ECONOMIC SLOWDOWN PUTS THE BRAKES ON SHIPPING TRAFFIC IN THE

UNCLAS SECTION 01 OF 03 SHANGHAI 000111

SENSITIVE
SIPDIS

STATE ALSO FOR EAP/CM, EEB/TRA
TRANSPORTATION FOR DAS JOEL SZABAT
STATE PASS USTR FOR CHINA OFFICE - AWINTER, TWINELAND

E.O. 12958: N/A
TAGS: EWWT EIND ECON EFIN ETRD PGOV CH
SUBJECT: ECONOMIC SLOWDOWN PUTS THE BRAKES ON SHIPPING TRAFFIC IN THE
YANGTZE RIVER DELTA

REF: A. A) 08 BEIJING 4679

B. B) GUANGZHOU 009

C. C) BEIJING 443

(U) This message is sensitive but unclassified.




1. (U) Summary: Previous unrestrained growth in the Yangtze
River Delta has left the shipping industry making unprecedented
decisions to cut costs, shift assets, and survive during the
economic downturn. Shipping companies have dramatically cut
rates and some are operating at below cost, further driving down
any short-term profitability. Compared to South China, industry
experts say it is not all gloom in East China with some
container shipments and bulk traffic supporting port activity.
The Yangtze River Delta is doing comparatively better than South
China, according to East China shipping industry participants.
End Summary.



Port Traffic Cooling Down
--------------


2. (SBU) Two of the top ten ports in the world are found in the
Yangtze River Delta, Shanghai and Ningbo, making the region's
ports a key bellwether of world trade activity. Container port
traffic has contracted considerably across all ports in the
Yangtze River Delta covering Shanghai (Yangshan and Waigaoqiao),
Ningbo, Zhoushan, and Lianyungang. The Yangshan Deepwater port,
although capable of impressive loading rates at almost 700
twenty-foot equivalent units (TEU) per hour, is currently
operating at 20 percent below capacity. On a mid-February visit
to Yangshan Port, which handles 60 percent of Shanghai's volume,
Econoff noticed that there were no cargo containers being
loaded, unusual for a busy port where 24 hour operations have
been commonplace to keep with annual double-digit growth. Port
officials said that shipments had dropped by 30 percent since
their peak in 2008. Yangshan Port General Manager Jiang
Gongsheng told Econoff that he is running two instead of three
work shifts, and many employees are assigned to training during
this downturn. Yangshan typically services four shipments a
week for the Middle East and European trade lanes. The other
major Shanghai port, Waigaoqiao, which currently handles the
vast majority of U.S.-bound cargo originating from or transiting
through Shanghai, has also seen similar reductions in traffic
volumes. More strikingly, Lianyungang in northern Jiangsu
Province, China's ninth largest port in TEU handled in 2008, had
no noticeable container ships berthed for loading, minimal
container truck activity, and noticeably open berth side
container yard space during a March 3 site visit.



Lower Commodity Prices Pushing up Bulk Volumes
-------------- -


3. (SBU) Lianyungang port authorities on March 3 nonetheless
maintained that the drop in export demand from the world
economic crisis has not affected overall port activities on a
large scale. Ports in the YRD region are showing a steady
growth of bulk commodity imports fueled by domestic demand for
raw materials and natural energy resources due to higher levels
of government spending for infrastructure projects, according to
a recent report from Cargonews Asia. (Note: Oil prices have
dropped since December 2008, instigating a rush to purchase and
stockpile oil at cheaper prices; see ref B. End note.) The
Shanghai ports are continuing to process ships loaded with coal,
crude oil, iron ore, and other natural resources for further use
in upriver provinces and municipalities all the way to
Chongqing. Bulk dry cargo in the area has grown on average at
17.2 percent annually for the past 10 years, but industry
experts are expecting a slower growth rate of 8.2 percent in

2009.



Shippers Preparing for the Worst, but Optimistic

SHANGHAI 00000111 002 OF 003


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4. (SBU) Ocean freight forwarders, who are the first to analyze
shipping orders coming through the manufacturing pipeline, claim
that shipping companies' drop in revenue during the last quarter
of 2008 was not a complete surprise. Signs of the decrease in
demand were seen at the end of second quarter 2008.
Particularly troubling, however, are the rates at which ocean
freight revenues and volume plummeted in the beginning of fourth
quarter 2008, reports William Chan, Vice President of American
President Lines (APL) Logistics China. According to Chan,
certain shippers in the region were offering container rates
below cost just to fill up capacity commitments.



Rock Bottom Prices for Containers, but Still no Cargo
-------------- --------------


5. (SBU) December and January cargo rates fluctuated as demand
was dropping and capacity was taken out of use to stabilize
prices. Even so, cargo rates dropped on a weekly basis in
February across all trade lanes. The price of one transpacific
container which at times in 2008 cost USD 1200 plus additional
fuel and other surcharges has dropped down to two to three
hundred USD with all surcharges included. Despite price
incentives like reduced fuel costs, renegotiated contract rates,
and lower ad hoc rates to move cargo, according to Juan
Bautista, Asia Headquarter General Manager of Werner Global
Logistics, there is no freight to move.


