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DE RUEHGZ #0009/01 0060914
ZNR UUUUU ZZH
R 060914Z JAN 09
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 0090
INFO RUEHBJ/AMEMBASSY BEIJING 0034
RUEHGH/AMCONSUL SHANGHAI 0005
RUEHCN/AMCONSUL CHENGDU 0005
RUEHSH/AMCONSUL SHENYANG 0005
RUEHHK/AMCONSUL HONG KONG 0013
RUEHGZ/CHINA POSTS COLLECTIVE 0041
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0026
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC 0030
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUEAIIA/CIA WASHDC 0041
RUEKJCS/DIA WASHDC 0041

UNCLAS SECTION 01 OF 02 GUANGZHOU 000009 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM 
STATE PASS USTR CHINA OFFICE 
 
E.O. 12958: N/A 
TAGS: ECON ELAB EFIN ETRD EIND PGOV
SUBJECT: Economic Slump Takes the Wind Out of Shipping Industry's 
Sails in South China 
 
REF: A) Beijing 4679, B) Guangzhou 715, C) Guangzhou 668, D) 
Guangzhou 618, E) Guangzhou 228 
 
(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED.  IT SHOULD NOT BE 
DISSEMINATED OUTSIDE U.S. GOVERNMENT CHANNELS OR IN ANY PUBLIC FORUM 
WITHOUT THE WRITTEN CONCURRENCE OF THE ORIGINATOR.  IT SHOULD NOT BE 
POSTED ON THE INTERNET. 
 
¶1. (U) SUMMARY:  There's no hiding from the numbers: the shipping 
industry in south China is suffering and they have little choice but 
to continue aggressively cutting costs to deal with the impact of 
the economic downturn.  South China's ports appear to have been hit 
harder than those in other regions, further reinforcing pessimistic 
predictions by local manufacturing industry leaders that 2009 will 
likely witness more of the same.  Shipping companies, already 
operating on low profit margins, are being squeezed as ocean freight 
prices on some routes have dropped by as much as 80 percent. 
Industry sources say the slowdown is primarily driven by 
deteriorating overseas demand, but exacerbated by other factors such 
as excess capacity in shipping vessels and changing conditions in 
south China's manufacturing-based economy - especially rising wages 
and raw material costs - and appreciation of China's currency.   End 
summary. 
 
Port Traffic Slows, Falling Rates Squeeze Companies 
--------------------------------------------- ------ 
 
¶2. (SBU) South China's port and shipping industry have seen a sharp 
drop in business during the last quarter of 2008, according to Cai 
Jinlong, Vice President of Guangzhou Port Group (GZP), reflecting 
comments similar to those reported ref A.  After registering strong 
growth during the first six months of the year, total port traffic 
fell year-on-year in August and September and recovered with only 
modest growth in October and November.  Shenzhen, which relies more 
heavily on foreign trade, has been especially hard hit, with total 
port volume in November down by 12.3 percent year-on-year, according 
to Ministry of Transportation statistics.   Cai also pointed out 
that Hong Kong's container traffic had declined by 13.9 percent in 
October.  Comment: In contrast, other major ports in Asia, including 
some elsewhere in China, appear to have suffered less (ref A) - 
suggesting south China's export sector is being hit particularly 
hard by deteriorating overseas demand.  This further reinforces the 
gloomy predictions we've heard from manufacturing industry leaders 
in the Pearl River Delta (refs B and C).  End comment. 
 
¶3. (SBU) Also troubling are the falling shipping rates squeezing 
companies' profitability, said Danny C.K. Ng, Regional Manager of 
Hanjin Shipping's south China operations.  According to Ng, several 
shipping companies, attempting to establish large market share 
earlier this year, leased or purchased additional vessels leading to 
overcapacity throughout the industry and, in turn and inevitably, a 
gradual decline in shipping rates per twenty-foot equivalent (TEU) 
containers.  Once the financial crisis hit in September, he said, 
the price decline went into free fall as customers cancelled orders, 
and shipping rates for the China-Europe route fell 80 percent, from 
USD 1,000 per container to its current USD 200 level - a difficult 
situation for companies operating on already low profit margins, 
lamented Ng.  (Comment: There is a bright side to this, as Nine 
Dragons CEO Zhang Yen told the Consul General over dinner one 
evening; those whose import-related businesses are good or quickly 
recovering from the downturn are able to negotiate and factor in 
major price concessions from shipping companies in their budget 
calculations.  End Comment.) 
 
¶4. (SBU) As cold comfort, Ng pointed out that Hanjin's China-U.S. 
route's shipping rates have "only" fallen 25-30 percent; not because 
U.S. demand is buoyant, but because in the U.S., carriers and 
customers negotiate annually and lock in rates for one year.  Most 
of these contracts are set to expire by May 2009, according to Ng, 
and then there will likely be some additional headaches for the 
companies which will have little leverage in negotiations. 
 
Impact of Low Demand and Low Fuel Prices 
---------------------------------------- 
 
¶5. (U) Both Hanjin and GZP executives said the worsening business 
climate is primarily due to deteriorating demand from overseas but 
 
GUANGZHOU 00000009  002 OF 002 
 
 
also pointed to other factors that have gradually eroded the 
competitiveness of south China's exports.  These include the widely 
reported impact of rising wages, raw material costs and appreciation 
of China's currency (refs D and E). 
 
¶6. (SBU) GZP executives described the recent decrease in oil prices 
as an "opportunity" for more port business.  Unlike Hong Kong and 
Shenzhen, a large portion of Guangzhou's port traffic is exporting 
coal and importing oil, said Cai.  The sudden reprieve from high oil 
prices not only lowers operating costs, but also increases port 
traffic by incentivizing oil traders to import and "hoard" oil while 
prices are low. 
 
¶7. (SBU) Hanjin's Ng said lower oil prices have indirectly softened 
the impact for shipping companies by reducing costs for their 
customers.  But he pointed out that carriers already had a built in 
hedging mechanism in the form of a customer surcharge - Bulk 
Utilization Charges (BUC) - which is based on fluctuating oil prices 
and is adjusted on a monthly basis. 
 
Coping with Crisis by Trimming the Sails 
---------------------------------------- 
 
¶8. (U) Shipping companies are cutting costs in order to square 
operating capacity with shrinking global demand.  Neither GZP nor 
Hanjin Shipping envision "wide-spread" bankruptcies in the industry, 
but say most companies will aggressively cut costs.  According to 
media reports, Danish shipping giant Maersk Line, the largest in the 
world, announced in October that it would close its Guangdong 
Information Processing Center and gradually lay off more than 700 
employees in the first half of 2009.  Other shipping companies in 
the region are choosing not to renew contracts on leased vessels, 
hoping to reduce excess capacity, according to Ng.  He also expects 
to see many more partnerships forming between companies during 2009 
in order to share ocean surface routes to reduce costs. 
 
GOLDBERG