China's fantastic pace of growth has put strong pressure on its logistics industry. Now government is taking measures to ease strain and create more room for growth

----By Lee Perkins

China, the world's second-biggest energy user, raised electricity prices on June 30 for the first time in more than a year. The move, part of a gradual government plan to help generators cover soaring energy costs, prompted a rise in Chinese power company stocks in Hong Kong. Huaneng Power International Inc, the nation's biggest generator, raised prices by as much as 7.3 percent. With the Chinese economy so dependent on imported energy, economists expect price pressures to increase inflation, a serious worry for a government already concerned about rural unrest.

China's ever-growing appetite for natural resources, and a dearth of adequate investment in commodity handling infrastructure, has strained supply chains across the country and led to a logistics logjam that has pushed up both global shipping rates and commodity prices.

Coal generates two-thirds of China's power and imports account for almost 30 percent of the country's increasing demand for oil. Recent logistics crunches have caused brownouts and forced some factories to operate on limited schedules or at night. To make matters worse for shipping lines, eyeing the threat of social discontent in provinces hit by surging food and fuel prices, the government has prioritised transport of domestic coal and grains.

Maximum capacity

China's railroad squeeze became acute in January when railroads switched to hauling passengers for Chinese New Year, and the effects became global as ships were forced to wait outside ports. "In terms of railways, China has to prioritise domestic [population] transport," said Mark Millar, Honorary Chairman of the China Supply Chain Council at the 3rd Trans Asia Conference in Dalian in April.

According to figures released by China's Ministry of Railways on June 8, the nation's trains carried 1.39 billion tons of freight in the first half of this year, a 6.3 percent rise over the same period last year. Despite the rise, most trunk lines are still operating at maximum capacity.

The current lack of commodity handling capacity is the result of inadequate financing, and in numerous ways is representative of the dichotomy between China's inefficient State and bustling private economies. Multinational companies built many of China's modern, efficient container ports carrying high value goods for export. By contrast, China's bulk commodity ports are still largely municipal government entities with a chronic lack of private investment.

Alarmed by road damage caused by the overloading of trucks, Beijing exacerbated the problem by enforcing cargo weight limits earlier this year, necessitating more trips to carry the same cargo. According to statistics from the China Ports and Harbours Association, the transport shortfall was around 500million tonnes last year.

The Railway Ministry has said China needs to spend US$240 billion expanding its rail system. "Domestic demand for raw materials has risen by a huge amount and domestic transport capacities have failed to follow," said one official at a major Chinese logistics company in Beijing. Mountains of imported iron ore and steel now clog docks in many big ports, forcing ships to wait at anchor as long as a month, at costs of up to US$100,000 a day per vessel in ship charter fees.

In reality, there are no longer policy obstacles against investment in commodity port projects by overseas private capital, and the government has implemented a number of policies to attract cash. But experts suggest more flexible implementation is required to put policies into practice, and most major investors remain State-owned enterprises (SOEs).

"According to the WTO timetable, rail infrastructure will be opened to foreign investment by 2008," said Millar. Despite this, foreign investment has been slow to express interest with key pricing issues remaining a major obstacle. Whether or not China will allow full marketisation of rail freight for strategic commodities remains a serious barrier for many potential investors. Without private rail capital China can't afford the rail system it needs. But private capital demands a return, which can't be guaranteed without freeing freight rates upsetting the subsidised energy rates many SOEs depend on.

"To alleviate the crisis, China plans to utilise its extensive water network. Intensive harbour construction is taking place in the Yangtze River Delta, Pearl River Delta and Bohai Bay area" according to Michael Liu, general manager North China for CMA CGM & ANL Asia Ltd, at the Trans Asia Summit. According to Ren Jianhua, vice-director of the ministry's planning department in a statement: "Under the ministry's plan, handling capacity in three major harbour groups will be doubled, reaching 3.5 billion tonnes each before 2010. These harbours will contribute a lot to alleviating the long delays in deliveries of coal, iron ore and oil."

Expansion plans

Spurred by the rise of Chinese coal consumption, South Africa's Richards Bay Coal Terminal recently announced plans to spend US$150 million increasing capacity by at least 28 percent, making it the world's biggest coal export port, rising from 72 to 92million tonnes by July 2008. Australia, another example, has increased ore exports from 127 to 246 million tonnes per annum. In addition, Hutchison Port Holdings will buy a stake in New Zealand's biggest coal shipment facility to tap growing exports to China.

Meanwhile, within China itself, COSCO (China Ocean Shipping Co), China's biggest shipping company, expects RMB400 billion (US$49 billion) of spending on ports over the next five years to tackle the logistics logjam.

As part of this expansion Nantong Port of Jiangsu Province plans to invest RMB1 billion this year to build seven berths and expects to handle 100 million tonnes of cargo in 2006, up from 83.3 million last year, according to Luo Yimin, Nantong Party Secretary. In five years, Nantong is expected to handle 200 million tonnes of cargo annually. After completion it will have 58 berths for ships sized above 10,000dwt and 35 berths for those above 50,000dwt.

"Tianjin port intends to invest by 2010 RMB27.3 billion (US$3.4 billion) in 30 major ongoing construction projects, raising Tianjin's commodity handling capacity of 300 million tonnes over the same period," said one official of the Ministry of Commerce. "These 30 major projects include completion this year of a 200,000dwt vessel lane raising the status of the port to the 200,000dwt level and speeding up of the southern port area's deep water, large scale crude oil, ore and coal berth. By the end of this year construction of the large scale coal wharf will be completed, and by the end of 2007 a 250,000dwt large-scale crude oil berth, along with a large-scale dry bulk handling birth, will also come on line."

Qinhuangdao Port Group planned to expand capacity by 45 percent in the first quarter of this year by adding six berthing terminals, boosting annual handling capacity to 209 million tonnes. "China's coal demand is strong," said Zhao Ke, deputy general manager of Qinhuangdao, in a statement last year. "We must add capacity now to allow us to handle the demand growth over the next five years." The port, located in Hebei province, currently handles up to 144 million tonnes of coal, much of which is shipped to Chinese power producers further south. Upon completion the port will have 16 deepwater berths capable of receiving 250,000dwt ships.

Hebei Provincial Government and other investors also intend to invest RMB32 billion (US$4 billion) in construction of a new port near the city of Tangshan, which will be fully operational by 2010. Caofeidian Port is initially expected to have an annual capacity of 50 million tonnes of coal, but will eventually reach 200 million tonnes, according to the Ministry of Communications. Backlogs will be further eased by a new railway connecting Caofeidian to the Datong-Qinhuangdao railway line.

The world's second-largest oil user after the US, China imported 126.82 million metric tons of crude in 2005, 3.2 percent more than the previous year. Dalian's oil terminal business accounted for 55 percent of northeastern China crude oil throughput last year after completion of a 300,000-ton oil transit dock in June 2004, making it the biggest oil transit port in China.

"Dalian Port Administration Department has already invested RMB27 billion (US$3.36 billion) in construction of the Northeast Asia Shipping Centre that in essence means building another port the same size as Dalian Port," said one official at the Port's Foreign Investment Office who declined to be named. "In five years Dalian will be one of the largest and most advanced ore and container ports in the world."