THE CHINA FACTOR

In every sector of our industry we talk of the ‘China factor’.

Container ships running the westbound China-Europe, or eastbound trans-Pacific legs are regularly operating at close to 100% load factors. To feed China’s ravenous export industry, bulkers laden with coal and ore, inundate the country’s bulk terminals. Indeed, the demand for raw materials is so great that daily charter rates for all sizes of bulkers having tripled in just over a year. Meanwhile, in January, charter rates for Suezmax vessels hit their highest levels for 30 years.

It is understandable that so many foreign companies – from multinational consumer goods manufacturers to logistics providers and port operators – are so interested in establishing a presence in the country. Container volumes have risen 25-30% year-on-year over the last decade, and analysts say that rate shows no sign of slowing down. John Fossey of Drewry Shipping Consultants says: “You are still looking at annual 7-9% growth in GDP. It normally follows that container growth is then two to three times that, and really in the whole of international shipping, there’s not one part that isn’t in some way affected by what’s happening in China.”

But how much this will impact on the global port industry is as yet uncertain, and much will ultimately depend on the exact manner in which the Chinese government decides to reform this sector.

Currently it seems that bulk facilities such as the coal terminals at Tinajin, Guangzhou and Shanghai are firmly off the menu, considered by the government as vital strategic points, which is hardly surprising given China’s seemingly insatiable appetite for energy. However, new investment opportunities in container facilities for foreign operators appear to spring up almost daily and there is little doubt that with current growth rates there is a definite need for both foreign capital, as well as new terminal capacity.

“The single biggest challenge that China faces is being able to keep up with its growth potential, ” says Fossey, adding: “While certainly its international port facilities are gearing up to begin matching international standards in terms of handling efficiency, there is still enormous pressure on hinterland transport systems, and there’s always the problem of lack of capacity throughout the country looming. It’s quite possible that this year China’s total container throughput will be 40mTEUs, and handling that is one hell of a tall order.”

As always in the transport industry, the supply chain is only as strong as its weakest link, and recent developments have shown how concerned the major shipping lines are about securing short and longterm quay and yard capacity. Currently no container terminal concession has been given to a carrier that wants to use it as a dedicated facility. Chinese law states that it has to be a common user terminal, but Fossey believes this may be about to change as Shanghai’s massive new Yangshan port development moves closer towards the onset of operations.

“Up till now no carrier could operate its own terminal but with Yangshan the criteria may be about to change, because it’s such a big facility that the port authority could decide to immediately recoup some of its investment by offering parcels out to carriers. Certainly all of the carriers are publicly expressing interest in operating their own terminals there, ” he says.

Indeed, in PS’ last China feature (October 2003), Hutchison Ports Holdings (HPH) group managing director John Meredith said he believed shipping lines would be invited to take concessions, and as a result HPH would not tender for any of the common-user concessions. Bids for the second phase of the project – the five-berth first phase is solely owned by Shanghai International Port (Group), formerly Shanghai Port Authority, and has been financed using domestic resources – are expected to be invited in the middle of this year. Whether foreign investors will be allowed to hold the operating or management rights remains a murkily unanswered question, although given China’s WTO commitments many feel it is safe to assume that management control will indeed be handed over to foreign operators.

Even with the current uncertainty, a raft of international terminal operators and shipping lines have so far shown interest in the scheme including Cosco, AP Moller Terminals (APMT), plus Singapore’s PSA Corp and Britain’s P&O Ports. However, if there is any such bet as a ‘sure thing’ in China’s reform it is that Hong Kong-based Modern Terminals Ltd (MTL) will be operating some sort of facility there. Not only has MTL signed a deal with Chinese carrier China Shipping Group (CSG), but under the terms of the Closer Economic Partnership Agreement (CEPA) signed between the Beijing government and the Hong Kong executive last year, Hong Kong firms will be allowed to operate fully in China one year ahead of other foreign firms. MTL has an undoubted head start and given managing director Eric Bogh Christensen’s repeated enthusiasm for Yangshan, if any foreign operator is allowed to participate, MTL should be the first.

But Shanghai is not the be-all and end-all of the Chinese port industry. Indeed, where other regions of the world are seeing lines often consolidating their port calls, in China carriers are by and large expanding their coverage with direct calls to an increasingly diverse number of ports. “Partly it is to do with the state-governed tariff system, which ensures that box handling rates at Chinese port are very low, but it’s also the fact that there is so much cargo coming out of different parts of China that a direct call often makes sense, and that’s the trend for all mainline services, ” says Fossey.

Recent evidence of this is the way in which the Bo Hai ports – Tianjin, Dalian and Qingdao – and other smaller ports further south such as Xiamen and Ningbo, have been transformed over the last couple of years from small facilities handling China’s cabotage business and a smattering of intra-Asian trade, to now being an integral part of many carriers trunk Asia/Europe or Asia/North America routes.

GO WEST!

