Examining the weak performance of an initial public offering by China's largest shipping group, Cosco, market analyst firm Transport Intelligence says the company's price performance following its debut on the Hong Kong stock exchange "has cast doubts on the sustainability of the high rates of growth enjoyed by the sea freight sector." Shares in Cosco reportedly fell to 10% less than its offer price.
Freight rates could be weakening by year end due in part to increased capacity coming on line. Growth in shipyard output is expected to continue as the rate for growth in international trade weakens.
Combined with increased capacity and slower growth in trade, Transport Intelligence indicates the lack of capacity at ports and container terminals has led to congestion, resulting in an artificial tightening of capacity. With new terminals coming on line as well as new ships, more shipping capacity should be freed up. The impact in coming years will be to drive rates down. (One analyst has suggested rates could fall as much as 6.8% by 2006, but most views are more moderate.)
Logistics costs in China itself are extremely high when compared to U.S. figures, says a report from the law practice of Benesch, Friedlander, Coplan & Aronoff LLP. Logistics costs in China are 25% to 30% of overall product costs vs. 5% to 7% in the U.S. Transportation and logistics costs in China are up to 19% of China's GDP vs. 7% of the U.S. GDP. (The recent State of Logistics Report issued by the Council of Supply Chain Management Professionals pegs the U.S. cost at 8.6% of GDP).
The inefficient logistics system in China is a function of geographic barriers that make the movement of goods difficult, says the Benesch Friedlander report. However, the system is also a victim of political barriers created by multiple government bureaucracies. "The result is a highly fragmented, underdeveloped logistics industry where inefficiency is the norm rather than the exception," the report states.
China is dealing with its infrastructure shortcomings aggressively and is expected to add 23% more roads over the next five years. It will also construct 100,000 km (62,000 miles) of new rail lines, one-third of that being high-speed passenger lines. China's largest shipping line, the afore-mentioned Cosco, is increasing terminal operations from 25 million twenty-foot-equivalent units (TEUs) to 36 million TEUs.
While the infrastructure developments will help, the logistics scene in China will remain complex due to the myriad rules and levels of bureaucracy that exist there.