Rates are oriented towards overland routes

Rates are oriented towards overland routes

Container transportation between China and Europe by rail and sea transport is almost equal in value
Container transportation between China and Europe by rail and sea transport is almost equal in value | Competition | Payment
According to the report of the international independent research company Дрюри (Drewry), in September the cost of delivery of goods between Europe and Asia by rail based on the Eurasian Rail Alliance Index (ERAI) and by sea based on the World Container Index (WCI) differ by no more than $ 100. At the same time, the land transit time remains 3-4 times shorter. This has made rail transport not only efficient, but also more competitive compared to sea freight.

Due to restrictive measures against the backdrop of the pandemic and, as a consequence, the cancellation of a large number of flights on the route through the Suez Canal, the total capacity of sea lines has been greatly reduced, which in turn leads to an increase in freight rates and an increase in transit time.

The sharp reduction in passenger aviation flights due to the pandemic has led to a decrease in the supply of air cargo in the air transportation market and also a shortage of total capacity. During the same period, the demand for the accelerated delivery of personal protective equipment excessively increased. These factors have led to an increase in prices for air freight, for example, from China to Europe, more than fourfold.

In this situation, rail services are the only stable element of international supply chains.

The reallocation of freight flows between modes of transport in the first three quarters of 2020 has led to an increase in the importance of rail transport amid a decline in air and sea freight.
«During this time, a much larger number of cargo owners have discovered railroad transportation. We started working with companies that did not have a full understanding of the possibilities of the railway before. The work that representatives of the railway transportation industry, including our company, have performed and continue to carry out, has opened up a new type of transport and its competitive advantages for many cargo owners. In terms of its performance, it is not inferior to air and sea types of transport, and in some aspects it even works much better», said Aleksey Grom, General Director of United Transport and Logistics Company – Eurasian Railway Alliance JSC (UTLC ERA).

According to him, the tariff attractiveness of railway transit has approached a very important mark that are the indicators of the ERAI railway transit index, the Shanghai SCFI container traffic index and the Drewry consulting agency's World Container Index (WCI) index are almost equal.

Drewry, an international think tank, has compared ERAI-based rail shipping rates and WCI-based shipping rates. As of September 17, the cost of delivery by ERAI rail was 2.684 USD/40», and WCI was 2.603 USD/40».
«Our index, unlike the maritime transport index, is quite static, and we believe that this is also one of its competitive advantages (cost characteristics of the railway transit corridor). It seems to me that it is much more important for cargo owners to have some kind of predictability and stability than changes in the form of a cardiogram, which is often characteristic of the shipping index», explained Aleksey Grom.

He also added that in some cases, transportation by rail may even be cheaper than shipping by sea. And in terms of delivery speed, it will be three times faster than deep sea routes.
«This means that railway transport has even more opportunities for active growth in transit in 2021», said Aleksey Grom.

According to the CEO for Eastern Europe A.R. Moller-Maersk Zholt Katon, by the end of this year, it is expected that global sea transport will fall by about 4-4.5%.
«The first half of 2020 year is the first time maritime traffic has dropped since 2009. It is important to note that the biggest decline between Asia-Europe was around 10%. In comparison, at the same time, transit rail traffic increased by 25%. Therefore, now there really is an opportunity for both customers and logistics providers to increase their share in this market and provide services», he stressed.

According to the director of Rail Cargo Logistics-RUS, Alexander Baskakov, the tendency to equalize the rates of sea freight and rail container transportation is also largely due to the provision of subsidies to the PRC.
«The Chinese side looks at the rates – how much is the difference with the sea - and increases subsidies if necessary. In addition, by the end of the year they want to increase the number of shipments, and we see that subsidies are growing, – he said. – For Russian shippers, the railway service is also much more convenient, because they receive delivery for the same money 2-3 times faster than by sea. In turn, the Chinese side prefers the railway as a better and more stable service, especially in the current conditions of the pandemic. Thus, China is expanding its geography and trying to build an effective logistics supply chain overland».

According to Dmitry Murev, Director General of Russian Railways Logistics, for the client, cost is a priority and paramount. However, at a time when tariffs between sea and rail are coming to a balance, the speed of delivery and, as a result, the cost of vehicle turnover becomes the most important factor.
«We are passing through a very important milestone, when the cost of delivery by rail is almost equal to sea freight. I should note that in some cases, the cost of delivery by rail may even be lower than transportation by sea. The calculation takes into account many factors: freight rates, the cost of customs and terminal services, delivery speed, and so on. In addition, operators and freight forwarders are working to improve efficiency and reduce shipping costs. Together with the subsidies of the PRC government, this gave the result that we see today», he said.

It is worth noting that in the current situation UTLC ERA is practically the only «bridge» connecting China and Europe through the territories of Russia, Kazakhstan and Belarus. The company ensures uninterrupted delivery of goods through the integration of technologies, centralized coordination of actions at border crossings and operational interaction along the entire length of the company's basic routes. Currently, container trains in UTLC ERA services are already running at a speed of 1.1 thousand km per day, covering the distance from the Chinese to the European border, depending on the route, in 5-6 days.

Settlement system

The Eurasian Rail Alliance Index (ERAI) is presented by United Transport and Logistics Company - Eurasian Railway Alliance JSC (UTLC ERA) at the 2018 China Logistics and Transport Exhibition. This is a composite indicator of the cost of transit container transportation in the Eurasian railway corridor through the territory of the Eurasian Economic Union in the China-Europe-China traffic.

The index shows the shippers the actual cost of railway transit services and reflects the indicative weighted average cost of transportation of 1 FEU (2 TEU) on all routes operated by UTLC ERA.

The value of the index depends on many factors, including the tariffs for transportation of JSC Russian Railways, JSC Kazakhstan temir zholy and HO Belarusian Railways, the cost of renting/using fitting platforms, travel time and speed of container trains coursing, the market value of freight forwarding, terminal, agency and customs services, the level of loading of container trains coursing, the level of balancing of cargo transportation by direction, the share of empty containers in the volume of transportation, the cost of cargo escort and protection services, as well as the ratio of 20 and 40 foot containers in transit traffic.

As additional tools to ERAI, sub-indices have been created - ERAI U-West and ERAI U-East, reflecting the cost of transporting a 40-foot container in a certain direction China – Europe or Europe – China, which can be used as an indicator in determining the cost of contracts for the transit transportation of containers.

Author: Ksenia Potayeva