News / Forwarders eyeing higher costs as China cuts subsidies for rail freight

Europe-bound Chinese rail freight is expected to become a whole lot more expensive as Beijing looks to address multiple looming economic crises.

Having spent years subsidising its rail freight network, with the intent of entrenching it as a legitimate alternative to the more dominant air and ocean cargo services, China’s government is reputedly lining up a faster-than-expected subsidy reduction.

One forwarder with operations across China and Europe told The Loadstar they were working with a presumption of a spike in freight costs.

Asked what this would mean for its chances to truly offer competition to air and sea freight, the forwarder said that, while not “fully ruling it out” as a realistic prospect, they believed it was “unlikely”, because subsidies sustained it.

“We are anticipating rail freight rates for shipments into Europe to spike dramatically, and in the not too distant future,” the forwarder said.

“Rail competes with ocean freight when ocean freight costs are high, but we are now in a moment in which we expect ocean rates to be coming back down, so time saved by using rail will be vastly outweighed by the cost of unsubsidised services.”

Noting that rail offered a “sweet spot” between air’s speed and ocean’s pricing, they added that it was, nonetheless, something of a niche product, a typical freight train carrying only around 48 containers.

“There is also an issue surrounding the complexity of crossing multiple borders,” the forwarder noted. “That means transit times are increased because of the bureaucracy involved in all those customs declarations.

“We like rail, and we use it, but we are not certain it has what is needed to compete with traditional modes like air and sea.”

Another source suggested that the trend of shifting production of low-value goods out of China to the likes of Cambodia, Thailand, and Vietnam could further deplete rail volumes.

The source told The Loadstar that efforts were being made to extend rail links to these burgeoning manufacturing hubs – the Vietnamese government this month approved an $8bn loan to this end – but it was not happening fast enough.

“Cambodia, Thailand, Vietnam are where the low-cost manufacturing is shifting to, but the rail links have not shifted with them.

“Without those links, without rail connectivity, there will ultimately be reduced demand.”