China's port operators harbour global ambitions

China’s port operators look set to either consolidate or expand overseas as the country adapts to a slowdown in trade and overcapacity in the sector.

The port complex of Zhoushan on China’s largest archipelago has long been lumped together for statistical purposes with Ningbo on the mainland. However, it’s just over a month since the two rival neighbours finally merged, illustrating a sea change in the Chinese shipping and ports sector as the state step up its efforts to tackle overcapacity and overhaul the bloated state-owned sector. 

Located at the southern end of Hangzhou Bay, which borders Shanghai to the north, Zhoushan Port completed its merger with Ningbo Port on September 29 to create the world’s busiest port group by cargo tonnage, with a combined throughput last year of 873 million metric tons. 

Aside from trying to wring out efficiencies, the merger forms part of a broader Beijing blueprint to beef up global trade links and create national champions that can “go out” and compete internationally, presaging further outward investments as China’s bigger port operators flex their increasingly powerful muscles. 

Mainland China barely featured 20 years ago in the global commercial port rankings. Now seven of the top 10 container terminals are Chinese, with Shanghai, Shenzhen and Hong Kong leading the ranking. 

“We’ll see increasingly large and powerful groups with very significant funds investing overseas,” Peter Stonor, head of transport, infrastructure & industrials at Russian investment bank VTB Capital, told FinanceAsia

Stonor advised ports operator China Merchants Holdings when it bought a 65% stake in Kumport, a container terminal in Istanbul, together with consortium partners COSCO Pacific and CIC Capital. The $940 million deal, also in September, is China’s single largest investment into Turkey. 

Shenzhen-based China Merchants also spent more than $700 million in 2013 on a 49% stake in Terminal Link SAS, which owns 15 container terminals in eight countries across four continents, and a 23.5% stake in the East African port of Djibouti. 

In the same year, China Shipping Group, one of China Merchants’ largest domestic rivals, purchased a 24% stake in APM Terminals Zeebrugee, a busy Belgian container port terminal, underscoring China’s growing ambition to acquire port assets worldwide. 

“Northern European ports of call have become increasingly congested and expensive and hence the Chinese are looking at alternative supply chains,” Stonor said.

In the case of the newly formed Ningbo-Zhoushan Port Group, it also helps to have a powerful backer. President Xi Jinping governed Zhejiang province, which houses both cities – first as acting governor and later party chief. Under his leadership from 2002 to 2007, the Ningbo-Zhoushan management committee was set up with the goal of pushing forward the combination. 

“The alliance [between Ningbo and Zhoushan ports] was actually encouraged and pushed by President Xi years ago,” one Zhejiang provincial official familiar with the matter told FinanceAsia. “He wanted to reduce the long-time competition between the two and make them bigger and stronger.”

But both cities, in particular the smaller Zhoushan, were lukewarm towards the idea at the time, due to the importance of the ports to the local economy and tax base, so the formal merger didn’t happen.

The throughput of both ports has nonetheless been counted together since 2006 because of their geographical proximity, making them fifth-busiest container port in the world. 

Following the merger a provincial-level port investment and operation company, Zhejiang Shipping Group, was also established to further integrate other smaller ports in the province, including Jiaxing, Taizhou, and Wenzhou ports, according to government officials and industry insiders. 

SETTING SAIL 

With China’s global trade retrenching as the economy slows – on a year-over-year basis, exports contracted by 3.8% in September while imports shrank by more than 20% – business at China’s ports is not booming as much as before.

According to HSBC, the throughput of the country’s major ports, including Dalian, Shanghai, Ningbo-Zhoushan, Guangzhou, and Shenzhen, grew just 1% in the third quarter of 2015 – the slowest quarterly pace since 2009. 

As a result, more port mergers look on the cards.

In relatively less developed Northeast China, where some of the country’s heavy industries are concentrated, Jinzhou Port recently announced in a stock filing that its controlling shareholder Dalian Port Group is looking to restructure the company.

According to some industry insiders and analysts, Dalian Port Group, which owns a 20% stake in the Shanghai-listed Jinzhou port and also runs the world’s 10th-largest port by cargo volume – Dalian Port – is likely to follow the lead of Ningbo-Zhoushan by consolidating Jinzhou and the other port assets in the region. 

“These ports still carry on an unsustainable expansion and fierce competition. Without reform and consolidation, they will have a very gloomy outlook,” Gong Li, a transport analyst at domestic brokerage Industrial Securities, said in a September report.

Some of these ports are also in need of investment, which carries a heavy cost and could delay debt-cutting efforts. 

The facility and infrastructure upgrades required to cater for bigger ships and more advanced cargo handling, and to thereby maintain the competitiveness of Chinese ports, will likely push up capital spending and prevent deleveraging in the next two years, according to Michelle Zhang, a Moody’s vice president and senior analyst. 

“From various aspects, such as in management and finance, [consolidation] could be the trend,” Zhang told FinanceAsia, adding that the backing of a larger port operator could help smaller ports raise funds and lower costs due to the higher credit rating of the group. 

“In this sense they would [also] be motivated,” she said. 

Chinese port and shipping firms have raised a growing amount of both debt and equity capital since 2011 when China’s cargo throughput growth started dropping sharply. 

According to Dealogic data, they raised $14 billion from equity-related deals last year, up from $10.6 billion in 2011. Debt issuances from the sector rose to $7.5 billion from $6.7 billion over the same period, while the volumes raised from syndicated loans almost tripled to $90 billion in 2014 from $35 billion in 2011.

While smaller Chinese players remain focused on the domestic market, shipping and port conglomerates with deeper pockets are already setting their eyes on overseas expansion and cross-border investment, in line with national objectives.

Meanwhile, terminal operators globally are being squeezed to sell out.  

“Shipping lines are being consolidated, ship sizes are getting bigger which requires more capital investment and hence there is more pressure on family-owned businesses to sell as they have fewer customers with more requirements,” said VTB Capital’s Stonor.   

The acquisition by China Merchants and its partners of Turkey’s third-largest container terminal, for example, coincides with Beijing’s ambitious “One Belt, One Road” plans. 

“Turkey is situated along both the ‘Silk road economic belt’ and the ‘21st century maritime silk road’, and with the Chinese government’s pursuance of the ‘One Belt, One Road’ initiative, strong growth in demand for container ports and logistics services is expected,” China Merchants chairman Li Jianhong said in a statement.  

Additional reporting by Alison Tudor-Ackroyd

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