A bumpy ride

For the logistics player who is in the country for the long haul, China could be a land of opportunity. But in the short term, the challenges are countless. This is also the case for chemical producers and suppliers who handle their own logistics in the country.

China’s chemical logistics facilities, which are already stretched to the limit, will face another burden next year when the country’s first three Sino-foreign joint-venture cracker complexes come onstream.

Secco, a BP, Sinopec and Shanghai Petrochemical joint venture, is aiming to start up its complex in the Shanghai Chemical Industry Park in Q1 2005. Around the same time, BASF-YPC, a joint venture between BASF and Yangzi Petrochemical, is due to start its complex at the Nanjing Chemical Industry Park (NCIP). And CNOOC Shell Petrochemical Co (CSPC) will be commissioning its facilities in Daya Bay, Guangdong, in October.

And this is just the start of China’s ambitious expansion plans. The country’s tenth Five-Year Plan has targeted an annual growth of 7% for the chemicals industry. But while investments in petrochemicals and chemicals are flowing in, industry observers say the transport and logistics industry is lagging severely.

One chemical industry source points out that China’s infrastructure is extremely weak when compared with those of Thailand and Malaysia. ‘The infrastructure is too basic in terms of technology, management skills and expertise. And safety standards are insufficient and below world standards,’ he says.

This is in stark contrast to the level of technical development and sophistication of the world-scale chemical plants that are due to come onstream soon.

One logistics player points out: ‘China is not a country, it is more like a continent. Rules that are adhered to in one province or county do not necessarily work in another. This causes considerable confusion and frustration for those in the logistics business.’

Even though China is set to open up its logistics market next year as part of its commitment to the World Trade Organization (WTO), reforms in sectors such as shipping and railways have been slow. As a result, the country has been unable to attract investments to keep up with the rapid growth in demand.

A report by China’s Logistics Information Centre shows that, while China’s logistics market grew by 31.7% to Rmb8200bn (US$990.7bn) in Q1 2004, investments in fixed assets rose by only 29% to Rmb78.5bn. And logistics costs rose by 11.2% to Rmb585.5bn in the same period. Logistics costs, at 21.6% of China’s GDP, are more than double those of developed countries such as the US and Japan.

According to a 2002 joint report by the China Federation of Logistics and Purchasing and Mercer Management Consulting, the third-party logistics (3PL) market is highly fragmented, as no 3PL provider has a market share of more than 2%. There is not a single company that can provide a nationwide distribution service.

Chinese companies spend more time on logistics than on manufacturing. Petrochemical majors Sinopec and PetroChina still have a tight grip on their logistics, with some subsidiaries operating their own ports, trucks and rail cars.

Although Chinese firms have been slow to switch to 3PL services, 3PL providers are expected to become more popular with the entry of multinationals and the pressure to reduce the cost of taking goods to the domestic and export markets.

Another factor will be the government’s interest in the development of the logistics infrastructure. The tenth Five-Year Plan talks of establishing national logistics centres and large-scale logistics enterprises. Key government ministries are encouraging local companies to team up with 3PL providers and to outsource a greater percentage of their logistics needs. There is also a move to remove regulations that hinder the entry of foreign 3PL providers. Given this scenario, demand for 3PL services is projected to expand by about 25%/year.

Standards for the logistics industry are expected to be in place soon. A National Committee for the Standardisation of Logistics Information Management was established recently to promote the development of the industry. It will formulate, revise and implement standards for a better flow of information in the logistics sector.

While these steps will improve logistics facilities eventually, chemical companies operating in the country face a bumpy ride for the time being.

China relies heavily on its roads to transport products to various markets around the country. But the road infrastructure is far from satisfactory.

The managing director of Shanghai HOYER Sinobulk Transport Co Ltd, Frank Andreesen, talks of a slowdown in the supply chain because of road congestion, poor technical equipment standards and the general lack of competence of truck drivers.

He also points out that many new expressways are badly damaged with potholes after only 2-3 years of use, to the extent of being severe accident hazards.

Earlier this month, roadworks and an increase in traffic resulted in a 10-day, 72-km traffic jam in the provinces of Hubei and Shanxi, according to media reports.

We also witnessed the chaos on the roads during a trip to China in June. While cruising on a new expressway in Henan province, we found one lane was closed for repairs. We were informed that the damage was caused by an adulteration of the concrete supplied by a private contractor. We were also told that the contractor and the official who had accepted a bribe from the former had been arrested.

Corruption is rife, particularly in the transport agencies of local governments as China rides through a road-construction boom. The Xinhua News Agency reported that there were 713 major cases involving more than Rmb1m this year, up 6.9% from last year. Three transport bureau chiefs from Henan province were indicted in massive corruption scandals between 1997 and 2003 which had resulted in poor design and construction of expressways.

