ING: China’s New Silk Road will be the golden middle way

A new report from ING, ‘New Silk Road - The golden middle way’, highlights how the new railroad competitor opened under China’s Belt & Road Initiative could revolutionise transport routes between the East and West.

The report notes that the New Silk railroad will make the transport of goods twice as fast as sea freight and four to six times cheaper than air freight. This will give shippers the ability to optimise supply chains by choosing a combination of modalities.

 

Major decrease of CO2 emissions

The railroad will also offer an important environmental advantage, contributing just five per cent of the CO2 emissions of current air freight options. As CO2 reduction becomes more and more important and emissions are linked to a rising CO2 price, transport prices are likely to increase in the future. This offers companies an additional incentive to transport goods via the New Silk Road rail systems.

ING says that shippers of higher-valued consumer goods and foodstuffs, such as electronic equipment, auto parts, clothing, wine and cheese, will be most likely to benefit from cost efficiencies because every day in transit makes the delivery more expensive. This is even more pertinent for freight in transit to deep inland destinations, where pre- and on-carriage periods add to the total shipping time. Commodities will continue to be transported via the sea due to large-scale capacity availability and the economy of scale advantages.

 

Competition for European freight airports

As the New Silk Road mainly competes with air freight, where the big difference in footprint is a growing advantage, freight airports like Schiphol, Frankfurt and Luik could feel the impact in the medium term. The Silk Road business case, however, relies strongly on Chinese subsidies, meaning there is a level of uncertainty over assurance of these in the long term. Scaling and efficiency gains should compensate for this.

The growth tempo for Northwest Europe could also be hindered by the fact that the Western European rail network is already crowded and prioritises passenger trains. Investments in European infrastructure are complex, and capacity expansion can take some 10-20 years. The rail network in Central and Eastern Europe does however offer more space and countries like Poland and Hungary are interested in becoming a ‘gateway to Europe’ overland.

“The New Silk Road represents a potentially revolutionary shift in the way that goods are transported between China and Europe,” said Rico Luman, senior economist at ING. “That said, one modality does not always cancel out another, so we expect, in practice to see an increased combination of rail with air transport and/or sea transport. Not only does this help to spread risk, but also offers opportunity for a more optimum servicing of supply chains.”