Breathing fire 

There's still life in China's port dragon as Stevie Knight discovers

- 24 Mar 2009, PortStrategy Online - insight for port executives


Chinese dragons are swimming against the tide - but what about the others left in the bow wash?
It's now a bygone era - but the recent years of legendary East Asia trade led to everyone jumping on the bandwagon of coastal port construction. However, some jumped with significantly heavier feet than others. The last of China's "Five-year guidelines" aimed to put a massive $810bn investment into transportation, including ports and railways, by 2010.

The effect has been to raise the stakes across the region, with ports worried about being closed out of the bonanza by being found wanting. However, now the bandwagon looks like losing a wheel, many of the container ports that relied on manufacturing exports have found hard-won volumes plummeting.

So, what now? In China alone these two markets accounted for around 38% of the total exports, and Christopher Runckel, of Runckel Associates, says quite bluntly, that since these coastal industries are crucial components of China’s overall system, accounting for around 40% of the gross domestic product, "the government can not allow them to fail". A rare interview with the UK's Financial Times with Chinese premier Wen Jiabao backs this view up: “Running our own affairs well is our biggest contribution to mankind,” says Wen. “We must take forceful steps.” This would in part seem to refer to the announcement of a $585bn infrastructure package - ports included - to stimulate the economy.

But, as Simon Su, director and chief economist of BMT Asia Pacific, points out, this will cause fall-out elsewhere given the limited market. He says: "Other ports may be affected if Shanghai and the others in the area manage to handle more transhipment traffic by putting in more investment - for example it could simply push Korea ports out of central and north Chinese transhipment traffic."

However, the impact of the economic slide is varied even within China, adds Mr Su. The three major port clusters along the country's coastal areas, the Yangtze River Delta, the Pearl River Delta and the Bo Hai Gulf area, have all faired rather differently.

The ports around the Pearl River Delta (including Shenzhen, Guangzhou, Zhanjiang, Shantou, Zhuhai and Zhongshan), have generally suffered the most since the export market decline and industry closures have hit the region badly.

While all the major ports have put in construction work over the last few years, Guangzhou has done rather better out of this than many. Not only did it invest in sea-to-river lanes, turning it from a river port to a deepsea integrated hub with 617 berths, 51 of which have over a 10,000 dwt capacity, but the port has also an integrated low-cost barge shuttle service that feeds the other ports up and down the Pearl Delta: an asset to the shippers in the area. This domestic traffic has made it robust, achieving both a 20% growth last year and a certain resilience to the vagaries of the export market - something that other ports in the area do not have.

With the billions of dollars being invested in Shenzhen's Yantian, Chiwan and Shekou terminals, the government originally predicted that both the Pearl River Delta ports and the Yangtze River Delta terminals would each reach a 2010 throughput of around 30m teu. They look like being disappointed.

However Shenzen and its manufacturing centres in Guangdong Province are inextricably linked - both in a financial and physical sense - to the port of Hong Kong, which lies a mere 37km away.

But here a note of caution was sounded from Hong Kong's authorities even before the downturn, who admitted in 2006 that its "port cargo traffic is somewhat restrained by its limited land resources and has higher overall through costs than the mainland major ports". Logistics companies accordingly shifted their focus towards value-added and strengthened hub functions, instead of relying on carriage of goods alone.

And up till now it has worked: last year, about a quarter of the Chinese mainland's international trade routed through Hong Kong, worth some $525bn. However 2009 box traffic at both Hong Kong and Shenzhen is expected to slow; Hong Kong-based China Merchants Holdings recently announced cutbacks to development projects and trimming of capital investment.

To mitigate this, the central Chinese government recently unveiled measures to protect Hong Kong's interests, including promotion of joint container terminal developments, the construction of a multi-billion dollar bridge linking Hong Kong with Macau and the southern Chinese city of Zhuhai and an express railroad linking the city with Guangzhou and Shenzhen.

