Structural change

Alexey Grom, Director General and Chairman of the Management Board of UTLC ERA, discussed with Gudok the progress in infrastructure development, technological enhancements, and digitalization strategies on the main transit routes within the 1,520 mm gauge area.


- Alexey Nikolaevich, the UTLC ERA has a significant history of development. Has the company's logistics structure evolved over the course of its development?

Since the inception of our operations in 2016, each passing year has been distinct from its predecessor. Ever-evolving external factors have continuously shaped the transportation structure, traffic direction, and customer demand across various modes of transportation. These dynamic shifts necessitated swift and decisive actions to uphold competitiveness and drive favorable financial outcomes.

In our first year of operation, we focused on commercializing transit services. We set ambitious targets, aiming to achieve 1 million TEU per year by 2026, despite widespread skepticism that the maximum figure could only be 200-250 thousand TEU. Subsequently, ‘swinging’ fluctuations emerged as our volumes grew significantly, with shifts observed between the East-West and West-East directions. These fluctuations, I might add, persist to the present day, posing challenges in prediction. Nevertheless, we remain dedicated.

During the pandemic, when logistics chains were torn up, borders were closed and flights were canceled, the UTLC ERA’s transit corridor remained the only reliable and competitive option, swiftly becoming the preferred choice. Within just two years, we nearly doubled the volume achieved during the record year of 2019. Our transit corridor effectively operated as a "railroad pipeline," seamlessly moving our train formations along the 1,520 mm gauge infrastructure with minimal delays. During the two years of the pandemic, we made efforts to maximize the throughput capacity on our transit route. This initiative, in turn, led shareholders to make rapid decisions in developing the corridor and its infrastructure. Consequently, the construction of new and the modernization of old border crossings, as well as the laying of new tracks, began at an accelerated pace.

In the last three years, we have consistently maintained record transportation volumes of 700 thousand TEU. Currently, nine out of ten containers in China-Europe-China railroad traffic are accounted for by UTLC ERA’s services.

- Has the situation on the route changed in general due to recent geopolitical events?

In 2022-2023, our European customers started to decline transportation transit through Russia, though the volume of transit did not drop to zero. Currently, there is a trend towards a resurgence in transit activity. Some customers have managed to increase their use of UTLC ERA’s services despite the ongoing circumstances. It is important to highlight that no customers have permanently left, and those who paused their services attributed their temporary decision to the potential risks of sanctions.

In 2023, we welcomed new companies from Belarus and Russia to our list of customers who have begun utilizing our services to ship their goods to the People's Republic of China. It is important to clarify that these are new shipments to new destinations. We did not merely take over orders from the other companies or persuade shippers to alter their routes.

- Could you offer an example to illustrate this?

- Dispatching organized container trains filled with potash fertilizers from Belarus is an unprecedented initiative. Historically, fertilizers in amounts of this magnitude have been transported using specialized rolling stock; however, we have successfully implemented a system of continuous and expedited delivery through container trains. Notably, the scope of our transportation network is consistently broadening. In my view, using containers has proven to be a strategic and efficient solution as regards this Belarusian exporter’s distribution channels.

- Has the transportation structure by mode changed since 2022?

- There have been significant changes in the mode of transportation.
Previously, transit transportation between China and Europe accounted for 99% of our order portfolio. However, this figure decreased to 33% last year. The remaining share was almost evenly split between import and export transportation.

One crucial point to note is that companies that had temporarily paused are now reaching out and inquiring, "Will you have the capacity to accommodate us when we resume operations?"

- And do you have an answer?

Our shareholders are enhancing throughput capacity with a growth-oriented approach, while also establishing a safety margin for the infrastructure. Although the railway may face challenges in handling a sudden surge in demand, steps are being taken to gradually increase transit volume capacities. With is in mind, Kazakhstan is constructing additional tracks on the polygon near the Chinese border, Russian Railways is upgrading border crossings at the Kazakhstan junction, and Belarusian Railways is modernizing its route to expand transit capabilities.

