotive shipments and raw materials and, and supply. So traditional industrial type. So supply chain, I suspect that has to do with just a lack of lack of air freight capacity. If we compare that to what's happening in the air freight side this This picture shows the first half of 2020 no prey database to Asia Pacific overall and China's obviously most important country in there. We saw in April, May June, airfreight imports growing quite substantially. But if we take out all the COVID related commodities, primarily AP, diagnostic kits, things like that, but in weight terms, it's no biggie. And we actually saw declining market. So for the first six months of 2020, we had a decline of 40% airfreight exports, and we had a growth of 3% on imports. But if we actually take all the coded commodities out we actually doing so on a commodity level, look at the product mix of rail imports from China into Europe. It's changed quite substantially over the last five years. So during 2014 and 2016, seafood, frozen seafood was a main key, very important commodity they're made up actually the largest part of volumes that were moving, that just completely dropped away from 2017 onwards and traditional industrial supply chain cargo has been more important more materials and supplies and that's very much driven also by what the logistics providers like God so obviously we're using these services are actually putting, putting on these, putting on these services. Automotive traffic has been a key feature of our shipments on the services or for quite some, quite some time. If we look at that,on a commodity level in terms of what's grown in value, what's going on, I mean, for time, we're really just focusing on the input side, some of the biggest growth has come from a sector that actually hasn't performed very well at all for the f8. Business, not this year, for sure. And in 20 2019, as well from the automotive sector, and raw materials, and supplies have been put in commodity haven't grown quite as fast industrial equipment and parts has gone quite strongly over the period. So that axis on the bottom shows the production value. And the y axis shows the growth in sales reps as well. If we look at the value proposition of China to Europe rail, it's really very much a middle mode. So it's, it's, it's faster than C slower than a, it's more expensive than say, it's some, it's cheaper. So specifically, we're looking at a 14 to 18 day transit time, sometimes you get trains that can do it in in 12 days as well, it really depends on how will I get through to the car, it also depends. on the time of year, I'm looking at generally about 30 days for the ocean, depending on the service streams, and about five days for our five days for air freight, that includes the customs clearance, warehousing, storage, and origin and so on. And the actual flying portion is probably the smallest amount of that with somewhere between 12 and 17 hours. That's the sad fact of air freight but mostly affects spends more time on the ground that's in the in the end. So it's about twice the cost of sea freight and about one quarter of the cost of cost of air from and if you look at it, if you if you look at the different modes in context, so air and rail move similar amounts in terms of tonnage. So, last year 2019, there are about 1.4 million tonnes of air freight from China to Europe and about 1.1 million times with by rail look at in value terms however, you say that 22% of value imports from China moved by a 3.2% by lab. So we looked at more specifically on our on a monitor level, this chart here shows the value per kilo differences between what's moved by air and by sea. And generally the gap between rail and air is much bigger than the gap between rail and rail is really much more of a competition for SSI than it is for the commodity group where the value per killer on air freight and off rail freight is similar as the whole computers and accessories. area in this this was doing very much by the fact that he was an early adopter of the service and not essentially living the same kind of commodities by air as they were moving by moving by sea. Yeah, signing up in a nutshell, we feel even though rail holds a lot of a lot of potential. We don't see it killing air freight the type of commodities that are moving still, even though they appear to be the same because of value paricular. They're fundamentally different. And the other side of the rail side is that how much how much capacity is there actually to increase? We've seen a big increase this year, but they're actually on that rail corridor is, is quite limited in this market. Guess two main route operate options for freight trains. One is a as a southern route, which goes through Canada has extended in in southern Russia, which is most suited for freight that comes from central China. And then there's a northern route that starts in Beijing. That goes primarily through Siberia and Belarus before then it's some it's a European nuclear opinion. Charles Kauffman Fredric, thank you very much for sharing. You know, it's striking to see how in recent years those volumes really have picked up. I was quite surprised to see the commodity mix shifted in just a few years and how seafood really dropped off and automotive and some other commodity groups have really started taking to rail. Just one question if I may, you know, you mentioned that capacity growth on rail is somewhat limited. If we go back a few slides when you highlighted the value mix across the two modes, you know, one thing that comes to mind do we you know air freight still is the dominant mode of transportation for high value goods, what accounts for some of the reluctance by shippers to move high value goods by rail on this corridor. Ultimate ultimately I think it's valid I mean it sir, if you if you if you have a $700 iPhone that you're transporting from China to Europe, and frankly, doesn't matter whether you're paying $4 a kilo, why not? Look, I think there's not a lot of sensitivity to price on that whereas with other commodities, particularly when you're looking at raw materials and parts the traditional industrial type supply chain carving and it really depends on how urgent it is what is the value per kilo, I mean, at the moment we're in a very low interest rate environment and continue for a while so the inventory carrying cost. At the at the moment, rail services there the level of reliability is less than it is with air freight and from an inventory planning perspective. There's more predictability on the on the air freight side particularly if you're going for an express type option, but um, and that, you know, ultimately you end up getting goods moving a little less urgent on rail than they would be moving by. Charles Kauffman Alright, Frederic, thank you for joining us today. and to those of you watching with this video, you will find a full transcript of the conversation and Frederick will be back regularly to share insights and analysis from the cargo facts consulting team. You can learn more about cargo facts consulting at cocofax consulting.com. We hope you enjoyed this Premium Plus event please let us know how we did by email is emailing us at info at cargo facts calm. Again look for more information on the Cargo Facts Premium Plus product soon. Until next time, we will see you online at Cargocargofacts.com and CFCinsights.com

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