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The Tide Turns for TSR Transportation

Thursday, December 29th, 2011

The TSR (Trans-Siberian Railway) International Container Transportation transports containers on the route that connects Japan/ Korea/ China with Russia and Europe through the combination of feeder vessels and the Trans-Siberian Railway. The route was developed in the 1970s and has played an important role as the shortest trade corridor to European countries from East Asia for about 40 years.

The feature of the route is the shorter distance and smaller number of days required for transportation compared to the Deep Sea route to Europe via Suez Canal. For example, in a case where goods are transported to Moscow from Japan or Korea, the number of required days is reduced from the 40 to 45 days for Deep Sea transportation to the 18 to 25 days for TSR transportation. Moreover, the Trans-Siberian Railway is network-linked with China, North Korea, Mongolia, Central Asia and European countries through its many branch lines, which enables the establishment of a variety of transportation routes to suit the destination.

The key question has been how much premium cargo owners are willing to pay for the reduced transportation days, considering the historical facts that the Deep Sea tariff rate fluctuates severely depending on the world market conditions.

Brief history

The history of 40 years can be divided into three phases. During the first phase, or between 1970 and the 80s, the route was used for transit transportation from Japan to Europe and the Middle East. The annual volume reached 110,000 TEU (twenty-foot equivalent units) in 1983, counting only the loaded containers. During that time, the Soviet Union set a rate for transit transportation about 30 percent lower than that for Deep Sea transportation in order to secure foreign currency earnings, which successfully won support from cargo owners.

The second phase was in the 90s, or during the days of confusion after the collapse of the Soviet Union, when the economic competitiveness of the route was lost and the volume of transportation remained low. President Putin assumed office in 2000 and the third phase started, during which time the Russian economy boomed aided by the surging crude oil price. Newly affluent Russian people demanded consumer goods, and home electric appliances made in Korea and consumer products made in China were transported by TSR directly or via Finland transit to Russia. The Finland transit was actually disappeared in 2006, as Russia practically eliminated the transit discount. The volume of cargoes increased further in the form of direct export to Russia, which replaced theFinland transit transportation. In addition to finished goods, production parts were transported to Russia by TSR. Korean car manufacturers established production bases in Russia and the CIS, and the system worked to regularly transport a large volume of production parts to assembly factories on block trains. The total of cargo transported to and from East Asia reached 620,831 TEU in 2007 according to the Coordinating Council on Trans-Siberian Transportation (CCTT). Port Vostochny, the doorway to the Russian Far East, set a record cargo handling volume of 400,724 TEU, and the Commercial Port of Vladivostok (VMTP) handled 267,288 TEU in 2008.

Global financial crisis

The cargo volume started dropping sharply due to the global financial crisis triggered by the Lehman Shock in September 2008. First, the financial sector of the Russian economy was hit hard, which stalled the momentum of the production, consumption and trading sectors. Moreover, due to the rapid drop of ocean freight rates caused by the global economic downturn, the TSR transportation lost its economic competitiveness and as a result lost many of the trade cargoes to the European Deep Sea route.

Thus, the year 2009 was a year when the TSR transportation was battered by the global financial crisis. In 2009, the volume of TSR transportation, to and from East Asia, dropped by 55 percent over the previous year, according to CCTT. Container handling volume at Port Vostochny was 60 percent lower than the previous year, about equal to the 2002-2003 level, suffering mainly from a big drop of shipments of automobile manufacturing parts for Korean car manufacturers who operate assembly plants in Russia.

On the other hand, container handling volume at the Commercial Port of Vladivostok (VMTP) dropped only 15 percent in 2009 compared to the previous year. One of the reasons for the small damage was that coastal (domestic) cargo represented about 30 percent at VMTP, which was almost free from the impact of the financial crisis. Another important reason was that the owner company, FESCO, actively supported VMTP by giving priority to FESCO vessels in calling the VMTP.

Port Vostochny has been the leading container port in the Russian Far East for many years. However, the leading position was replaced by VMTP since February 2009. Please note that about 85 percent of lifted containers are transported to various destinations by rail from Port Vostochny, while about 35 percent is shipped by rail, and a fairly large volume of containers are delivered by trucks or coastal vessels from VMTP.

Recovery from the crisis

As the world-wide economic recovery became clear from the second half of 2009, Deep Sea charges gradually increased. Similarly, as the Russian economy recovered slowly, TSR transportation also regained liveliness from the spring of 2010. Container handling volume in 2010 was 59 percent up at Port Vostochny and 49 percent up at VMTP compared to the previous year (Figure 1). The growing trend continues in 2011. Container handling volume during the January-August period in 2011 was 44 percent up at Port Vostochny and 30 percent up at VMTP compared to the same period of a year ago (Figure 2). Similarly, according to CCTT, in the first half of 2011, TSR carried 219,500 TEU in international traffic, an increase of 52 percent, with imports increasing by 66 percent, exports by 41 percent and transit by 32 percent, These facts indicate that the TSR cargo volume to/from East Asia has recovered to the precrisis level.

