20.12.2020 19:59:10 //
Juha Peltonen
Anna Dammert

Supply chains shorten, but only chronologically

When export cargo switches onto Chinese railways, maritime traffic in Finland increases.

The general vibe last spring was that the coronavirus would make companies operating in developed markets move their production closer to their main markets, and possibly even return manufacturing to those markets, as they needed to reduce their dependence on Asian subcontractors. At ports, there is no sign of this occurring – at least not yet. On the contrary, the value added by Asian subcontracting is actually rising.

Håkan Fagerström, Group Head of Cargo at Tallink, has done plenty of research on China’s new silk road. He is currently writing his doctoral thesis on the impacts of globalisation on European foreign trade, and thereby also on Finnish industry.

“The strongest growing trend in the Baltic region is rail traffic to the Far East. Trains are running between China and Europe through the southern, central and northern corridors, and traffic is strongly increasing at the moment. This will cause major changes in future goods flows,” says Fagerström.

He says that while some cargo will always be more suitable for maritime transport (such as paper and timber), rail transport has a speed advantage when it comes to semi-finished products – and even more so once Rail Baltica is completed.

“At the moment, sending a shipping container to China will require it to be reloaded three or four times at various terminals, and it will take about five weeks for a container to reach Shenzhen. It will then be another day or two by train to Central China. If trains will soon be able to get from Helsinki to Xi’an in twelve days, this will be quite a difference. The price is also nowhere near as high as air freight. It is only slightly more expensive than maritime transport, yet four times as fast.”

Fagerström says that the value added by Asian subcontracting has risen, and particularly for semi-finished products.

“Only ten years ago, China was exporting raw, unprocessed goods. If we’re talking about the metal industry, then this means things like T-beams. Nowadays, these beams come ready-painted and equipped with openings and design elements – that is, the degree of processing is continually increasing in Chinese exports. Fast connections are the reason behind this. They enable the use of semi-finished products in a manufacturing process for which a five-week sea voyage is far too slow.”

So it doesn’t sound as if subcontracting is moving to Europe, does it?

“The goods coming out of China may be increasingly more processed, but subcontracting is getting faster if not physically closer. When China was closed in the spring, some production was temporarily moved to maintain production chains. But raw industry isn’t going to change in any way. That would require more than a one-year pandemic.

Poland is a logistics hub

This growth in rail transport will increase maritime transport to Finland, as the final stage – between Helsinki and Tallinn – must be traversed by sea. Poland is the logistics hub for rail traffic between China and Europe. Trains can reach Warsaw from China in about ten days. From Poland, the cargo will continue by road to Tallinn, and from there to Helsinki by sea.

“A lot of white electronics are already entering Finland from Poland, even though the country doesn’t manufacture any home appliances. These goods originate in China, and EU customs charges are being paid in Poland. When Rail Baltica is completed, it will change the entire chain,” says Fagerström.

Rail Baltica will connect Tallinn to the Central European rail network via Warsaw, but equally well to China.

“Rail Baltica will generate a significant amount of extra traffic between Finland and Estonia, as its terminus is in Muuga. Cargo trains will then be able to continue straight up from Warsaw. It will be 5–7 years before Rail Baltica is finished, but we’ve already reached the point of no return. That is, even though there’s still some political arm-wrestling going on in some countries, it’s coming all the same.”

In Finland, the effect of Rail Baltica will be felt most in Vuosaari.

“Ports are going to be crowded, and in Helsinki this will mean Vuosaari rather than the city-centre harbours,” says Fagerström.

On the Estonian side, Rail Baltica will increase traffic in Muuga, which opened a second ro-ro ramp at the beginning of November. Muuga Harbour can now accommodate two ro-ro vessels at the same time.

“They have room to build there, and EU funding is also quite easily available for infrastructure development. I can’t speak for them, but it’s possible to build a significant cluster of logistics services in Muuga that can also be used to warehouse containers coming from China,” says Fagerström.

Traffic from the Far East is one-sided in the same way as it is between Finland and Russia: there are practically no exports. This means that there must be capacity to store empty cargo units.

Difficult to make a tunnel profitable

Fagerström is certain that Rail Baltica will, at some point, increase the pressure to build a tunnel between Finland and Estonia – although that would be far in the future.

“It would be naive to say that there will never be a tunnel, but it’ll be such a long time before it happens that I don’t think of it in concrete terms. Technology is not yet advanced enough to make the tunnel project financially viable. The tunnel could run along the seabed, like the one under the Fehmarn Belt in Germany. That would be easier than going through the bedrock, but they have a sandy bottom there and we don’t. Between Helsinki and Tallinn, you would have to go to such great depths that the tunnel entrances and exits would have to be quite far away. Otherwise you’d end up with horrendous uphill gradients, and the price would also be hideous. Rail Baltica, on the other hand, is a fact and will increase maritime traffic between Finland and Estonia,” says Fagerström.