Chinese Fuelling Local Growth

Asian giant's huge appetite for goods and materials is taxing cargo capacity and pushing up freight rates

As China continues to suck up imports on its way to achieving spectacular economic growth, the local shipping industry is all smiles from this once-in-a-century bull market.

Yet although demand is thriving, cargo capacity is not catching up for two main reasons.

Shipbuilders are reluctant to build carriers for commodities, Khalid Hashim, managing director of Precious Shipping Plc, said last week.

"As anecdotal evidence, Hyundai Heavy Industries, the single largest shipbuilder in the world, has only built one Capesize [class] dry bulk ship in the whole of 2003," he said.

Neither does Hyundai have an order for a dry bulk ship this year, next year or 2006, when they have sold out of their capacity, he said.

Capesize vessels are too big to navigate the Panama or Suez Canals.

Major global raw-material suppliers and receivers are also reluctant to sink money into infrastructure, which leaves ships at sea waiting for a berth to open and leads to unproductive throughput at ports.

Particularly at busy Asian ports, the bottlenecks are forcing freighters to line up for a month or more to pick up cargoes to feed industrialising China's hunger for raw materials.

"If you look at the current situation about 9 per cent of all dry bulk ships in the world are not available for use as they are tied up in congestion. This congestion is a direct result of the explosive demand growth from China and the almost zero investment over the last decade by the raw-material suppliers and receivers in the world," Hashim said.

The local marine-transport industry is likely to grow by 10 per cent this year on the back of rapidly rising demand for imports and exports, said Paiboon Ponsuwanna, secretary-general of the Thai National Shippers' Council.

Sea industrial freight rates have been surging over the past year and are expected to climb throughout this year.

China's voracious appetite for imports, especially building materials, has made almost all of the world's ships gravitate to the Middle Kingdom, leaving traders with no choice but to pay higher freight charges. "The rapid growth of China's economy, with stimulation from building lots of facilities for the Olympic Games in 2008, makes for a huge need for shipping," Paiboon said. However, next year freight rates are likely to stabilise because new ships will be coming into the market, he said. "Building a ship takes 18-24 months."

Exporters of food and agricultural products, which often quote prices at C&F (cost of product plus freight), are exposed to a profit-margin squeeze from higher freight costs, while others selling at FOB (free on board) are protected because their customers bear the transportation costs.

Yanyong Tangchitkul president of the Customs Brokers and Transportation Association of Thailand, said a rash of bad news, to wit the bird flu outbreak, the violence in the South and the stalled privatisations of state-owned firms, would weigh on exports this year.

"These factors influence the confidence of importers and exporters worldwide. If the government can't handle the problems, exports will suffer, and so will the shipping business in the end," Yanyong said.

Local shippers have also had to add staff and transportation assets because the government wants them to transfer container unloading from Bangkok Port to Laem Chabang Port in Chon Buri.

"Most shipping companies are located in greater Bangkok, but container unloading volume at Bangkok Port now is only 1.5 million 20-foot equivalent units (TEUs) per year.

"That doesn't balance when compared with Laem Chabang Port's annual unloading volume of more than three million TEUs."

Of the total container unloadings in the country, 60 per cent are at Laem Chabang Port, 30 per cent at Bangkok Port and the rest elsewhere, he said.

Most shippers are small firms that cannot compete with overseas companies which have integrated networks and plenty of capital, he said.

"Mergers among the small companies is the way out for Thai shipping firms," he said. "The big shipping companies normally deal with large exporters, so there's still room for Thai companies, which are strong enough, to capture other market niches."

Suwit Ratanachinda, president of the Thai International Freight Forwarders' Association, said the shipping business might be bustling but that did not mean good times for freight forwarders.

Conversely, forwarders are finding it tougher to run their businesses.

"We're the middleman between shipowners and producers. If freight rates jump, we have to add them to our charges, which usually gets us blamed by customers," Suwit said.

The forwarders benefiting from the current situation are overseas forwarders that have their own ships and networks. They have an advantage in finding customers in that they can offer integrated services, and they gain from the escalation in freight rates, he note.