Monday, 24 June 2013

An Overview of China's Container Trade

Shortage of Containers May Hinder China’s Future Economic Growth

Key Issues:

• Growth in container demand will continue to be driven by growth in China’s GDP;
• The development of container ships has made it possible to have factories and distribution centers to 
establish global supply-chains with China as its base;
• Yangshan Deep Water port is the largest container shipping port in the world and able to handle 20 million 
containers a year;
• Five of the world’s ten busiest container ports are located in China;
• With an enormous injection of USD 200 billion to develop China’s hinterland transportation network, thus container 
demand is expected to surge as more goods will be transported via road and rail.

Key Developments within China’s Container Shipping Industry (2008-12):

International container shipping is one of the most dynamic economic sectors of China over the last few years. Between 1990’s and 2012 the container trade at China’s ports expanded more than 10% p.a. on average (2011: +11%). The container shipping sector greatly surpassed seaborne trade overall and even the growth in international sea transport in China.

The major reasons for the growth in container shipping in China are on the demand side, the increasing international division of labour in the course of liberalization and the resulting trade movements; and also the rise in importance of goods eminently suited to transport by container. On the supply side, the considerable expansion of the container ship fleets and faster loading and unloading of container ships are playing an important part; they allow short turnaround times in port.

The growth in international container shipping will continue for the next 10 years in China, with an only slightly reduced impetus. The container shipping industry expects annual growth of about 9% in container demand up to 2020. The main routes that are likely to achieve the greatest expansion include intra-Asian transport as well as the routes from China to North America and intra- Asia. In contrast, transport between North America and Europe will reduce. Of the 25 largest container ports in the world, 16 are in Asia, and 4 of China’s major ports are listed among the Top 10 busiest in the world.

Despite the recovery in global demand for container transport, freight charges will gradually increase but forecasted to be below the level experienced before the Global Financial Crisis. The main reason is the anticipated massive expansion of global container ship capacity. Between 2008 and 2011 the available container capacity worldwide will expand by about 50%. The shipyards’ long order books for container ships argue against a rapid redress of the excess supply. 


The rise of China is at its heart an economic phenomenon. Its story is the most astonishing example of economic growth in human history. China’s remarkable journey to become an economic superpower can only be explained by its fairly unique economic driver, trade. And the most important variable for China in this complex world of international trade was shipping containers.

The irony is that this “workhorse” played a pivotal role in China’s economic transformation from one of the poorest developing economies under communist rule to become the world’s second-largest economy in just 30-years, but has hardly been mentioned. We tend to forget that the humble shipping container was a powerful antidote to economic pessimism surrounding China in its initial intention to become a trading nation. This simple metal box has single-handedly transformed China into global trading powerhouse. In fact, new research suggests that the container has been more of a driver of globalization for China than all trade agreements in the past 50-years taken together.

In terms of trade, the total value of China’s exports and imports in 2011 was $3 trillion; with about 13 percent of that trade occurred between China and the US. China has already surpassed Germany as the world’s No. 2 trading nation[1]. Total foreign trade in 2010 was $2.17 trillion, up from $1.4 trillion in 2005, $289 billion in 1995 and $21 billion in 1978[2]. Trade has been growing at a rate of around 30 percent a year since 2001 (2011). The World Bank calculated that China contributed 31 percent to global trade growth in 2011[3].

Strategic Role of Containers

Containerization is a testament to the power of process innovation. In the 1950s the world’s ports still did business much as they had for centuries. Then containerization changed everything. It was the brainchild of Malcom McLean, an American trucking magnate.

Currently, the volume of total world seaborne trade – measured in tonne miles (the product of distance and the quantity transported) rose by an average of 3.6% between 1990 and 2012[4]. Maritime transport therefore forms the basis of the high, and largely constant, growth in world trade (see Chart 1). This compounded with the dynamics of international container shipping, the recovery in total seaborne trade since financial crisis appear to be impressive. 

Chart 1 also shows the surge in container demand from China has been far greater than total trade in both the US and the whole of Europe put together. Though the container’s transformative power seems obvious for China it is certainly “impossible to quantify”. Since the 1990’s the growth rate of container demand has averaged 10.6% per annum[5]. Early evidence suggests that one plausible reason for the surge in container demand from China was due to an increasing proportion in the container handling business from transshipment traffic across all major ports in China[6]. 

China’s ‘live-wire’ remains the Port of Shanghai. It contains three major container areas: Wusongkou, Waigaoqia and Yangshan. In 2011 alone, all three container areas itself handled 368 million tons of cargo, including 28 million TEUs of containerized cargo, despite the worldwide financial crisis[7]. Containers are the heart of the Port of Shanghai's business[8]. Over the five-year period ending in 2012, container traffic through the Port of Shanghai increased from 6.43 million TEUs to 21.7 million TEUs[9] (refer Appendix 1 for detail of individual port performance in China).