There are also ideas that might prove practical at to how throughput capacities can be increased even relying on our current infrastructure capabilities. To implement them, we stay in close collaboration with shareholders and partners. We are addressing logistical challenges and ensuring a balanced flow of transportation in both East-West and West-East directions. Transporation routes cannot work one-way. We will either end up with a shortage or, conversely, an excess of rolling stock. This complex yet challenging task requires cost-efficiency while upholding competitive services.

- Besides utilizing your primary transit route to the EU through Belarus, you have also been expanding operations in the Kaliningrad direction. What is the current status of this expansion?

- The Kaliningrad route has the capacity to handle a significant amount of extra transit cargo. In 2021, we transported nearly 175,000 TEU along this route, with its potential estimated to range between 300,000 to 500,000 TEU. Regrettably, the advancement of this service is currently on hold due to transit challenges through Lithuania. We eagerly anticipate resuming this project once the necessary conditions are established.

- Which transit indicators did you have at the end of the first quarter of this year? 

- It’s almost a repeat of last year's volumes. The volume of transported containers in the first quarter of 2024 amounted to 176.5 thousand TEU, slightly lower than the 178.6 thousand TEU transported in the same period of 2023. There have been notable shifts in our transportation routes, particularly with the gradual recovery of transit Eurasian transportation. This recovery can be attributed in part to the unstable situation in the Red Sea region. In the first quarter of 2023, approximately 30-35% of our transportation volume was accounted for by the China-Europe-China route. However, in the same period of 2024, this figure increased to nearly 50%, with plans to raise it further to 70% by the end of 2024. Whenever something around us changes, so will we.

- Speaking of the process of change. What are your thoughts on the new technology that involves extending container trains to accommodate 71 conventional cars? How does this innovation align with the current infrastructure conditions?

- Well, we surely advocate for the extension of train lengths to a minimum of 71 meters, citing several benefits. These include cost reduction, increased infrastructure profitability, and optimized capacity utilization. And there is this collateral technological advantage: higher speeds lead to enhanced customer loyalty in Eurasian rail transportation. Previously, our trains could accommodate up to 110 or even 114 conventional cars; this technology was primarily adopted to enable the redeployment of a large number of empty containers at Russian Railways depots. Presently, over 85% of our trains consist of at least 71 conventional cars. 

Given our transportation's specificity with China, it is crucial to ensure synchronized adjustments are made to accommodate long container trains across neighboring infrastructures. As far as I know, our shareholders are collaborating with Chinese Railways to address these challenges.

- Alexey Nikolaevich, numerous companies are currently emphasizing the importance of "seamless" container movement, which inevitably involves the transition to a paperless document flow. What are your thoughts on electronic waybills?

We fully endorse the initiative across all levels of engagement with the market and administrations. The introduction of the electronic transit consignment note will enhance competitiveness in transportation. Currently, our services still rely on traditional paper-based processes for loaded containers. 

While the absence of an electronic consignment note is not a significant hindrance to transit development on railway lines today, as the volume increases and new terminals emerge at the China border, digitalization of the consignment note and all shipping documentation will become essential.

- What additional steps are required to enhance container transit?

Container transit has surged by over 70% in the first five months of 2024 compared to the same period last year. Such a sharp rise in transportation across all modes can be a challenging situation. However, our infrastructure was able to handle it effectively, thanks to the creation of capacity reserves on key Eurasian routes in previous years.

As we approach the end of May 2024, it is evident that the slots on the primary transit routes of UTLC ERA, such as for June and July, have already been fully booked by customers. Prospective clients may not secure access to transit services until August. 

Currently, the major constraint lies in end-to-end infrastructure limitations, including the construction of new lines on the Dostyk-Moyinty segment in Kazakhstan, the modernization of Russian border crossings, and ongoing enhancements to the adjacent 1,435 mm gauge infrastructure. These endeavors aim to significantly increase the throughput capacity of the transit corridor within the next two to three years. Additionally, the development of transit transportation will be propelled by the third border crossing project on the Kazakhstan-China border, that connects to the Bakhty-Ayagoz section. By reducing production costs and enhancing service quality in doing so, we aim not only to accommodate a million containers in transit but to scale up for two or three million containers through a joint initiative.

Our operations now embody change as the standard practice. 

It is important to highlight that no customers have permanently left, and those who paused their services attributed their temporary decision to the potential risks of sanctions.