Drastic action required as China’s excess boxport capacity creeps towards 100m teu

Dalian correspondent Jason Jiang will be writing weekly in depth features for Splash starting today with a look at China’s massively overbuilt ports scene.

Go back to the 1990s and a list of the top 20 container ports in the world featured a fair smattering of Japanese cities. Japan built ports aplenty towards the end of the 20th century, but like the nation’s bridges to nowhere, it soon regretted such excess. For much of the past two decades Japanese ports have had to counter all that terminal construction with mergers of regional ports. No Japanese port has been in the top 20 boxport list this decade.

Of course, the top 20 is littered with Chinese names, and will be probably in perpetuity. Including Hong Kong, mainland China has nine of the top 20 slots in fact. China’s ports buildup has been on an unprecedented scale since 1992 when Li Ka-shing and Hutchison Port Holdings got a prized first contract on the mainland to develop Shenzhen’s Yantian port. Still, in Newtonian terms, what goes up, must come down: excess capacity is now very visible up and down the coastline. Quay cranes are in a raised state as the Chinese economy slows. Port mergers, like Japan, are now the way ahead.

Olaf Merk, a ports expert with the OECD, says China has around 50m teu container port capacity in surplus to actual volumes. To put that 50m figure in perspective, that’s more than the combined throughputs of Japan, South Korea, Taiwan and Russia.

“When looking at what is already in planning, things could get worse, with surplus capacity to reach almost 100m teu in 2030,” Merk warns.

The main reason for this overcapacity is the combination of lower trade growth in China and competition between Chinese cities, he explains.

“Many Chinese mayors are ambitious and want to have the biggest port; this has led to a highly uncoordinated infrastructure construction frenzy , resulting in port capacity that could be effectively used during the period of double digit growth, but that becomes redundant in the current climate,” Merk explains.

The central government has called local provincial government and major ports to optimise operations and capacity through integration.

Zhao Nan, research director at the Shanghai International Shipping Institute (SISI), says restructuring will carry on for years. The Yangtze River ports will also start a new round of mergers and restructuring soon, Zhao says.

Currently a series of sweeping port reorganisations are ongoing across the nation.

In 2015, the Zhejiang government started the integration of five major ports in the province including Ningbo Port, Zhoushan Port, Jiaxing Port, Taizhou Port and Wenzhou Port. The government has established a new entity named Zhejiang Port Investment Operation Group (ZPIO) to operate the ports under one platform. The group will also be the largest port company in China – and the world – in terms of port throughput upon completion of the restructuring. So far, Ningbo Port has completed a merger with Zhoushan Port.

Zhejiang completed overall port cargo throughput of 1.1bn tons in 2015, with Ningbo-Zhoushan accounting for 890m of the total.

Tianjin Port is currently in collaboration with Heibei Port Group, which operates a number of major ports including Tangshan Port, Huanghua Port and Qinhuangdao Port in Hebei. The two port groups have established a joint venture Bohai Tianjin-Hebei Port Investment and Development Company to jointly invest and operate port terminals.

Tianjin is a port picked out by well known Hong Kong-based transport analyst Charles De Trenck as perhaps the most reckless when it came to expansion in the previous decade.
“It boggled my mind 15, 10, and 5 years ago,” he says.

To the south restructuring is also underway. Xiamen Port and Zhangzhou Port in Fujian, have already completed a merger in 2014, while three major ports in Guangxi, Qinzhou Port, Beihai Port and Fachenggang Port have all been restructured into Guangxi Beibu Gulf Port Group in 2013.

Currently the most complex and difficult port restructuring is in Northeast China.

Along the short coastline in the Bohai Rim, there are four major listed port companies including Dalian Port, Jinzhou Port and Yingkou Port in Liaoning and Qinhuangdao Port in Hebei.

In the first quarter of 2016, Liaoning province ranked the last in all Chinese provinces in terms of GDP growth. The economic recession of what has often been dubbed China’s rustbelt area has directly led to weak shipping demand in the region, while the ports are also competing with each other through lower prices for their own survival.

The government has proposed to establish a provincial port company to operate all the ports under one roof since 2014, however, there hasn’t been any progress yet.

“The ports in Liaoning are going through very difficult times and the malign competition among the ports is further worsening the situation. There are too much repeat capacities and functions in the ports, which would make the restructuring even more difficult,” says Lv Jing, a shipping economist and the dean of the Transportation Management College at Dalian Maritime University.

“The port restructurings must be based on suitable business models and pure administrative integration arranged by the government authorities is not going to work. But the cost of the business restructuring is also very high, especially for those major port assets, and the balancing the interest of each local government is also crucial, ” Lv says.

SISI’s Zhao has a few suggestions for the future port restructurings, “Firstly, the coordination between local governments should be enhanced, they could learn from the Collaborative Development of Beijing, Tianjin and Hebei Province Initiative, secondly, the coastline resources management should be improved to monitor and supervise the port capacities. Thirdly, the anti-unfair competition regulations should be strengthened.”

James Frew from UK consultants Maritime Strategies International reckons China has some tough choices to make when it comes to remedying its bloated ports scene.

“I don’t believe there are easy answers,” he says, citing issues of the expansion of neighhbouring Busan. The South Korean port expected to take transhipment cargo from China and actually geot very little due to the huge expansion of Chinese port capacity.

“It is further complicated by the different provincial governments in China backing their own ports,” Frew observes. “Shandong province, for instance, is not going to accept a rationalisation of Qingdao’s capacity because Tianjin is gaining market share.”

Two remedies according to Merk from the OECD would be to slow down expansion plans and increase coordination between ports.

Phase in new capacity in line with demand rather than with politicians’ ambitions, Merk urges.
As well as Beijing looking to Japan as to how to combat overcapacity, the mandarins in the Chinese capital could do worse than looking at South Korea, Merk says, where a national ports policy sets out the specialisations of each port in the Korean port system.

Whatever is decided, it appears Chinese port construction has plateaued.

Next week Jason will be looking at why there are still so few women serving onboard merchant ships.