Each year goods moving through the Port of Shanghai represents one-fourth of the total value of China's foreign trade. Even more staggering facts to know that each month an average of over 2,000 container ships call at the port. Chart 2 below depicts an increasing proportion of transshipment traffic, i.e. container handling in China. 

It’s clear that the proportion of transshipment traffic rose in China from 11% of total container handling in 1980 to over 37% last year[10]. This literally means that an increasing number of shipping and charter companies in China and have succeeded in keeping the number of working containers at a relatively high level by efficient use of ships and by grouping transport at the large container ports throughout China.

                                      Chart 2 depicts an increasing proportion of transshipment traffic in China. In absolute terms (measured in TEU), transshipment activities are considerably larger than container trade in China[11] (2012: 400 million TEU compared with 114 million TEU in the 1990’s).  A combination of direct deep-sea import/export, transhipment and short-sea container traffic in China has ensured attractive future prospects for container demand as ports are able to penetrate global markets. 

                                                 Meanwhile Chart 3 below clearly indicates that trade between China-Rest of remains the most important for global container trade, with a share of over 38%[12] in 2011 (refer Chart 3 below). The runners-up are trade on the Trans-Pacific route (just under 16%) as well as the routes between Europe and the Far East (over 12%). In comparison, intra-European trade (just over 7%) and the trans- Atlantic route (about 6%) are hardly more than niche markets. 

