In the dock

Containing his excitement

Two reports from the port sector are worthy of note this week. At first they look a little contradictory. But on reflection they offer two different perspectives on conditions in China’s domestic economy.

The first is from Parash Jain and Mark Webb in HSBC’s equity research team in Hong Kong, and it concludes that volume growth through Chinese ports has slowed significantly this year.

The second comes courtesy of the Economic Observer newspaper, which is published in Beijing. It details a different problem: Chinese ports battling with tremendous congestion, as imports overspill.

How to explain the apparent conundrum: the slowdown in throughput for the ports in general, with the news of storage facilities bursting at the seams in some locations, as imports pile up quayside?

First the wider context, covered by HSBC. Jain and Webb discuss a slowdown so far this year, after a frenetic 2010 when businesses restocked in the West after coming through the worst of the global recession.

This year, performance hasn’t been anywhere near as spectacular. Of course, the growth data has to contend with a record high for comparison from 12 months ago. But the key point is that the restocking period has come to an end (indeed, the suggestion is more that another destocking cycle is underway, as companies cut back internationally in expectation of weakening economic conditions).

This then impacts directly on HSBC’s forecast, which assesses port throughput in terms of TEU volumes (‘twenty foot equivalent units’ – the jargon for standard-size containers), and tends to be more focused on exports. HSBC is still reporting a sector in positive territory. But the forecast is an 11% increase in throughput this year, a lot less than the 19% surge in 2010.

Some ports will perform better than others. The Bohai Rim in the northeast (primarily Tianjin, Qingdao and Dalian) will do best in growth terms because it is less reliant on exports to Western markets. But Webb and Jain are less optimistic for the Pearl River Delta ports in the south (places like Guangzhou and Shenzhen), where increases in labour and other operating costs are beginning to show up at manufacturers in the hinterland. The two analysts predict tougher times ahead, as more of the manufacturing base heads for other parts of the country in search of lower costs.

But the slowdown in the sector is also a result of tighter credit conditions at home, as Beijing’s policymakers try to rein in domestic inflation. And it’s these policies that are contributing to the congestion that the Economic Observer is describing in ports like Qingdao, Tianjin and Qinhuangdao. Here operators are desperately searching for warehouse space to store arriving cargoes of soybeans, rubber, plastics, pulp and iron ore.

Here the story is more about imports. The problem, the EO notes, is that many of the companies that normally snap up these commodities are now struggling with the impact of the credit tightening.

It gives an example of a state-owned rubber trader in Shandong, which has seen one of its largest clients get its bank facility reduced by a third this year. That means the customer is now procuring its raw materials on much more of a drip-feed basis, as it tries to reduce pressure on its working capital. In turn, the rubber trader has cut down on his own inventory, which then ricochets further back up the supply chain to the ports themselves, who suddenly have to find space to store a commodity pile-up.

Other newspapers are reporting similar stories: the Guangzhou Daily on cutbacks among soybean processors, and the Shanghai Securities News on reduced steelmaker collection of imported iron ore.

Both reports suggest commodities that are getting stuck “upstream” in the supply chain.

The EO says that the port of Qingdao, which is used to handling a ‘normal’ 2.8 million tonnes of backlog, is currently storing almost 13 million tonnes of arriving imports.

“Very bad news,” one port official admitted.

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