Amid the disruption of ocean freight, the China-EU Rail Freight experienced a solid but asymmetrical growth in the first half of 2024.
After a bleak 2023, rail freight volumes between China and Europe on the main Eurasian corridor (known as the Main Route) rebounded by 120% year-on-year in the first half of 2024, approaching 2021’s peak levels. However, its growth was asymmetrical and solely driven by the Westbound volumes (Figure 1). Although geopolitical factors affect flows in both directions, the effects were not the same.
The Red Sea crisis has motivated shippers to search for alternative options to maritime transport. As a result, Westbound volumes of the China-EU rail freight in the main corridor surged by 121% in the first semester of 2024. In the meantime, Eastbound volumes have continued to decline since the start of the Russia-Ukraine war, suggesting the lasting impact it is having on European shippers' choice of mode of transportation.
Figure 1 - Data Source: ERAI.
The uneven development is also in line with the increasing EU trade deficit with China in the past three years (Figure 2). Chinese imports from the EU have dwindled to 2019 levels. China’s pursuit of self-reliance and muted domestic consumption contributed to the receding Chinese demand for European goods.
Figure 2 - Data Source: Chinese Customs.
A closer look at the freight business shows that rail freight volumes remain heavily concentrated on one or two routes – via Poland westbound and via Germany eastbound. However, the rebound in volumes reactivated some routes between China and the EU that have gone quieter due to the Russia-Ukraine war.
Specifically, Westbound saw volumes from China to Germany (Duisburg) that more than doubled in the first half of 2024. Apart from Germany, the close China-Hungary economic ties have resulted in growth in volumes to Budapest. Finally, the progression of the China to Liège, Belgium route can be explained by the dynamism of cross-border e-commerce, Liège being the location of Alibaba’s hub.
For the Eastbound direction, the route from Poland to China saw a strong growth in volumes for the first time since the outbreak of the war between Russia and Ukraine. The recovery was led by diesel-based vehicles – the main product shipped in Eastbound, although volumes are still less than half those of the pre-war levels (2021). Apart from these vehicles, paper products, wood, and several types of food were among the few products for which rail freight shipments have increased Eastbound.
Outlook: When Abnormality becomes the New Normal
The ups and downs of China-EU rail freight over the past five years show that this market often benefits from disruptions in ocean freight. In an increasingly unpredictable world, how will China-EU rail freight volumes evolve in the upcoming months?
With the war between Russia and Ukraine dragging on, transport volumes from the EU to China are expected to continue their current downward trend. Apart from the regulatory concerns, the growing domestic market share of Chinese vehicles and the development of production in China will reduce shipments from the automotive sector, which has long been the dominant category in Eastbound trade. Animated consumption in services in China could provide some support to the buoyant demand for food and beverages on the Eastbound route to a certain extent. However, the overall volume of this category of goods is marginal.
In comparison, volumes from China to the EU will be subject to more volatility. Here, we use the fourth quarter of 2022 as a reference for the analysis. After the initial shock of the Russia-Ukraine war in February 2022, westbound volumes quickly rebounded before plunging from September 2022 (Figure 3). This development coincided with the collapse of the ocean freight rates. Shippers who had turned to rail during the pandemic returned to ocean freight.
Figure 3 - Data Source: ERAI and UPPLY.
While the war between Russia and Ukraine remains a persistent factor, demand for westbound rail freight over the coming months could be more affected by developments in sea freight, particularly freight rates and transit times.
Observing the latest developments in ocean freight rates, many believe the hike in ocean freight rates has started cooling down. In addition, the contraction in the index of new export orders in China in recent months signals a weakened external demand for the foreseeable future, which may not sustain the level of freight rates (Figure 4).
Figure 4 - Data Source: Chinese National Statistics Bureau. Under 50 means there is contraction, Above 50 means expansion.
Nonetheless, the latest escalation of the Middle East geopolitics overshadows the prospects of vessels returning to the Red Sea. A prolonged conflict will mean the carriers will continue to use the Route via the Cape of Good Hope. With no clear way out of this crisis, it could prevent a sharp plunge in ocean freight rates, as we saw at the end of 2022, even when European demand had softened.
When putting the two factors together, rail freight on the Westbound corridor remains an attractive option, especially for more time-sensitive products with no clear way out of the Red Sea crisis. In the meantime, while this brief analysis has solely focused on the main route via Russia, the trans-Caspian Route (Middle Corridor) has gradually obtained more engagements from both the EU and Chinese authorities. The strong political interests from both sides certainly could help to meet the challenges in infrastructures and regulation harmonisations in the Middle Corridor.