Overloaded trucks are also responsible for the damage to the roads as truckers have modified their vehicles to carry extra loads and save on high road tolls. Some simply overload trucks without any regard for the vehicles’ registered and designed payloads.

However, the Chinese government recently clamped down on this common practice (ACN 12 July 2004). Under the new regulation that was implemented from 1 May, hauliers have to pay a fine of Rmb200-500 for every vehicle overloaded by up to 30% and Rmb500-2000 for those overloaded by more than 30%. They would also have to unload the extra cargo at checkpoints. Previously, fines were a maximum of Rmb50 per overloaded vehicle.

Transportation charges in the general packed goods transportation market have risen after the clampdown, squeezing the margins of chemical producers and traders, especially those dealing in polymers, as these are generally transported by road. However, transport rates in the bulk liquid transportation market were not affected by the new regulation.

According to a Sinochem source, road-transportation charges for a 100-km stretch have increased to Rmb200/tonne from Rmb80-100/tonne (ACN 12 July 2004). And a trader complains: ‘What has happened is that those of us who have been using a safe mode of transport such as International Standards Organisation (ISO) trucks, also have to bear the extra cost incurred by the new regulation along with the errant players.’

A Ministry of Communications (MoC) official told the Chinese media recently that the revision in fines was a correction of the previous rates, which were abnormally low. But he added the government was considering lowering the toll charged on expressways.

Although the regulation has been imposed by the central government, the level of adherence varies from region to region. And according to one non-Chinese chemical producer, the domestic industry has been lobbying the government so intensely that it is very likely the ban will be withdrawn in the next couple of years.

‘We do agree with the need for safety on the roads, especially as the condition of the domestic expressways is poor. The congestion on the roads is getting worse. But let’s be realistic. The government tried to enforce this regulation a couple of years ago, but soon had to withdraw it under pressure from local companies,’ says a second logistics operator.

And there are others who believe that, despite the clampdown, local players will start overloading again, once the government’s spotlight has moved to other issues.

Andreesen feels that China’s transport industry is in general suffering from the short-term thinking of many companies; this is turning out to be a vicious cycle. Too many companies are looking at making money in the shortest time using almost any means, managing to avoid operating costs and taxes, while cutting corners on legal, safety, and service standards. They are focused only on reducing out-of-pocket expenditure, disregarding, for example, depreciation charges, social costs, and taxes, he says.

He cites the example of companies depreciating locally manufactured vehicles over ten years when the vehicles are not likely to last more than five years. ‘When vehicles essentially have to be scrapped after five years, companies are finally facing the real cost of their operations as they have to release the residual book values into their profit and loss statements. If investors are not willing to reinvest, companies would face the beginning of the end and such examples already exist in the Shanghai trucking market,’ he says.

Stiff competition in this sector, especially in Shanghai, is not helping matters. Andreesen estimates that more than 5000 registered trucking companies were in operation Shanghai last year. But close to 50 000 companies had their own in-house distribution fleets.

There were more than 4000 trucks last year for the transport of dangerous products in the city. And 182 companies were given government approval to transport such goods. Currently, Shanghai has only 12 companies that have been granted or are able to maintain their DG (dangerous goods) licence.

‘It’s a buyer’s market as there is stiff competition. For example, for a 20-ft box container, the going market rate is around Rmb6/km. It’s a rather poor income, even for a local company,’ says Andreesen. Yet the market is sustaining itself with new transport companies continuing to set up operations

To make matters worse, generic box container truckers have found a liking for the ISO tank market, which involves transporting a lot of dangerous goods. Trucking companies have been able to attract a small premium over the box container trucking rate for moving such goods.

‘Chemical companies do not distinguish between box-container and ISO tank truckers as long as the generic box containers fulfil a set of minimum requirements. This means that chemical companies are prepared to take a sufficiently controlled risk, given also that the market has not yet developed specialist ISO trucking companies as is the case, for example, in Europe,’ he says.

A major complaint from trucking companies is the high road tolls. According to Andreesen, the toll is usually around Rmb2/km, which is almost double the rate in Europe. ‘A debate has been going on for a number of years to shift the high toll to fuel tax, but nothing has been done yet,’ he says.

Andreesen stresses the need for international standards, especially when dealing with dangerous goods. ‘If the truckers are subjected to the European Chemical Industry Council’s Safety and Quality Assessment System (SQAS), more than 80% of them would fail,’ he says. ‘There is a need to raise the minimum standards to bring them gradually in line with those in developed countries. As such, there would be no harm to start thinking about a gradual implementation of SQAS.’

