China’s bulk ports to incur high capex

Largely exposed to the recent slowdown in domestic and international mining trade, Chinese ports are in serious need of a revamp, says Moody’s.

 

A throng of Chinese ports, ancillary to coal and iron ore mining industries, are likely to suffer continuing financial pressure should they fail to adjust their infrastructure facilities to the country’s economic shift, notes Moody’s in a sector report issued this month.

As China veers away from relying on low-value-added manufacturing and towards bolstering domestic consumption, the agency reckons the need to shift focus from throughput growth and commodities to “containerised” and high-value goods will significantly impact bulk ports, an important link to the logistical chain sustaining the country’s unfolding growth story.

“The ongoing downturn in the iron ore and coal sectors, combined with intense competition from neighbouring ports, is threatening a number of ports in the North and Northeast of China that mainly handle commodity bulk cargo”, says Michelle Zhang, a vice president and senior analyst at Moody’s.

Rising labour costs will add to the financial pressures weighing on these ports’ profitability, in a context where overcapacity is unlikely to recede.

As the industry adapts to changing dynamics, port operators will have to vamp up and modernise their infrastructure in order to cater for bigger cargoes and a greater diversity in the cargo mix.

Moody’s expects port operators to incur high capex over the next two years, putting added pressure on their balance sheets.

“In addition to basic loading/unloading and warehousing functions, ports need to provide more sophisticated facilities such as delicate cargo handling, refrigerated storage, and even peripheral services to support the more advanced supply chains,” the agency noted.

The report highlights the crucial role governments will have to play to maintain the overall credit quality of major port companies in the country. It also underlines the importance of location as a key differentiating factor among increased international competition.

Three regions are deemed strong enough to resist the depression trend: Pearl River Delta, Yangtze River Delta and Bohai Rim, equipped with the right infrastructure facilities to stay ahead of competition.

To react to this trend, China’s Ministry of transport (MOT) last June announced a directive to guide the rationalisation of port development, which concentrates efforts on getting regional and local authorities – China’s main port owners – to work in tandem towards optimising capacity use of adjacent ports through the development of regional logistics and transshipment hubs and networks.

Moody’s cites Bohai Rim’s five neighbouring ports, which focus mainly on iron ore and coal and have all recently been equipped with large deep-water berths that can accommodate iron ore vessels of 250 to 300 kilotons, as an example of the growing gap between demand and capacity.

By contrast, it singles out China Merchants Holdings, whose minority investments across China account for 33 percent of the country’s total container throughput, as an example of institution that is proving resilient through the storm thanks to strategic locations and diversified port activities.