In the past years rail has played a more important role in moving products between China and Europe. In 2019 rail and air tonnes between China and Europe were equal, but by the end of 2022 rail moved 63% more in weight terms than air. In 2021 rail accounted for almost 5% of the value of imports from China, with air and ocean accounting for the balance.
However, rail imports from China into the European Union dropped by about 16% in weight and 14% in value terms. During this period airfreight import tonnes decreased by 30% and ocean import tonnes increased by 9%. Airfreight import value increased by 12%, while ocean import value by 27%. The mismatch between weight and value growth is partly driven by inflation and partly by a depreciation of the value of the Euro.
The drop in rail volumes has continued into the first quarter of 2023, with both import and export volumes down by over 40%.
Overall rail imports into and exports from Europe peaked in the fourth quarter of 2021 but dropped rapidly following the Russian invasion of Ukraine. Imports from China experiences an uptick between August and October 2022, but have since dropped to levels not seen since 2019. Exports from Europe did not see a temporary uptick and are now running at 2019 levels. Other than the overall trade weakness a further factor has been the normalisation of ocean shipping rates between China and Europe, which are now essentially at pre-pandemic levels. The chart below shows a comparative overview of rail vs ocean weight from China to Europe between January 2021 and March 2023.
While rail competes with both air and seafreight options, the biggest level of competition is with ocean freight and as such rail is very sensitive to changes in the relative cost of ocean vs rail container rates. In a broader sense shippers will seek to minimize total distribution cost by making a trade-off between the additional cost of inventory in transit using a container shipping option vs the higher price per container of goods moved by rail. The higher the value per kg, the greater the willingness to use a faster, more expensive mode of transport. Ocean transit times are in the order of 35-45 days, while rail services can be between 14 and 16 days on transiberian routes or between 21-24 days on multimodal routes via the Caspian Middle Corridor. Between 2020 and 2021 rail container rates were actually below ocean shipping rates, but the situation has since changed with rail container rates from $7000 per FEU compared to ocean rates of as low as $2000 per FEU.
The chart below shows an overview of the value per kg for the nine commodity groups that account for 90% of the value of rail imports from Europe. While rail tends to have a higher value per kg than the similar commodities that move by sea, the difference is not as big as the difference to the value of commodities moved by air.
The value gap underlines the fact that there is more competition between sea and rail than between sea, rail and airfreight options. Given the extremely high price of ocean freight until the fourth quarter of last year, much of the growth in 2020 and particularly 2021 was driven by a shift of volumes from liner shipping services. Given that rail only moves only about 2.5% of trade weight between China and Europe, small shifts away from ocean can have a big impact on rail. By comparison China to Europe ocean container volumes were in the order of 26.4m TEU, compared to about 1.6m TEU moved by rail.
Our previous analysis of the China to Europe rail market can also be found here.
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