But while the shipping industry enjoys the current bounties produced by the China trades, the country’s leaders are casting nervous glances towards its western provinces. One of the most sensitive issues in Chinese politics is the growing economic gap between its surging coastal areas and it’s poverty-stricken west, and Beijing is particularly sensitive to the accusation that it is doing nothing to encourage growth in the west.

Hence the ‘Go West’ policy, which some believe will open up China’s hinterland to terminal operators, as well as forwarders and intermodal transport operators. At present the hinterland artery that is enjoying the most success is unquestionably the Yangtze corridor, and foreign participation, on a modest level at least, is already present in Nanjing – which handled 470,000TEUs in 2001 and is projected to handle nearly 2mTEUs by the end of the decade – and Chongqing. Not only that, but many carriers now have their own almost completely dedicated barge services on the river, although regulations currently forbid them from deploying their own tonnage.

“It’s often the case that Maersk Sealand, APL or OOCL will go to a local barge operator and take all of its available space then effectively run the service so that it links with the carrier’s deep sea services.

There is exclusive control of some barges.” adds Fossey.

A source at OOCL confirms that the Yangtze remains its premier intermodal route, and while he adds that the rail network has potential, that is dependent on a substantial investment in infrastructure, rolling stock and IT systems. “Currently, the demand exceeds the supply of railway transportation. The increase of capacity supply of railway will only narrow down the gap between supply and demand. Only about 5 % of our goods are via rail. One must not forget the other great cargo network and that is via the inland waterways which compete with the rail on many fronts, ” he says.

WHO WILL GET THERE FIRST?

It is not too huge la eap of the imagination to predict some sort of future carrier involvement in the operation of Yangtze river terminals, unless of course terminal operators can get there first.

Even so, in the government’s tenth five-year plan (2002-2007), huge amounts of funds have been reserved for infrastructure developments in the west to improve its connectivity with the outside world. But some transport operators question how soon the benefits of this will start to become apparent. “Business managers seem reluctant to locate full production capacity in the west, despite the government initiatives, i. e. tax incentives and cheaper land development, because when everything is taken into account the costs of manufacturing and distribution exceed those on the coastal belt, ” says Brian Lutt, APL’s president for greater China.

While exports from China’s coastal areas have risen by 40% over the past few years, exports from the western interior have been only half of that, and recent research by Drewry has revealed that the vast majority of China’s container traffic originates, or is destined for, only 150 miles inland from the coast. As with everything in China that is changing and Ford’s recent establishment of a new facility in Chongqing is an example of increasing amounts of foreign direct investment in China’s hinterland.

HUGE OPPORTUNITY FOR FOREIGN FIRMS For these projects to achieve any significant level of success though, no one is under any illusion that the supply chain needs significant strengthening. For container traffic this particularly concerns the creation of a network of inland freight depots, and some operators believe this requirement represents a huge opportunity to foreign firms. “There is no reason why an international operator could not set up a similar sort of inland network that we see people such as P&O Ports or ECT doing in Europe, ” says one port executive in Hong Kong, “In fact, the need for this sort of thing in China is more pressing than anywhere else I can think of.”

Also as has been seen in Europe, it might well be that terminal operators begin to take a greater interest in running intermodal services themselves. Certainly HPH recently took the lead in this respect with the launch of its new multimodal services on the Shenzhen Pingyan Railway (SPR) in which HPH holds a 65% stake, with the remaining 35% held by the Shenzhen Yantian port company. The service links the HPH-operated Yantian International Container Terminal (YICT) with the northern Chinese hinterland beyond Guangdong – one of the areas promoted in the ‘Go West’ programme – and is set to take advantage of the economic growth there.

With an overall investment of around $42m, the service employs five diesel locomotives along the dedicated 24km of its three railways, after which it links up with the main rail arteries out of Guangdong. SPR also has a 50,000 square-metre container facility serviced by 18 forklifts, 4 reachstackers and a RTG. “With the advantage of YICT’s deep-water port status in southern China, Pingyan Railway is able to offer excellent multimodal transportation services including departure, arrival and transhipment of dedicated trains, railway containers, international and railway reefer wagons.

The transhipment of breakbulk truck cargo and other related business are also incorporated into Pingyan Railway’s services, ” says an HPH spokesman, although he declines to reveal its current volumes.

This strategy of providing value-added services and intermodal links could be set to become one the most important weapons in the terminal operator’s armoury. However warns Fossey, it will take time, as container penetration levels in much of the interior remains in the 40-60% range, and a considerable amount of general cargo still moves as breakbulk. “The principal reason for this is cost with many shippers in the interior extremely sensitive to price, and breakbulk tariffs generally lower than those for containers, ” he says, “This has been compounded by the fact that many have not been made aware of the real cost and service benefits associated with the container.”

Nonetheless, all in the industry agree that container penetrations levels will certainly rise. The opportunities that this will present to carriers and terminal operators are enormous. The real challenge is to identify correctly the best locations for terminals and – and this is true of any foreign company investing in China – choose good local partners.