Is Covid-19 Shifting the Future of Eurasian Rail?

Asia-Europe rail freight traffic has been growing steadily since the launch of regular services in the early 2010s. The epidemic has boosted that growth trend during 2020, as Chinese exports have soared amid the global economic slowdown.

The grounding of passenger flights essentially knocked out air freight, which mostly relies on airlines’ extra stowing capacity, redirecting traffic to rail and ocean as a result. While maritime routes have accumulated unprecedented bottlenecks, the relevance of rail has increased.

According to a report of the International Union of Railways, up to 2 million twenty-foot equivalent units (TEU) could be travelling by rail across Eurasia by 2030, up from 340,000 TEU in 2018.

The pandemic may be accelerating this shift

Beijing posted a whopping $535 billion trade surplus in 2020, thanks to a 3.6 percent increase in exports over 2019 levels to $2.6 trillion and a concurrent 1.1 percent slowdown in imports. The heightened demand for “Made in China” consumer products like medical supplies, fitness, personal care, and home-office equipment accounts for much of that growth. Benefitting from this momentum, China replaced the U.S. as the European Union’s top trading partner in the goods category (though the U.S. remains in first place once services are factored in).

This trade surplus translated into a container imbalance for long-haul transport, which sees roughly one container coming back for every three containers going out of China. In December, spot freight rates on the Asia-to-Northern Europe route were up by 264 percent as a result of this pattern. Yet, the Adriatic gateways were virtually unaffected. Managing to avoid those types of bottlenecks, Trieste’s container terminal maintained its pre-COVID performance.

These conditions nourished a railway boom in Euro-Asian logistics, even though backlogs and surcharges spilled over to rail transport by the end of 2020. China State Railways declared a 41 percent year-over-year (YOY) increase along the Eurasian corridors, tallying 6,354 trains in the first seven months. July alone showed a 68 percent YOY increase to 1,232 cargo trains, the highest ever in a single month. Closing the year with a record 12,400 freight train trips, the company experienced a 50 percent increase over 2019 to 1.14 million TEU. Kazakhstan Railways (KTZ) assessed their growth during the same period at 4 percent YOY, with 143 million tonnes carried and a freight turnover of 131.6 billion tonne-km. For its part, Russian Railways (RZD) carried 502,600 TEU on the China-Europe-China route, while UTLC ERA crossed 500,000 TEU.

A senior representative from the Swiss railway company Hupac stated that the entirety of the facemasks being imported from China to Europe are shipped by rail, and that, notwithstanding an overall slowdown in line with the industry, his company had doubled traffic with China as of September 2020. According to China’s foreign ministry spokeswoman, Hua Chunying, freight trains had transported 27,000 tonnes of medical supplies from China to European countries by June 2020.

Emerging Routes

Although roughly 95 percent of Euro-Asian shipments transit through Russia, the current context has galvanized even the Middle Corridor across the Caspian, which was only completed in 2017. The volume of freight carried through Azerbaijan in 2020 increased by 50.7 percent settling at 2,618,576 tons against 1,737,156 tons in 2019. The Baku–Tbilisi–Kars (BTK) railroad reached a record of 138,000 tons carried in the first half of 2020 alone.

As a result, Turkey is emerging as an additional hub for trans-Eurasian trade. New infrastructure investments include the $86 million development of the Kocaeli railport, which is being spearheaded by a 67:33 joint venture between Arkas Holding and Duisport. The partnership received two $30 million loans from the EBRD and ICBC Turkey respectively in May 2019. Meanwhile, Turkish Railways (TCDD) have completed their Kars Logistics Centre offering dual gauge capabilities, on-site customs clearance, as well as storage and handling areas. Maersk, which only started offering intercontinental rail services in 2017, launched its first China-Turkey service between Xi’an, China and Izmit, Turkey in 2020. This followed closely the launch of a Xi’an-Prague service through the Marmaray Tunnel, offered by China Railway Express and Pasifik Eurasia Lojistik.

As competition between corridors kicks in, we can expect operators to start retaliating with discounts and digitalization. So far, Russian Railways, Belarusian Railway, and FESCO have introduced their first service relying entirely on electronic transport documents, transit declarations, and customs clearance—part of the INTERTRAN technology program being rolled out on the Russian Railways network.

A Long Term Shift?

In the past year, the rail sector has picked up the slack for other modes of transport in Asia-Europe freight. By the end of the first quarter, air freight was down to 40 percent of its regular capacity for traffic involving China. To alleviate disruptions due to the cancellation of air cargo, the Universal Postal Union coordinated the creation of the first mail-only rail freight service, among other things.

Meanwhile, container traffic through the Suez Canal—the main conduit for transoceanic shipping—shed 15 percent of its volume in the first five months of the year. Cheaper fuel prices have diverted some of that traffic to the South-Atlantic route, which, despite the longer mileage, turned out to be cheaper than the canal’s transit fees. According to a representative of Hupac, while the share of ship to rail in Asia-Europe freight was roughly 80:20 before the crisis, it now looks more like 65:35. Davies Turner, a British freight forwarding company, has seen its Express China rail service double its 40-foot High Cube container volumes YOY.

Going forward, Massimo Deandreis, the General Manager of the SRM consultancy firm argues that rail freight will certainly complement ocean shipping but not replace it. Conversely, according to Philip Stephenson, Chairman of Davies Turner, “the impact of Covid-19 will push many shippers to rethink their supply chains, and a lot more Asia-Europe air and ocean freight traffic could move permanently to rail.”

Today, the rail option generally offers the same reliability and predictability as other modes of transport, and it hence comes down to habit. Should the situation endure much longer, rail may well become a substitute for at least certain product lines and supply chains.

Then again, by the fourth quarter of 2020, capacity and container box shortages were causing considerable congestion even for rail freight. China-Europe services neared full capacity, even though the backhaul journey remained underutilized. Under such circumstances, forwarders like CEVA, DSV, and DHL Global Forwarding have resorted to road transport, the latter running up to 50 trucks a week on the westbound route.

In the meantime, congestion at ports is currently expected to continue into the second half of 2021, and this may open up new opportunities on the Adriatic, where terminals have been more resilient.

Nicola P. Contessi, PhD is an international affairs specialist with expertise in global governance, foreign and security policy, and international transport, and a Research Associate of the York Centre for Asian Research. @nicontessi