New Silk Road revival or silence before the storm?

06. 05. 2020

Guest author: Majorie van Leijen, Editor-in-Chief RailFreight.com

There is something strange going on in the world of logistics and its analysts. They just cannot seem to agree. ‘The New Silk Road is facing its hardest challenge since the beginning’ is combined with messages such as ‘these are golden times for Eurasian rail’ or ‘we are witnessing a boost in cargo volumes’.

By Majorie van Leijen

It is not unusual that figures and forecasts vary from one to another, but in general, the conclusion is the same. There is growth, or the opposite is true. But today, while we are in the middle of what we call the corona crisis, even this conclusion is hard to draw.

This is not unsurprising. Just as China is recovering from the coronavirus outbreak and the logistics industry was refuelled in that side of the world, the European market is seeing manufacturers closing its doors. This could lead to a decrease in export to China, or import from China when it comes to spare parts required in certain factories.

We are dealing with an asynchronous spread of COVID-19, followed by asynchronous and non-uniform actions of countries in terms of closure and opening, Ekaterina Kozyreva of the Infrastructure Economics Centre (IEC) noted. “This will negatively impact on trade restoration.”

Revival in China

In March, the Chinese national development and Reform Commission (NDRC) announced that rail freight traffic between Europe and China had resumed by more than 90 per cent. Compared to the same period last year, the number of trains even increased.

By the end of February, 1132 trains had run between China and Europe from the start of the year.

As there is a travel time of around two to three weeks for most Eurasian rail freight services, this revival of the Chinese market started to be felt in March.

A backlog of products that were already produced but could not be shipped is coming to Europe on rails.

The trains are packed, not only because of this backlog but also because shippers now opt for the fastest route to Europe.

This also partly explains why the temporary triumph is not yet shared by the maritime industry. The port of Rotterdam announced this week that it was feeling the impact of the coronavirus outbreak in China today. Rail freight operators relying on hinterland transport from important ports as Hamburg or Rotterdam say the same. Moreover, those backlogged products that are loaded on ships to Europe take longer to arrive, as the journey by sea takes four to five weeks.

Short-lived?

Should we then prepare for a New Silk Road boost on all fronts this month? Possibly, but the climax will probably not last long, as it is now Europe’s turn. Factories are closing its doors and production is gradually decreasing. The most significant closures at the moment are those of automobile manufacturers.

Many of these companies transport their wagons by rail, or import spare parts from China by rail.

But also production in other segments is slowing down.

In Italy, all nonessential factories were ordered to shut down in an attempt to halt the coronavirus outbreak. Moreover, many companies are struggling with a shortage of labour due to illness. The European logistics industry is still running, but will be affected in the long-term, is the expectation.

What is so typical about the current situation, is that it is defined by a drop in supply, before a drop in demand, notes the IEC analyst. “Usual economic recession refers to the decrease of credit financing volumes, the fall in stock markets and the decline of demand. This time, due to artificial suspension of production and border closures, a shock in supply is observed.”

Kozyreva adds that a drop in demand drop will certainly follow, but only later. The expectation is that of an economic crisis, something that will certainly impact the New Silk Road volumes in a negative way. Whether you opt for the optimistic or pessimist version, a slowdown in growth is inevitable in the long run.

Still good news

Yet, the revival of the Chinese economy is good news for the logistics industry worldwide.

There are companies profiting from the reopening of factories in China, regardless of what is happening in Europe. Such example are leading British car manufacturers, notably Jaguar and Landrover, which rely on car parts from China.

These companies can now continue their production.

What also comes as good news, is that policymakers realise the importance of rail more than ever, and they are willing to do the necessary to keep trains rolling. Russian Railways has reduced the rates for transiting empty containers from third countries to China by up to 40 per cent. The Chinese government meanwhile announced several measures to ensure that the vital rail modality remains an attractive option.

Some would say that the resumption of freight traffic from China to Europe highlights the stability of the supply chain and the importance of rail freight within this. Indeed, rail freight has proven to be the most shockproof modality, and with its lead time advantage, it even triggered a modal shift, if only temporarily.