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by Jonathan Beard, managing director,
GHK (Hong Kong) Ltd
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Dr Jonathan Beard is managing director of GHK (Hong Kong) Ltd that is part of the global GHK Group, a leading logistics and economic development consultancy. Financial advisors, potential investors, operators and governments regularly seek his opinion on logistics policy and development. Dr Beard was lead author for the Hong Kong Port Master Plan 2020, Hong Kong Port Cargo Forecasts 05-06 and the Shanghai Port Master Plan 2003. He has recently finished reviewing a major port investment on the West Coast of North America serving the Asia-Pacific trades and also provided support to the successful bidder for the Karachi New Deepwater Port. In addition to his work on sea ports, Jonathan has also worked extensively in the aviation sector and has been retained over a number of years by Airport Authority Hong Kong to advise the Board and senior management on competitiveness strategies and master-planning. He is currently President of the Hong Kong Institute of Management Consultants, and holds a BA, MA and PhD from Cambridge University. |
A key challenge for policy makers is to ensure adequate capacity and competition in port services, without generating dramatic over-supply: "white elephants" are neither good for the economy nor the environment. Meanwhile, for operators and investors, there is clearly a desire to ensure maximum utilisation of facilities and avoid a financially destructive price war for cargo-typically a by-product of significant surplus capacity. Shippers and shipping lines on the other-hand may welcome such a scenario.
Probably nowhere on earth has the development of container terminals been so rapid as China. The supply side response and the ability to quickly introduce additional capacity, both in terms of new-build but also via productivity enhancements at existing terminals have been phenomenal. These issues are starkly highlighted in the development of port facilities servicing two of China's key economic regions-South China (Guangdong Province plus Hong Kong) and the Yangtze River Delta (YRD). However, as this article suggests, the two regions may be heading for contrasting futures in terms of the projected balance between supply and demand for terminals.
Before presenting the analysis, a word of warning. Forecasting future terminal capacity is far from straightforward. Even assuming that development programmes and Five-Year Plans are adhered to, the capacity of any given facility at any point in time may vary according to a variety of factors. These include: operational productivity; the ratio of 20ft to 40ft containers; the average number of container moves (containers unloaded and loaded) per vessel call; the vessel size mix; the ratio of transhipped to direct (land or inland waterway) containers; throughput variation during the year ("peaking"); the effects of working close to capacity on customer service and satisfaction; etc.
With due regard to these caveats, Figure 1 shows, for South China, the balance between the supply of container terminal facilities (presented as total capacity) and demand - the "cargo base". The trend over time for capacity shown in Figure 1 assumes that capacity increases at a uniform rate between the benchmark years identified in various development plans. In truth, this may not be the case as additional capacity may arrive in lumps.
The "cargo base" means the international cargo (inbound, outbound and empties) generated by the South China economy. It should be noted that in addition to South China international cargo, ports may also handle transhipment cargo. Moreover, some of the capacity within South China, notably Nansha and Guangzhou is primarily occupied with feeder traffic - this throughput would not be included within the South China international cargo base projections. Nonetheless, the key point is that South China appears to have moved from a position of highly constrained CT supply - i.e. when Hong Kong was the only major container port - to one of surplus capacity, which is likely to continue until the end of the next decade.
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Some of the additional capacity may be soaked up via handling transhipment (and feeder) traffic, however the impacts for port competition are clear - significant excess capacity chasing cargo, which will likely put downward pressure on tariffs. Furthermore, it seems fair to assume that South China ports will also be keen to handle transhipment cargo and hence compete with Hong Kong in this market - there will likely be strong lobbying to ease current Mainland restrictions on transhipment.
A key question is whether any checks and balances come into play. Will the projects that are primarily driven by local government support (and related subsidies), rather than commercial logic, be reined in as the proponents (and related commercial operators and investors) start to be concerned about lack of throughput volume and falling profitability?
Will those operators with major investments in Hong Kong and Shenzhen - China Merchants, MTL and Hutchison Port Holdings - be able to exert any control over the balance of supply and demand and the downward pressure on revenues or will the excess capacity induce a price war (on the basis that "any cargo is better than no cargo")? On the other hand, the lower prices and increased choice of port services are clearly of benefit to shippers and shipping lines. Beyond the negative environmental impacts, should policy makers therefore be worried about significant surplus capacity if the investment risk has been largely allocated to the private sector?
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Figure 2 presents a similar analysis for the YRD. The capacity analysis covers Shanghai and Ningbo, plus the smaller ports of Lianyungang and Taicang. The absence of any significant capacity over-hang, especially post 2012 is clear. Given this context, it seems likely that the additional 14 berths that could be developed at Yangshan will be brought on stream before 2020 - i.e. 50 berths by 2020.
The tightness of capacity should ensure that there is no significant chase to the bottom for cargo - operators should be able to protect their tariffs without seeing a substantial migration of cargo to other ports. The competition is primarily between Shanghai and Ningbo for the YRD cargo base (Lianyungang and Taicang are unlikely to be major players). Competition from Bohai Rim and South China ports will be minor. There is only limited overlap between hinterlands and hence little of the YRD cargo base is contested by ports from other regions. For international transhipment there may be some competition if Mainland restrictions are lifted. This is in addition to the international competition from Busan, Hong Kong, Kaohsiung, etc. However the projected supply-demand balance indicates that the YRD ports will have the luxury of deciding whether they want to top up with this footloose, lower revenue cargo or not. Moreover, their substantial base-loads of origin/destination (O/D) cargo will ensure high liner connectivity and add to the competitiveness of both Ningbo and Shanghai for O/D and transhipment cargo, before they even need to start thinking of cutting charges.
Given the high demand for port services, relatively tight supply, limited competition for Shanghai, and extremely high capital expenditure for Yangshan (notably the road link to the terminal platform), the headline handling charges for Shanghai are surprisingly low, especially when compared with the rates in South China and elsewhere. This remains the case, even with the tariff increases announced at the end of 2007. A key influence and point of departure from Hong Kong and South China, is the prominent role taken by government (through the Shanghai International Port Group) in keeping prices down. Rapid volume growth at the new Yangshan, keeping transport costs down for YRD manufacturers and a desire to top the throughput league tables appear to be higher political priorities than cost recovery for the substantial, public sector investment at Yangshan¡K.certainly for the time being. |
