How the Belt and Road initiative is shaping future freight trade

As I prepare for my next public speaking foray into Asia, I was reminded of an earlier article that I had written that pointed to the demise of 20,000+ teu container vessels. What many failed to recognise, was that the article was not speaking of the demise of shipping, but rather to the changing trends of freight /cargo movement as result of China’s new hub and spoke logistics mix created by pairing ports (maritime silk road) with rail networks (one belt).

Speaking to players in the industry, there appears to have been recent acknowledgement that there is a fundamental change taking place. This acknowledgement always carries the caveat that “nothing will replace maritime trade”. This piece hopes to give some context to shippers when looking at their changing world.

Within the container world, there is an acceptance that rail has encroached on the shipment of high value and time sensitive goods. Previously these would have been shipped by sea but increasingly are now shipped via rail – computer parts from Chongqing being a prime example. There is almost a daily announcement of a new rail connection between China and Europe. Examples of such announcements include the Changsha – Tilburg line that will carry 41 x 40 foot containers carrying clothes, accessories and office supplies. This particular line is the second direct rail connection between China and the Netherlands. It is planned to ramp this up to four times a month. The Zhengzhou – Europe line expects annual train trips to increase from 501 in 2017 to 650 trips in 2018 (179 done in the 1Q18 – so on track to be met). At present the westbound trains are pretty full and freight forwarders are already complaining about securing slots. Eastbound trains are getting busier and it is claimed that the current network could actually now function without subsidies. Currently it is argued that rail would only be sustainable when 10,000 trains operate annually. Currently they have approximately 7,000 in operation.

As China moves to replace 30% of sea freight by rail freight by 2020 in its trade with the West, this is going to have a significant impact on size and type of vessel as sea freight is reduced to commodity type cargoes. In order to achieve this 30% target, China has many layers in rail trade between China/ Europe, including:

1. The railway companies (China railways/ Kazakhstan railways/ Russian railways/ European railways) / operate the locomotive + provide the boogies + switch the gauge at border gateways + schedule the trains

2. The operators / those who make the train + sometimes with their own containers or rent wagons from railways + get the subsidies + fill up the trains + operate the return trains.

3. The clients of the operators (freight forwarder and big direct clients)

4. The freight forwarder (K+N, Schenker, SLI LOGISTICS…) / Book the space or wagon or container into a train from an operator + sell that space to big and small clients.

There are already indicators that the traditional logistics models of 1, 2, 3 and 4PL logistics providers is morphing into a new 7PL model. This transformation is being driven by the BRI pairing of ports and rail networks so as to give an optimal mix of transport mode to end customers. Indications of this transformation is the increasing number of shipowners buying into ports as well as logistics providers. Adopting this vertically integrated approach sees traditional silos of freight forwarding, shipping and logistics falling under a single umbrella in order to meet customer’s simple end-to-end solutions to continuous supply chain needs of lower inventory levels, regular delivery and shorter product planning cycles. Examples of this include the consolidation among liners such as COSCO and OOCL, French shipping line CMA CGM acquiring 25% of CEVA Logistics, DP World’s acquisition of Denmark’s Unifeeder.

Whilst we can see the impact of rail on container trade, can we say that there is a similar pattern emerging for bulk shipping? It is argued that bulk shipping will be largely unaffected by the BRI, but looking at what is happening on the ground suggests otherwise. Looking first at liquid bulk, we see that China’s push for energy security has seen the construction of high capacity oil and gas pipelines.

Previously, gas transported as LNG can now be delivered by pipeline as is oil. This highlights the importance of the Kyauk Phyu port in Myanmar that reduces sea distance and security risks in the Malacca Strait in feeding the refinery in Yunnan province.

Dry bulk appears to be a sector that is staging a recovery in shipping, but is being held back by an oversupply of vessels. Furthermore it appears that it may be immune from impact from the BRI. Early indicators are that it too would have to deal with some fallout arising from the BRI. Whilst a valemax size appears to be the right sized vessel for current iron ore cargo, this can be changed as shipping currently goes to China’s eastern seaboard yet China’s stated development plan for the future is to develop its western and inland regions. Will ports be able to handle this size vessel? There is also the move in Europe to operate longer freight trains – some up to 1,500 metres in length, with new generation locomotives and bogie. Analysis shows that the bogie frame weight can be reduced by 37% as well as improving curving behaviour with regards wheel-rail forces. Is this going to encourage a move of bulk from sea to rail?

However, whilst shipping will dominate, the questions that need addressing include: What type of vessels and vessel classes will be needed in the future? Is it appropriate for current businesses to remain within the current ‘silo’ mentality i.e. shipping for shippers, freight forwarders stick to their knitting and so on? I recall a time when the sector dismissed adopting scrubber technology to meet emissions targets and they’re now scrambling to get onboard. Is this scenario playing out in their response to the BRI?