Another positive growth factor for the container market in China is the rising proportion of goods shipped that are highly suitable for transport in containers (finished and part-finished products, as well as general cargo). In contrast, traditional bulk goods (e.g. steel, ore, coal and grain) are falling in relative importance. The transportation of temperature-sensitive goods is no longer a problem, as reefer containers have been developed. This freight structure effect, which will continue in the future, has given a lasting boost to the demand for container transport.
In addition, it is now possible to transport products in containers that, at first sight, do not appear suitable for this form of transport (e.g. certain agricultural products, chemicals and building materials)[13]. This is particularly valid for transport between countries with trade imbalances. 
As a result of the trade surplus, China has with the rest of the world; the demand for container capacity on the routes from China is higher than in the opposite direction. In many cases it is more economical to load containers with “unusual” goods on the return journey from other countries to China than to transport them empty.
Economic Impact of Containers
What explains the outsize effect of containers in general? Reduced costs alone cannot. Though containers brought some early savings, shipping rates did not drop very much after their introduction. In a 2007 paper David Hummels, an economist at Purdue University, found that ocean-shipping charges varied little from 1952 to 1970—and then rose with the cost of oil.
More important than costs are knock-on effects on efficiency. In 1965 dock labour could move only 1.7 tonnes per hour onto a cargo ship; five years later a container crew could load 30 tonnes per hour[14] . This allowed freight lines to use bigger ships and still slash the time spent in port. The journey time from door to door fell by half and became more consistent. The container also upended a rigid labour force. Falling labour demand reduced dockworkers’ bargaining power and cut the number of strikes. And because containers could be packed and sealed at the factory, losses to theft (and insurance rates) plummeted.
Sustainable Container Demand 
In the case of China, the increase in demand for containers can viewed either on the demand or supply side. On the demand side there are a number of specific advantages of this form of transport. Shorter loading and unloading times, compared with traditional cargo ships, and better opportunities for onward transport are particularly decisive factors behind the great success of container shipping[15]. 
These save costs and, by virtue of shorter turnaround times, reduce capacity bottlenecks in the ports. For this reason the degree of containerization (as a proportion of the total volume of cargo handled) has increased considerably in all the ports in China (refer Appendix 2).
Of significant importance to the strong growth in container demand from China were both in the past and future economic development plans. Beijing realized that over time containers had reshaped global trade and was quick to adopt containerization. Soon ports in China became bigger and their number smaller. Among the immediate multiplier effects to the Chinese economy was that more types of goods could be traded economically. Speed and reliability of shipping enabled just-in-time production, which in turn allowed Multinational Companies (MNC’s) to relocate to China as it enabled firms to grow leaner and more responsive to markets as even distant suppliers could now provide wares quickly and on schedule[16] .
From there, international supply-chains also grew more intricate and inclusive in China. This helped accelerate industrialization in emerging economies such as China[17]. Trade links was established trough containerization enabled developing economies simply to join existing supply chains rather than build an entire industry from the ground up. But for those connections, the Chinese miracle might have been much less miraculous.
From an economic point of view the container shipping sector is benefiting from the further advances in international division of labour and decentralization of production processes occurring in China[18]. The traditional industrial countries in Europe and the USA no longer choose only low-wage countries that are closer by (Eastern Europe or Mexico) but increasingly in Asia. 
The high foreign direct investments into China alone (over USD 60 billion in 2012), is concentrated on the industrial sector, illustrates the importance that outsourcing and off-shoring now have on its economic growth[19]. Within only a few years China has become the world market leader in many industrial products (e.g. refrigerator, air-conditioning equipment and other consumer electronic goods) that eventually are shipped in containers. 
Outsourcing and global freight transport have naturally benefited from the liberalization of conducting trade in China over the last few years. The surge in container demand was due to lower customs duties and the dismantling of non-tariff trade barriers act as a catalyst for international trade[20]. China’s entry into the WTO at the end of 2001 was an important milestone in this respect. It gave an immense boost to trade in and with the whole region. It is not without good reason that China are now dominating the global shipping industry.
Drewry is forecasting an average growth of over 15% p.a. in container handling up to 2020 in China (refer Chart 5 above). This means that container growth rates in the next few years is expected to boom since the financial crisis. Even up to 2020, we should expect an average growth of 15% per annum in container demand from China[21] . For these reasons, inter alia, the high levels of container demand in the last few years will therefore increase and be sustainable. This is largely due to the exceptionally high growth in productivity levels achieved by Chinese ports
The pre-requisites for future demand for containers from China are already in place. On the demand side, the reasons already stated also argue for high future growth rates can be expected that the emerging Asian countries like China, India and Indonesia, Latin America and Eastern Europe. With even stronger links to the global value-chain, the demand for imported manufactured goods from Chinese consumers with higher income have increased, leading to containers being a much sought after commodity.
Rational for China’s Future Demand 
As the global economic growth began to lose traction in 2008, China was among the first nations to be pro-active and made a bold decision in looking for ways to use its huge reserves to boost its domestic economy. 
For starters, over the last few years, Beijing has increased its development expenditure in improving the productivity of all major shipping ports dotted along the South-East coastline in order to create an integrated supply-chain management system with its remote North-West Provinces. 
Why are container ports the real driver of the Chinese economy? Every year goods moving through the various ports in China represents one-fourth of the value of China's foreign trade[22]. One staggering fact is that each month on average over two thousand container ships leave the China, carrying their cargo to the world's major continents and markets[23] .
With a massive capital injection of more USD 100 billion from the Chinese government to upgrade all major container ports to attract Post-Panamax vessels it is forecasted that China’s trade to accelerate further[24] (refer Appendix 2). A port is considered post-Panamax ready when it has met three key criteria’s:
  • Channel depth of 50 feet with sufficient channel width and turning basin size;
  • Cranes capable of loading and unloading Post-Panamax ships;
  • Docks engineered to handle the new bigger cranes.
With larger vessels expected to come calling at various ports in China, maritime analysts have already predicted that it's going to be the shipping industry's busiest season of the year. However, the eventual problem is the challenge for these liners to find enough steel boxes to ship their televisions, toys and other gifts. The other burgeoning concern is that after being stuck in the global economic doldrums, Chinese shipping businesses are slowly beginning to recover as manufacturing activities resume but the shortage of containers may certainly disrupt their delivery process.
The past fifty-five years have seen intermodalism transformed from a theory into a high tech global phenomenon. “Intermodalism” describes the system of standardized cargo containers which move seamlessly between different modes of transport around the world. Containers have been pivotal in the emergence of this system and over time reshaped global trade. 
The impact from containerization have been evident the world over. Ports have became bigger and their number smaller. More types of goods could be traded economically. Speed and reliability of shipping enabled just-in-time production, which in turn allowed firms to grow leaner and more responsive to markets as even distant suppliers could now provide wares quickly and on schedule. International supply chains also grew more intricate and inclusive. 
To conclude, shipping containers have helped accelerate industrialization in emerging economies such as China. Trade links enabled developing economies like China to join existing supply chains rather than build an entire industry from the ground up. But for those connections, the Chinese miracle might have been much less miraculous.
Appendix 1

Appendix 2

[1], Bloomberg
[2], CNBC
[3], Bloomberg
[4], There are no data available on international shipping at a supranational level. We have therefore relied on statistics from well-known market research institutes in this sector. These are mainly: the Institut für Seeverkehrswirtschaft und Logistik (ISL), Drewry Shipping Consultants Ltd. (Drewry) and Ocean Shipping Consultants Ltd. (OSC).
[5], World Cargo News
[6], There is a further parallel with aviation in that, on routes between the hubs large container ships, now with a capacity of over 9,000 TEU (increasing trend) are used, while considerably smaller ships (currently up to 2,500 TEU) are chosen for feeder services.
[7], World Maritime News
[8], World Maritime Report
[9], World Cargo News
[10], Drewry Shipping Consultants
[11], World Cargo News
[12], Drewry Maritime Research
[13], World Cargo News
[14], World Cargo News
[15], World Cargo News
[16], World Maritime News
[17], Trade And Industrialization After Globalization’s 2nd Unbundling: ", by Richard Baldwin, NBER Working Paper 17716, December 2011
[18], Bloomberg
[19], CNBC
[20], Bloomberg
[21], World Cargo News
[22], World Cargo News
[23], Drewrey’s Shipping Report, 2012
[24], Bloomberg


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