The northern port cluster around the Bo Hai Gulf (Qinhuangdao, Tianjin, Yingkou, Qingdao and Rizhao ports) competed fiercely for a slice of the five-year developmental pie. Tianjin, though, had the Beijing backing - it is right on the city's doorstep, and its 2007 figures almost matched Guangzhou's 20% growth spurt.

According to the “Guideline” 2010 would see the port export and import value come to $200bn and 10m teu throughput, on the back of massive manufacturing and processing plant developments in the region, 20 new container berths and deep dredging of the navigation channels plus the Dongjiang Bonded Port Area. But though 2008 figures still put the throughput at 8.5m teu, the port is vulnerable to the eccentricities of the box market and the downturn is bound to bite.

However, it seems others can also see Bo Hai's possibilities for a good port in a storm. Shenzhen Yantian Port Group and Hutchison Port Holdings have just announced joint plans to build a new container terminal at Yantia, on the tip of the north-facing promontory of Shandong. The initial phase will involve construction of 1.39m square metres of operational area linked to a 1,442 metre long quay, all calculated to snare traffic for the north of China.

Dalian Port, perched on the northeast Liaodong peninsular, is in a good position for its Pacific transhipment business (which is the mainland's second largest). But just as important is its other main string as China's largest oil terminal. Around half the shipping that goes through Dalian is oil - a more stable market by its nature - which means Dalian is positioned for a slightly less rough ride from the world economy.

However the central government is taking no chances and is stuffing incentives here too. January saw seven preferential policies including whopping packages for financial assistance, investment and support, plus a favourable tax regime starting up in the Free Trade Zone. And in February share prices of China's major port and shipping lines like CSD, Jinhui Holdings and Cosco shot up - apparently on the back of expectations of the Chinese government’s stimulus package.

In the middle of the coastline is the Yangtze River Delta and the cluster of ports around Shanghai, including Ningbo (the third largest), just across the water. Ningbo, Shanghai and Qingdao ports invested heavily in recent years - Shanghai's deepwater development boasts a 3,000 metre-long deepwater quay and 120 rubber-tyred gantry cranes plus a sophisticated logistics park: Qingdao recently put money into attracting reefer box trade with 55,000 square meters of cold-store alongside specialist Eimskip.

However, along with everything else, recent throughput has dipped sharply – although an unexpected share-price ‘bounce’ came for Shanghai when the government announced it would once again get behind its premier port’s ambitions.

Further, as Mr Su explains, all this east coast construction has left large areas unexploited. "This will be a new focus for the Chinese," he says. "The government has been trying to encourage investment and development from the east to the central and western areas," which implies further development of the Yangzte river ports like Chonqging, Wuhan and Nanjing.

Interestingly, David Lammie of Yangtze Business Services says: "We are looking at domestic demand, and despite the global situation, figures through for end of last year and January 2009 show reasonably strong growth - partly based on reconstruction efforts from the earthquake in Sichuan but also from other commodities going up and down the river, which is keeping traffic fairly strong."

He continues by saying that part of the government initiative is aimed at shifting focus from the coastline further west. "It has got more expensive on the east coast - so looking at the logistics issues alone, what is needed for further development is to open up the interior of China to inward investment," adding that this is expected to open up new areas of trade with Thailand and other Asian countries.

Also, Mr Su has noted another couple of threads to the Chinese direction. Firstly, that China is trying to cultivate the private equity market in the region, and also that "consolidation is good for the market" as far as the Chinese government is concerned, and it is actively helping acquisitions and mergers along.

So it seems from this that smaller port concerns may either be forced out or eaten alive in the current climate.
The obvious problem remains that, despite Chinese Premier Wen's assertion that he has "the confidence that China will work with the international community to get through the difficult times together", if the Chinese government are propping up certain ports at their end of the market, it is inevitable that other regions which don't benefit from such support may find the wheel coming off their port activities sooner rather than later

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