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China Freight Transport Report Q4 2010
Business Monitor International, Aug 2010
The China Freight Transport Report provides industry professionals and strategists, corporate analysts, freight transportation associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on China's freight transportation industry.
China’s move in June towards increased exchange rate flexibility (code for a degree of yuan appreciation against the US dollar) was in BMI’s view unlikely to have a major impact on freight transport operations. Investors were quick to trade on the news with shares in the country’s three largest airlines, Air China, China Southern and China Eastern rising. But any upward movement in the currency is expected to be gradual at best and we are sticking to these forecasts that the value of the yuan will end the year at CNY6,8270/US$. Indeed, the initial enthusiasm of investors surrounding the move appears to have given way to reappraisal as the carriers all saw their shares retrench later.
With up to 80% of Air China’s debt believed to be denominated in US$ or dollar-pegged currency, as are the prices of aircraft, like other Chinese airlines, the company would stand to benefit for a stronger yuan, particularly as this would likely offset the effects of reduced overseas demand for Chinese products as exports become less competitive. Though air freight operators could stand to profit from a revaluation, this fillip is unlikely to find its way into the pockets of Chinese ship owners.
Unlike aircraft, most Chinese ships are produced domestically, meaning lines would take little benefit from a relative fall in overseas production costs. Though a decline in the cost of bunker fuel would help cut expenditure, this would go only a small way towards offsetting what would almost certainly be a severe reduction in overseas demand for Chinese exports of clothes, household items and other manufactured products which are the bread and butter of Chinese container lines such as China Overseas Shipping (Group) Company (COSCO) and China Shipping Container Lines (CSCL).
Beijing’s understanding of the potential damage a one-off revaluation of the yuan would have on the country’s export sector is surely a factor in China’s overwhelmingly cautious approach to alteration of its exchange-rate policy. This reality was not lost on investors in the two shipping lines whose shares, unlike those of China’s major airlines, showed little movement amid the market’s otherwise bullish sentiment. China’s massive economic machine will continue supporting the freight transport sector, but there are signs that the engine is beginning to decelerate due to a combination of factors. Slowing property prices, stress in the banking system, weaker global demand for Chinese exports, the formal ending of the CNY/US$ peg, inflation and wage pressures all point to slower growth.
There are also signs that the economy is rebalancing away from export-led growth to a model more strongly based on domestic demand. Political risk factors will focus on potential labour unrest and the likely reaction of the ruling Communist Party. After 11.9% GDP growth last year, we see the economy slowing in both 2010 (to 8.8%) and 2011 (to 7.5%).
China’s airfreight industry is growing strongly and attracting greater interest from investors and international airlines as a ’consolidation play’. In 2010, we now expect airfreight volume to increase by 11.2%, more than offsetting last year’s drop of 3.9%. period to 2014.
The publisher maintains the view that road transport is set for continued strong growth as road connections across the country improve, the number of vehicles grow, and the pattern of freight demand shifts in a lower bulk/higher value direction. This year, BMI projects that cargo volume hauled on Chinese roads will rise by 8.0%.
Rail freight growth rates are beginning to moderate. Double-digit annual growth in tonnage volume is now unlikely looking forward. In 2010, we predict total cargo volume will rise by 7.8%, offsetting last year’s drop of 2.5%.
BMI is projecting an increase in volume at the Port of Shanghai (POS), up by 15.6%, after the 13.6% contraction during the slump last year. Going forward we believe growth will be level off quite abruptly. At the Port of Ningbo Zhoushan (PONZ) we see this year’s volume gaining by a very strong 27%. Shanghai is expected to see 10.6% container handling growth while PONZ will see growth of 5.1%. In real terms, we expect China’s total trade (imports + exports) to surge forward this year, following the sharp 13.5% fall in 2009. The recovery will see growth of 20.3% in 2010, more than making up for last year’s setback. However, 2011 will see the brakes applied again, with trade growth reducing right down to only 2.5%, making for three very volatile years. BMI’s medium term forecast is for average annual real terms trade growth of 7.9%, almost on a par with GDP, and representing something of a slowdown on the earlier part of this decade.
In fact, we believe that behind these rather stop-go figures a fundamental realignment is taking place, with the driver of the Chinese economy shifting from exports to internal demand. Notably, over the next five years we expect imports to grow by an annual average of 9.9%, significantly above exports of 6.3%. The main risk factor for the China freight transport forecasts lies on the downside, and is represented by a greater-than-expected ’double-dip’ global economic slowdown in 2011, potentially in the worst scenario. combined with the outbreak of a US-China trade war. Reciprocal trade sanctions between Washington and Beijing could lead to quite sharp reductions in bilateral trade volume.
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