VZCZCXRO3819
RR RUEHCN RUEHGH
DE RUEHGH #0111/01 0681015
ZNR UUUUU ZZH
R 091015Z MAR 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7708
INFO RUEHBJ/AMEMBASSY BEIJING 2582
RUEHGZ/AMCONSUL GUANGZHOU 0260
RUEHSH/AMCONSUL SHENYANG 1795
RUEHCN/AMCONSUL CHENGDU 1804
RUEHHK/AMCONSUL HONG KONG 1971
RUEHIN/AIT TAIPEI 1592
RUEHGP/AMEMBASSY SINGAPORE 0228
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 8342

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 
 
 
--------------------------------------------- --- 
 
¶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