Demand for shipments has risen since Red Sea attacks

A China-Europe freight train returning from Russia arrives at a railway container freight center on September 20, 2023 in Manzhouli, China.

Liu Wenhua | China News Service | Getty Images

Shippers are scrambling to find alternative ways to transport goods from China to Europe in light of the disruption caused by attacks on the Red Sea, a major ocean route.

Air cargo volumes on the major apparel route between Vietnam and Europe increased by 65% in the week ending Jan. 14 when compared to the week prior, according to data from Xeneta, a freight rate data platform.

And — while it only represents a very small proportion of containers moved between the Far East and Europe — rail routes via Russia have seen an uptick in interest too.

Freight forwarders and consolidators — companies that organize the shipment of goods — have reported a sharp increase in enquiries and bookings for the route. Rail is attractive to shippers as it is cheaper than air freight and quicker than using ocean transportation.

RailGate Europe, a group of consolidators, transports goods including furniture, toys, clothes and automotive parts from China through Russia to European countries.

The journey takes between 14 and 25 days depending on its origin and destination, a transit time that is “significantly better” than ocean times, according to Julija Sciglaite, RailGate Europe’s chief business development officer.

Ocean shipping from China to the Dutch port of Rotterdam via the Red Sea takes around 27 days, but re-routing via South Africa’s Cape of Good Hope adds about 10-12 days. Last week, German shipping company Hapag Lloyd said it would continue to re-route its vessels until further notice.

Rail through Russia

Firms have raised concerns about sending goods via rail through Russia, Sciglaite said. “Since [the] war in Ukraine started, many companies were afraid to deliver their cargos via Russia as train passes [through] part of Russian territory,” she told CNBC by email.

“Since [the] war started, [the] number of bookings decreased significantly via Russia, but within [the] last year, this route is recovering due to good transit time and prices,” she said.

A train engine pulls carriages that started their journey in Yiwu, China into Barking rail freight terminal on January 18, 2017 in the U.K. The train took 16 days to cover around 7,500 miles through China, Kazakhstan, Russia, Belarus, Poland, Germany, Belgium and France.

Dan Kitwood | Getty Images

However, since the Houthis started attacking vessels in the Red Sea toward the end of 2023, demand on the railways went up, Sciglaite said. “After [the] incident in [the] Red Sea … demand skyrocketed,” she said, although the full impact on demand won’t be known for several months, she added. The Lunar New Year, which starts on Feb. 10, is also likely to stimulate demand, Sciglaite said.

While the EU permits sanctioned goods to be moved via rail through Russia (road transport of sanctioned products is prohibited), military goods through the country are banned via any mode of transport.

Igor Tambaca, managing director of Rail Bridge Cargo, a Dutch logistics company, said China-Europe rail route bookings were up 37% over the past four weeks. “The demand for rail exploded,” he said in an email to CNBC, adding this is due to the Red Sea disruption and because of the Lunar New Year.

Rail Bridge Cargo transports goods from machine parts to electronics and foods. “Russia transfer is only refused by customers who have an ethical issue with Russia. Most customer[s] do not care about ethics when for their supply chain they have to have a fast and reliable solution to Europe,” Tambaca said, adding that the company also offers insurance on this route.

Shippers who don’t want to send goods via rail through Russia can use the “middle corridor,” which runs from China through Kazakhstan to Turkey via the Caspian Sea, but this takes around 26 to 29 days, Tambaca said.

The middle corridor route is a focus for Austrian operator OBB Rail Cargo Group, owing to customers’ concerns about sanctions, according to company spokesperson Maria Magdalena Pavitsich.

Inquiries for the middle corridor route have seen a “huge” increase in recent weeks from customers in Europe and Asia, she told CNBC by email. “One of the reasons for this is that sea freight prices have risen sharply and we expect them to rise even further — [this] means that prices are coming closer to those of rail freight,” Pavitsich said.

Tambaca said the cost of sending one forty-foot container (FEU) from China to Europe via rail is currently around $7,900. This compares to a February forecast of $6,507 per FEU for ocean freight between the Far East and the Mediterranean, according to Xeneta data.

Chinese railway stations including Xian, Chengdu and Yiwu have increased their prices “several times,” Sciglaite said, although they are not at the rates seen during the Covid-19 pandemic or when the Suez Canal was blocked by the Ever Given vessel in 2021, she added. So far, trains are running on time, but that could change, Sciglaite said. “There is big chance that due to overbooking delays will appear, the question is how fast and how big,” she said.

China’s ambitions

China’s Belt and Road Initiative aims to increase Beijing’s global influence through transport modes including rail to connect it with Asia, Europe and Africa, while Moscow is working with foreign partners to build railway routes from Central Siberia south toward China, Russia’s President Vladimir Putin said at a Belt and Road forum in Beijing in October.

British company Davies Turner began operating a rail freight service between China and the U.K. in 2018, with goods traveling between the Chinese cities of Wuhan or Xian through Russia, Belarus and Poland to Duisburg in Germany, with onward journeys by truck and ferry.

The company described the rail connection between China and Europe as a “vital bridge for international economic and trade co-operation,” in an online statement in September, and noted a “staggering” 77,000 freight trains have operated on the route in the decade to 2023.

Ongoing disruption

Marco Forgione, director general of the Institute of Export and International Trade, told CNBC by phone that he expects the disruption in the Red Sea will continue for months or possibly the whole of 2024. “Correcting the supply chains and getting everything back in order will take many months,” he told CNBC by phone.

“What we’re seeing in the Red Sea is going to continue to be a disruption to global international trading. You can’t just replace everything that was coming through with alternative types of modes of transport,” Forgione added.

In the longer term, the Red Sea crisis could favor exports out of the U.S., according to Paul Brashier, a vice president at ITS Logistics.

“In the near and the long term for Europe, [the] cost to obtain goods are going to increase. Does that potentially change the trade balance between Europe and Asia and Europe and the United States? … It’s very, very, very possible that U.S. exports could could gain some traction due to this,” he told CNBC by video call.

CNBC’s Evelyn Cheng, Lori Ann LaRocco and Lee Ying Shan contributed to this report.

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