Not Doing Well, but Better than the Pearl River Delta
-------------- --------------

6. (SBU) Bautista also pointed out that the Chinese New Year
peak shipping season for container export cargo started earlier
this year which may skew overall year on year figures, but many
factories in the YRD area have been on hiatus since December
2008 to February 2009 with no major activity in sight.
Companies that were once aggressively competing for space to
move their cargo during the three peak seasons, Back-to-School,
Christmas, and pre-Chinese New Year, are not expecting any peak
seasons at all in 2009. However, shippers in the East China
region all agree that they are not doing as well compared to the
Bohai Bay in the North, but are confident that the Yangtze River
Delta market is certainly doing better than the Pearl River
Delta market (refs A and B). APL's Chan believes that the
container shipping industry as a whole will show signs of
recovery in 2010.


Playing Risky Roulette in the Shipbuilding Industry
-------------- --------------

7. (SBU) More than half of China's shipbuilding industries are
concentrated in Shanghai, Jiangsu, and Zhejiang areas in terms
of the number of shipyards in the area. In recent months, the
industry has been faced with surpluses of ship inventories where
there once were heavy backlogs. Chinese shipbuilders produced
on the assumption there will always be demand for capacity out
of China, an environment of unfaltering and continuous growth.
(Note: With average five-year timelines from order to ship
delivery, the shipbuilding market is a very risky, capital
intensive industry. Compared to other shipbuilding countries,
China is even more speculative due to port development in
parallel with ship building orders; see ref C. End note.)


Avoiding Losses at All Costs
--------------

8. (SBU) Ship owners' responses, although varied, are aimed
towards cost-cutting measures minimizing losses from speculative
orders for new ships placed up to 5 years ago. Shipbuilders in
East China are seeing common cost-cutting responses such as
delays in orders or earlier retirement of existing ships. What
was once unheard of before, some shippers are choosing
last-resort measures like order defaults (with time delays built
in for court proceedings) or cancelling new builds, both
exceptionally costly options.

SHANGHAI 00000111 003 OF 003




Shifting Ship Inventories
--------------


9. (SBU) APL, one of the largest shipping lines in China, saw
ship utilization capacity fall to 83 percent in fourth quarter

2008. While dealing with the drop in demand for cargo space,
APL is also facing twenty-eight new vessel commitments due from
2009 to 2012. According to APL's Chang, the thirteen ships
committed for delivery in 2009 will replace ships that will be
forced into early retirement while the remaining contracts have
been negotiated for delivery in 2010 and 2012. During February
meetings with China Shipping and COSCO, two of the largest
Chinese state-owned shipping companies, company executives
report no slowdown in growth plans in spite of the drop in
demand. COSCO's Cosco Shipbuilding subsidiary even plans to
expand ship repair and conversion operations opened in 2008 in
Lianyungang to facilitate shipbuilding operations in the near to
medium term. (Comment: Ship order activities are matters that
fall into sensitive company internal information. China
Shipping and COSCO offered conflicting information compared to
industry observers in regards to the existence or number of
cancelled or delayed ship orders. End Comment) (Note: China's
economic stimulus plan will directly support the shipbuilding
industry. Stimulus plan directives for the shipbuilding
industry include: supply domestic ship line demand with
domestic products, encourage scrapping of aged ships and buying
of more new ships, offer financing for new ships, adjust export
tax rebates, and consolidation in line with the automobile
manufacturing and steel industries. For details see ref C. End
note.)



What Happened to the Unused Capacity Space?
--------------


10. (SBU) In describing the unprecedented changes to the market
in recent months, Jannson Chan, ocean freight director of DSV
Air and Sea, noted that 800,000 TEU, equivalent to 100 fully
loaded container ships, were pulled from the entire China market
ship capacity this January in an attempt to boost rates slumping
from overcapacity. Anecdotal information from an executive from
APM Terminals and Shanghai maritime safety officials reveals
that hundreds of laid up vessels are anchored at sea near ports
in Singapore, the Philippines, and Shanghai and Ningbo. Empty
containers have been stored since Chinese New Years on unused
vessels to save demurrage fees. In Lianyungang, where China
Shipping has a large joint venture that manufactures containers,
unused new containers numbering in the thousands can be seen
from the main highway, stacked seven containers high - taller
than the factory building in which they were made and laid out
across company property and on nearby open lots. That container
factory has at least temporarily ceased production and workers
are currently just receiving a minimal monthly payment (shenghuo
fei) to avoid unemployment and the possibility of social unrest,
according to Lianyungang municipal officials speaking in early
March.
CAMP