Vehicles must also be well maintained and the training of the management, staff and drivers is vital to maintain safety.

‘Some trucks have no lights, poor brakes and run on worn-out tyres. The government should protect law-abiding companies through efficient law enforcement,’ he emphasises.

And at the 8th China Chemical Logistics & Transportation Conference, organised by the Centre for Management Technology (CMT), Andreesen pointed out that driver fatigue, caused by long working hours, contributed to a high incidence of accidents on the highways. ‘Drivers working with local companies normally drive between ten and 12 hours a day and they hardly ever have a rest day.’

The country does not have a law that limits driving, unlike Europe which restricts truck drivers to working only ten hours a day.

The problems related to road transport would not be as severe if chemical and other companies could rely more on the railways. After all it is the second cheapest mode of transport, behind shipping. But in what has turned out to be a vicious cycle, the poor quality of the railway network has pushed companies to rely more on road transport, thus adding to the congestion on the roads.

‘The railways are in very poor condition, so the major mode of transportation for chemicals is the roads. The government has been receiving a lot of complaints about the inefficiency of the railways, but nothing has been done so far,’ says the first logistics player.

China’s railways are as congested as its roads, moving food grains and trying to meet the demands of power stations that are hungry for coal. It is estimated that almost 90% of the cargo space available on trains is allocated for the movement of key materials such as coal, oil, fertiliser and grains.

Not surprisingly, a third logistics provider says the railways are unreliable and the time taken for transport is further stretched by long transit periods. ‘The railways cannot provide a door-to-door supply chain. I need a reliable trucker to receive products after they have been moved by rail, but often I can’t find one in remote locations. As long as the rail infrastructure and performance does not improve, it is safer and more efficient to transport cargo all the way by roads,’ he concludes.

The Ministry of Railways says the country’s rail network can meet only a third of the demand at present, even though all the major trunk lines are operating at full capacity. Statistics show that in recent months 280 000 carriages were needed daily, compared with last year’s daily average of 160 000 carriages.

To further illustrate the severity of the problem, the Xinhua News Agency reported that, although China’s railways accounted for only 6% of the world’s rail network, they shouldered 25% of the world’s freight volume.

Furthermore, transportation of dangerous goods on the rail network is heavily constrained as applications for DG licences for particular proudcts and routes take as long as 6-18 months to be processed.

The Ministry of Railways has tried implementing some relief measures, such as allocating priority status to certain goods and increasing the speed of trains. However, these cannot solve some of the fundamental problems.

The construction of railways has failed to match the rapid development of the economy. Unlike the roadways, the railways are still wholly state-owned. Annual investments are less than Rmb60bn and lag behind the investment on roads, which is about Rmb300bn/year.

The chemicals industry source says the government has been reluctant to open up the railways to the private sector because of security concerns. The railways were designed and operated in the past to meet the demands of the military.

But the situation is set to change as the government is drafting a blueprint to privatise the railways. It is also looking to restructure the railways to separate government functions from enterprise functions; rationalise staff; spin off peripheral operations; and reform railway investment and financing.

The ministry has mapped out a plan to increase its 73 000km-long rail network to 100 000km by the end of 2020. It is working on separating passenger and cargo transport on the railways. And recently, double-decker container trains were introduced on the Beijing-Shanghai route.

The Asian Development Bank (ADB) has approved a US$400 000 technical assistance grant to help China assess the impact of its ascension to the WTO on the country’s rail sector, and to recommend action and policy-reform support to meet future challenges. The ADB has also provided a US$500m loan to help build a 377km track between Yichang, Hubei, in the east, and Wanzhou, Chongqing, in the west. The project, which will be completed in 2009, is expected to shorten transport time and relieve congestion.

Changes have also been taking place to increase the movement of products by water. In March, the domestic shipping sector was thrown open to foreign investors (ACN 12 July 2004). Since then, the MoC has approved the formation of five Sino-foreign joint ventures for domestic shipping. They are Sinochem Shipping & Enterprises Co (Hainan), with Stolt-Nielsen; Dongzhan Oil Transportation with Odfjell; Cosco Dalian with Shokuyu Tanker; Nanjing Yangyang Shipping with Tokyo Marine; and Norinco Logistics Co with Aurora Tankers (IMC).

The MoC says the changes in regulations were prompted by the rapid growth of China’s chemicals industry. The entry of foreign players would allow domestic operators to improve their technology, operations and safety standards.

Stolt Nielsen, a partner of Sinochem Shipping & Enterprise Co (Hainan), will provide management expertise, says Tang Xuan Ting, general co-ordinator of Sinochem Logistics. The joint venture will also tap Sinochem’s ready network of subsidiaries, located all over China.

