29 Октября 2014

From:	John Keir, Ross Learmont Ltd
Email:	 john.keir@telia.com 
Date:	29 October 2014

Amid all the hustle and bustle, a quiet revolution is taking place.

Car sales provide a rough and ready indication of the economic health and vitality of a nation. In the first half of the year, China maintained its leading position with total sales of 9.6 million, which represent a rise of 11.2% over the same period in 2013. The USA came second with 3.8 million, while Japan occupied third place with total sales of 2.5 million vehicles. However, US sales just about matched those of 2013, while Japan recorded a healthy 11% increase on the previous year. Russia came eighth in this year’s ratings with 1.1 million vehicles, a fall of 6.2% on the 2012 total. The EU’s leading market, Germany managed a modest 2.4% rise in sales, which mirrors the general market trend in mainland Europe. There are concerns that some of the large European economies may stall and this generally negative outlook is depressing sales of “big ticket” items such as cars. Since January, the Rouble has depreciated 20 percent against most western currencies, including the Euro. Russian importers and ultimately consumers now face paying considerably more for a broad range of imported goods. At the same time, neither the EU nor Russia is helped by the imposition of trade sanctions and embargoes. When the one coughs, the other invariably sneezes.

To add to Europe’s woes, China is taking advantage of the current political problems to extend to Russia the hand of friendship on several major rail projects, not all of which are in the Far Eastern part of the Eurasian landmass. The Chinese are keen to upgrade the whole railway line from Moscow to Beijing and wish to start on the crucial stretch between Moscow and Kazan. It should be recalled that Kazan has been nominated as one of the host cities for the FIFA World Cup to be held in Russia in 2018. Currently, Kazan is 11.5 hours by train from Moscow but the Chinese believe that by using their technology, the 770 km journey time could be cut to a mere 3.5 hours, thus providing a long-term benefit to the country - not merely upgraded football stadia.

In addition to technical know-how, the Chinese can also provide access to funding, which the West is unwilling to provide while the current embargoes remain in place. In many ways, China is emerging as a credible competitor to Europe as a source not only of technological expertise but also of attractive finance packages. However, this is not a “one-way street”, for China needs access to Russia’s vast natural resources in the form of minerals and energy, which lie just across a common land border, rather than thousands of miles away by sea in unstable parts of the globe. The proposed improvements to cross-border rail links will speed up access to those resources.

At the same time, China needs Russia’s help to solve a major logistical problem that China has with its North-East Region. As mentioned in the RLL Report of 30 July, the Summa group is to develop the Far East port of Zarubino as an outlet for large quantities of Chinese goods, which are to be transported to markets in southern China as well as North East Asia and Singapore. The head of the Summa Group, Ziyavudin Magomedov signed an agreement with the Chinese Province of Jilin to construct a “dry port” in Hunchun, which is located a short distance from the Russian border and the port of Zarubino. Summa is committing USD 300 to 350 million of investments to the new hub, which should be ready by 2018. In return for its investment, Summa gets a 50-year lease on the dry port with an initial capacity of up to 40 million tons per annum.

The plan is for the cargo to be customs-cleared in Hunchun before being transported the short distance on an upgraded Russian broad-gauge rail line to Zarubino for loading. Summa calculates that Zarubino Port will eventually have the capacity to handle up to 100 million tons, sixty percent of which will come from China. The port will have a container terminal capable of handling 2 million teu per annum, next to which will be a grain terminal with an initial capacity of 10 million tons. These will be followed by a ro-ro terminal and a dedicated facility for handling alumina. Total investment in Zarubino and Hunchun will set back Summa some USD 2.6 to 3 Billion. Chinese interest in developing the route via Zarubino is based on two simple facts. First, Zarubino will provide an alternative route for domestic cargo moving from N E China to the densely populated southern provinces. More importantly, the cost to transport one ton of cargo via Zarubino and then on by sea should be USD 250 per ton cheaper than sending the cargo via the Chinese rail network.

Meanwhile to the north of Zarubino, in Vladivostok and Vostochny a new trend is emerging. Although the total number of containers passing through Far East ports this year rose by a modest 4.5%, the number of laden export containers shot up by 23.9% to 104,900 teu. This suggests that Russian exporters are taking advantage of the falling Rouble to open up new markets by shifting to intermodal transport. Once exporters switch to containers, they are often reluctant to return to conventional modes of transport. A quiet revolution is well under way in the Far East ports.

If we review the statistics for Far East ports and study their implications, we shall see that the Zarubino project could double annual throughput of ports in the Russian Far East region to over 3 million teu. This means that Russia’s centre of container gravity would shift from the Russian North West Ports with a current throughput of 2.75 million teu to the Far East Ports. The Russian logistics market is estimated to be worth Euro 40 Billion and is growing annually at double figures. Germany sells Euro 36 Billion worth of goods to Russia and, like France and Italy, it will not want to see this market meekly handed over to Chinese competitors. Already this year, German sales to Russia are down by 20% and with EU economies heading towards a “triple dip”, the major European economies cannot afford to lose another slice of this lucrative market.

John Keir, Ross Learmont Ltd.
29 October 2014

Copyright ©, 2014, John Keir