Bottleneck threatens growth
“Ihave a dream.”
Sun Zhenbo, a 30-something agricultural businessman with Erenhot Jinguyuan Grain and Oil Co, said as he examined a map hanging in his office.
“I have a dream that one day Erenhot would become the grain commodity distribution and trading center for the whole of Asia.”
Sun’s dream is a bold one. Erenhot, which is perched on China’s northern borders with Mongolia, is just a small city with a population of only 80,000. For six out of every 12 months, the city is wrapped up in bitter Siberian cold.
However, Sun’s dream is not just a random pipe dream.
Agricultural trade between China and Russia has grown rapidly since 2017.
The latest figures from China’s Ministry of Commerce, published in January, have shown that bilateral trade volume between China and Russia has already exceeded the targeted level of $100 billion, reaching an all time record volume.
Bilateral trade of agricultural products actually surged by 31 percent year-on-year, in the first 11 months of 2018.
The high growth rate is on top of the phenomenal growth rates seen in 2017, when China-Russia agricultural products trading totaled $4 billion and was described by media reports, as “the largest growth point in China-Russian trade.”
Looking forward, the Russian government is expecting to raise bilateral agricultural trade to $9.5 billion per year by 2024. In the same year, it is expected that overall bilateral trade between the two nations will reach $200 billion, according to a Xinhua report, citing the Russian agricultural ministry. There is just one catch. The agricultural infrastructures in the two countries, as well as at the border crossings, are so out of date and in urgent need of repair and upgrade, that they are actually hindering growth and the development of trade.
“It is already at full capacity,” Sun told the Global Times.
“The grain offloading station at Erenhot, for example, has reached its maximum design volumes,” said Sun.
Sun said the station has a maximum capacity of receiving 16 rail cars of grain. In 2018, cargo surged and the railway authority allocated one more platform for unloading and transportation purposes.
In reality, the station handles approximately 1,700 tons of goods per day, which is approaching the daily maximum of about 2,000 tons of grain per day.
Farmers and grain merchants told the Global Times that there are currently only four major ports handling grain trade between China and Russia – Alashankou in Northwest China’s Xinjiang Uyghur Autonomous Region, Erenhot and Manzhouli in North China’s Inner Mongolia Autonomous Region, and the Vostochny Port in the Russian Far East.
“The grain transportation infrastructure in the first three ports are too backward to be acceptable, and their capacity is now far from ideal,” Sun said.
In the grain trade, a port’s handling capacity refers to its ability to accommodate grain-carrying trains, to offload cargoes, to switch cargos from Russian wide-gauge trains to domestic standard-gauge trains so that the grain can then be transported across China’s sprawling railway network, and lastly, the ability to command train fleets.
“The problem of China-Russia agriculture infrastructure is that it is out of sync,” said Hao Xiaodong, deputy manager of Inner Mongolia Dongxin Agricultural Technology Development Co. Dongxin is a grain trading firm.
“Agriculture in Russia is carried out on a massive scale, and grains are planted and stored in huge quantities. But the logistics are dilapidated and not fit for purpose. In another aspect, when traders try to trade grain across the borders, the offloading capacity at the border ports and the weak offloading capacity of the trains are out of sync with Russia’s huge output,” Hao explained.
Tackling difficulties
Chinese grain traders are trying to build warehouse capacity and platforms in Russia, and equip these transportation hubs with additional offloading capacity, but the process is a difficult one.
Hao’s company is investing 70.43 million yuan ($10.5 million) in a grain warehouse and logistics hub in Erenhot.
The project, the first of its kind in the city, contains a conveyor belt for grain transport, specialized and mechanized rail cars for handling grain and 21 silos that can store 360,000 tons of grain per annum.
Ma Wenfeng, a senior analyst at Beijing
Orient Agribusiness Consultancy, told the Global Times on Tuesday that the current high transportation costs for grain is the main obstacle preventing China-Russia agriculture cooperation from taking off.
Experts said currently the majority of grain between China and Russia is transported via trains and freight trucks, incurring exorbitant logistic costs.
The corn produced in Northeast China’s Heilongjiang Province, after thousands of kilometers of transportation, is sold at a higher price in eastern China than US seaborne corn, which basically negates the benefits of Russian agriculture imports, according to Ma.
But Ma pointed out that an opportunity exists along the extensive farming areas adjacent to the Heilongjiang River (the Amur River), if the advantage of low-cost water transportation can be tapped.
Fighting for low costs
One Chinese company that aims to tap the Amur River’s logistics advantages is Harbin-based Dongjin Group, which has been one of the largest foreign owners of farms in Russia, since March 2017, and has so far leased 120,000 hectares of farmland in Russia’s Khabarovsk.
“There is a beauty in every angle in China-Russia agriculture cooperation, from geographic potential to agricultural goods complementarities and to geopolitical reasons,” said Zhang Dajun, chairman of the company.
“The problem now is that due to various reasons, there are no modern grain trading system in place, both in Russia’s Far East and China’s northeastern provinces,”
Zhang told the Global Times. “And this has become a significant bottleneck, checking the growth of China-Russia agricultural cooperation.”
Developing cross border agriculture cooperation needs modern logistics, specialized systems to support the grain trade, and supporting infrastructure, Zhang said. “Currently we have none, or very little of that, and so the sector’s development is just at the early stages.”
The current grain trading system is disproportionate to China and Russia’s standing as world’s leading economies, Zhang noted.
In 2017, Chinese foreign direct investment into Russia jumped 72 percent, but the figure was a mere $2.22 billion. In comparison, bilateral trade was $84 billion.
Amid the China-US trade war and China’s strategy to diversify its soybean supplies, Dongjin Group grew soybeans in an area as large as 30,000 hectares, harvesting about 80,000 tons of the crop in 2018 in Russia.
This differs from the merchants in Erenhot, as Zhang’s company seeks to tap the low-cost river transportation on the Amur.
However, river grain transportation on the Amur is barely viable at present – there is only one wharf on the Chinese side and construction is still taking place on the Russian side.
Last year, Zhang’s company only managed to ship about 10,000 tons of soybeans across the Amur, at a wharf in Fuyuan, Heilongjiang Province, before winter weather closed the river to traffic in October.
The rest of the harvest had to be stored over the winter.
To try and rectify this situation, Dongjin Group is investing 100 million yuan to expand the wharf facility at the Port of Khabarovsk.
In the future, his company plans to combine a transportation model using both rail and sea transport, to further reduce the cost of shipping grain and to directly connect with markets in eastern and southern China.
Certainly, investment in China-Russian agricultural infrastructure won’t just benefit this sector alone, according to Zhang. “If the trading volume between the two countries reached the 10-millionton level, logistics in the Amur River alone will need 1,000 grain carrying barges with a displacement above 1,000 tons. This will also boost the local shipbuilding industries of both countries,” Zhang said. There are still, however, difficulties to overcome. According to Hao, deep agricultural sector reforms in Russia have removed the government’s influence in the sector, making government intervention less influential. And for Chinese and Russian grain merchants, their capability is limited, when it comes to building big infrastructure projects, Hao said. “At present, Chinese and Russian companies are fighting like lone wolfs instead of as a wolf pack, and this has further reduced their ability to change the situation,” Hao said. The two countries have set up financing schemes to boost development in the region. The Russian-China Investment Fund for Regional Development, which was announced in September of last year, has set agriculture as one of its key investment targets, according to media reports. It has become vital for stakeholders to tackle this bottleneck of agriculture infrastructure in the region. To Zhang, the old saying that has supported thousands of Chinese locations, still applies here. “Wanna be rich? Build a road first.”