The market is driven by Korean cargo, including electrical appliances, auto-parts, plastic ingredients and chemicals. However, major auto-parts for Hyundai Motor Company and Kia Motors Corp. have declined severely, since Hyundai closed the assembly plants at Taganrog and Kia stopped the assembly operation at Izhevsk. Hyundai Motor Company has opened an own manufacturing plant near Saint Petersburg in 2011, and is using Deep Sea route for auto-parts delivery from Korea. The TSR route is still used for delivery of Korean auto-parts for GM-Uzbekistan at Uzbekistan, as an alternative route to the Trans-China Railway (TCR). Container share by country at Port Vostochny in 2010 was 75.5 percent for Korea, 22.6 percent for China and only 2.0 percent for Japan. China is believed to exceed Korea if containers passing through Zabaikalsk-Manzhouli border were added. The actual Japanese containers are estimated to be larger than this if containers shipped to/from Russia transshipped at Busan were included. Although Japan took the initiative in developing the TSR transportation in the 1970s, Japan has lost presence since 2000, surpassed by Korea and China. The main reason for the long term decline of Japanese share is that Japanese export makers have relocated manufacturing sites to other Asian or European countries in order to optimize manufacturing cost.

Economic competitiveness and ‘Watershed’

The key factor determining the business of TSR transportation is economic competitive versus Deep Sea route. For the TSR route, however, there is the plus of speed, adding a slight premium, estimated up to $500 per 40 feet container (FEU or 2TEU) in case of transporting from East Asia to western Russia.

Then the question is 1) up to which destination TSR transportation is competitive over the Deep Sea transportation; and 2) how the economic competitiveness changed over time. To find answers to these questions, a concept of ‘watershed’ could be useful.

‘Watershed’ is a geographical line where entering from the east and entering from the west compete on an equal footing. The former route consists of feeder vessel and TSR transportation, while the latter route consists of the Deep Sea to Baltic ports and trucking to inland destinations (Figure 3). In theory, the further east the destination the TSR route has the greater advantage, and the further west the Deep Sea route has the greater advantage. For instance, for a delivery from Korea/Japan to Siberia, TSR route has big advantage. However, the advantage will gradually diminish if the destination shifts to west.

TSR transportation has economic competitiveness between East Asia and Moscow at this moment. In other words, the ‘watershed’ is located around Moscow. However, in case of shipment from East Asia to Saint Petersburg, TSR transportation isn’t economically competitive. That’s why for autoparts delivery to Saint Petersburg plants, Hyundai and Toyota use the Deep Sea transportation.

Tracing back through history, in phase one of the 1970s and 80s, the watershed was in western Europe, having leapt clear of former Soviet Union. Subsequently, when Russian Railways entered the turbulent period in the 1990s, the watershed is estimated to have shifted east to the vicinity of Irkutsk. From 2000 on, because of the relative relationship in the changes of the Deep Sea and TSR routes, the watershed is believed to have moved to the vicinity of Moscow. The global financial crisis which occurred in the fall of 2008, has forced to shift the watershed to east, probably to Ural mountain area, mainly due to the declined Deep Sea tariff. Russian side agents decided to lower the TSR rate in early 2009 to recover the economic competitiveness of TSR route. In fact, TSR rate was lowered by 42 percent during the Jan.-Apr. period in 2009. As a result, the watershed seems to have moved back to Moscow region by the end of 2009. Lessons from historical experiences tell us that when the watershed lies to the west of Moscow, it is possible for the TSR route to take on freight bound for Moscow, but when it moves east of Moscow the TSR route losses freight.

What can consequently be considered is the gearing of the total TSR rate to the Deep Sea rate. Generally speaking, the maritime freight charges on the Deep Sea route change greatly – they are high in the economic good times, and become low in recession. As the changes for rail freight charges are small in relation to this, freight volumes change drastically according to the business tide.

The new phase of the TSR transportation: Revival of European transit

Now the TSR transportation is handling the historically highest volume of containers. Terminal expansion projects are planned at Commercial Port of Vladiovstok, which has been heavily crowded due to the soaring container handling volume. There will be a capacity limitation for the Russian Far Eastern ports.

A possible scenario for the next phase of the TSR transportation could be a use of alternative route of Far Eastern ports. The most promising route is the Manzhouli-Za- baikalsk border crossing route, merging to the Trans-Siberian main line at China. The route was improved by constructing a trans- shipment station at Zabaikalsk in October 2008, by TransContainer. The maximum annual transshipment capacity is 550 thou- sand TEU (Figure 4).

Right now this route is used mainly for China-Russia trade, but the future potential will be great, including transit transporta- tion between China and Europe. Transit transportation between Korea/Japan and Europe has disappeared since that lost economic competitiveness in 2006 as men- tioned before. As long as the ‘watershed’ for Korea/Japan lies in Russian territory, transit transportation to Europe will not revive. However, the story becomes different if ‘watershed’ for Northeast China is defined assuming the Manzhouli-Zabaikalsk route, there is a possibility that the watershed lies in Europe, since the cost of feeder vessel can be eliminated in this route.

Recently, DB Schenker announced launching a daily container train service beginning in November 2011, between Leipzig and Shenyang via Zabaikalsk, for transporting BMW auto-parts, to be manufactured at Shenyang. The total transit time is expected to be 23 days, which is more than twice as fast as the Deep Sea transportation. This project could open the 4th phase of the TSR transportation as transit transportation between China and Europe.

Russian Railways has recently approved an integrated development concept for the container business of its holding company. In the concept they pay special attention to the growing trade between the countries of the Asia-Pacific region and Europe, and much of this traffic could be potential transit via Russia.

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