A second chemicals industry source lauds the change in policy as he believes it would help in the safe transport of hazardous chemicals especially because some local companies operate barges and ships that are 10-20 years old. What is a matter of concern is not just the age of the vessel but also its condition. Most of the vessels are in a very poor condition, say logistics operators and chemical producers.

The formation of the various joint ventures is expected to result in investments in new barges and ships that are of less than 50 000 deadweight tonne (dwt), which are needed to negotiate inland rivers such as the Yangtze.

But for chemicals producers, it is not just about having the right ships but also having a government policy that permits transport of chemicals along the rivers.

In June, the government introduced a ban on the shipment of hazardous chemicals, such as acrylonitrile, along the Yangtze because of environmental concerns. This has become a big headache for producers and buyers as about 12 000 tonne of acrylonitrile are shipped every month along the Yangtze.

The reaction from the industry to the ban is mixed. Sinochem supports the ban, and, according to one company source, it is much safer to transport dangerous chemicals by road in ISO trucks than to move them along the Yangtze, which has strong currents. He also points out that some of the vessels transporting the hazardous products are in poor condition.

‘A safer mode of transport would be trucks that use ISO tanks. These tanks can resist 5G (gravity) impact. When transporting by road, any leak can be limited to a small area. However, if a ship leaks, the chemical would spread to a larger area.’

The first logistics provider echoes this view: ‘ISO tanks are drop-tested and impact resistant. It’s highly unlikely that you would have a loss of product.’

But, he adds, there is another risk as the centre of gravity for trucks in China is higher than that in Europe.

Some producers have reacted strongly to the ban. ‘The policy is very good for China, but they can’t ban everything. They have to do more research on standards for vessels. They should insist on better management of ships to control safety; otherwise it will hurt the economy. Many companies have invested heavily along the Yangtze river and they will suffer if the ban continues,’ says a second producer.

And several foreign chemical companies maintain that the waterways are the safest mode of transportation for hazardous chemicals, provided the quality of the vessels has been vetted (ACN 16 August 2004).

But the ban could be shortlived. ‘I think the government’s strategy behind the ban was to make the local shipowners more quality conscious. They will probably relax the ban once conformance levels are sufficiently high. They are also conscious that the ban should not hurt the economy and the companies that have invested along the Yangtze river,’ says the source from the foreign chemical company.

Turning to China’s coastal ports, those in the eastern and southern parts of the country have seen high growth in activity. The Shanghai port has become the world’s third-largest container port after Rotterdam and Singapore. It handled more than 10m TEU of cargo last year.

But the country’s coastal ports handled 320m tonne of cargo more than their designed capacity of 1.73bn tonne last year.

The shallow waters near some ports, such as the Shanghai port, are causing problems for large container ships. To solve this, the port authorities have started building the Yangshan deep-sea container port near Shanghai, the first phase of which will be completed next year.

Despite these developments, it has become quite common for chemical producers to invest money in building jetties or ports near their plants to facilitate transport. For instance, investors in the NCIP are building their own ports.

But as one logistics provider points out, outsourcing this activity would result in cost savings and producers would be able to make more productive use of their capital.

While transportation is proving to be a headache for chemical producers, at least they need not worry about warehousing, thanks to the development of nearly a thousand logistics parks all over the country. In fact, China now has surplus warehousing space, which has prompted the National Development and Reform Council to restrict new investments in this sector.

Wang Yao Qiu, who heads the logistics research centre at Beijing Jiaotong University, told the Chinese media recently that local governments had blindly invested huge sums of money in large-scale facilities without clear plans for business development. Worse, some of the logistics parks have been built in areas that are not easily accessible. As a result, many of the parks have no tenants and the central government has stepped in to rescue the investors.

Some local governments have tried to use tax-free incentives to lure investors to their parks. But these measures have sometimes attracted property developers instead of manufacturers. Wang says this is because the cost of land for property development is usually two to three times that for logistics use.

In conclusion, chemicals producers have a limited choice when it comes to moving their product around the country. Every mode of transport has its own set of problems, which the government has recognised.

The potential for the logistics industry is enormous. But investing is China is not without its perils. The third logistics player points to the poor returns it has garnered so far in China.

‘The returns from the chemicals logistics sector have so far been below expectations. But we are keeping our fingers crossed that we will strike gold soon, now that the mega cracker projects are due to start up.’

And huge investments, as well as government support, will be needed to ensure that excess capacity does not get built in the enthusiasm to bring the country’s logistics facilities on par with that of the developed world.