China’s ‘One Belt’ rail freight strategy off to slow start as return cargo lacking

Volume of cargo is mostly one way for now - China to Europe - leaving half empty containers on the return journey

PUBLISHED : Sunday, 15 November, 2015, 7:01pm
UPDATED : Thursday, 19 November, 2015, 7:10pm

The flagship rail project of China’s new Silk Road strategy is off to a slow start as mainland logistics companies struggle to fill up containers with return cargo.

European-bound freight trains have become a key element in the vision to build a Silk Road Economic Belt as part of the “One Belt One Road” initiative to stimulate rail trade between Chinese inland cities and Europe.

In the past few years as many as 11 Chinese cities have established rail freight services to Europe, including Chongqing in China’s west which has been shipping Hewlett-Packard computer parts to Duisburg in Germany since 2011.

The 11,170 km land route takes only 11 days, saving more than 20 days over ocean shipping.

However, finding return goods to fill the freight trains has been a headache because traditionally the volume of Chinese imports from Europe are a lot less than exports out of China.

“Only single-digit containers return every month so we can’t even fill a train,” said Gong Qinghua, a sales director of a freight forwarder operating between Yiwu, an east China city famous for gift items, and Madrid in Spain. This compares to eight fully booked trainsthat head to Madrid monthly.

“Yiwu’s products are very popular in Europe, but for a small town like us, we don’t have huge demand for European products,” said Gong.

Major items imported to China from Europe include car parts, consumer goods and food.

One-way transportation results in unnecessary cost as the wagons have to come back to China anyway. The return cargo China train service began in 2014.

According to China Railway Corporation, in the first half of 2015 there were 50 return train loads, compared to 200from China to Europe.

Li Gang, a researcher at the Institute of European Studies at Chinese Academy of Social Sciences, said there were structural problem in China-Europe trade. For example, China’s major exports to Europe comprise clothes, electronic items and other labour intensive products that are more suited for rail transportation, whereas the major imports from Europe, such as large mechanical equipment and precision instruments, could not be shipped by train.

Another challenge is the European’s wait-and-see approach to the China-Europe rail service.

Darryl Hadaway, the chief executive of Silk Route Rail, which focuses on Eurasia train cargo services, said Europeans were sceptical about using trains run by state-owned Chinese companies due to security considerations, transparency and because of the cultural barrier.

“It is a difficult sale for Chinese companies to convince a European freight forwarder to bring products on their train,” he said.

Li said the China-Europe rail link has so far been “China’s one-man show”, adding that Chinese companies have to strengthen their communication and relationships with European freight forwarders and small -to-medium enterprises (SMEs) before they can build up the business.

Zhang Rong, deputy general manager of Minsheng Logistics, a freight forwarder specialising in return cargo trains from Duisburg to Chongqing, said business has been hurt by Russia’s ban on food imports from Europe in retaliation for economic sanctions imposed on it by the west.

“We see demand growing fast for imported food such as meat and fruit because of the e-commerce boom,” she said. “The sanction affect is huge.”

Still, the Duisburg-Chongqing rail link is one of the best performers in the freight market, with Zhang expecting return trains to reach 100 this year and the same in 2016, compared with only 22 in 2014.

Zhang said the return train service was still at a very early stage and it was difficult to estimate when it would turn a profit.

Li said the China-Europe rail link was not likely to be commercially viable for another three to five years. “Silk Road is a long-term strategy for China.” he said.

In 2014, trade volume between China and Europe via customer-booked freight trains reached US$4.9 billion, while total Chinese-European bilateral trade exceeded US$600 billion, according to China Customs statistics.

“The potential for China-Europe rail is huge as the China -Europe relationship is entering a golden era,” Li said. “Yet the market will decide.”