Brighter Freight Outlook In 2013

China's freight transport sector is set for a stronger year in 2013, as although we project the trend of a slowdown in the country's economy to continue the weakening in macroeconomic outlook will not be as deep as that estimated for 2012, so having less of an impact on domestic and import freight operation. A brighter export outlook, with China's key export markets of the US and Europe in recovery will also offer further growth options for the country's freight transport sector.

Recently released 2012 freight transport data for China highlights the impact of the macroeconomic slowdown, with BMI estimating China's real GDP to have expanded by 7.7% in 2012 compared with 9.1% growth in 2011, on the country's freight transport sector. While growth in both road and inland waterway freight volumes slowed y-o-y, China's air freight and rail freight levels recorded a y-o-y decline in 2012.

Slowdown A Worry
China Freight Overview 2011 & 2012 (% Change y-o-y)

BMI 's earlier macroeconomic forecasts correctly predicted a slowdown in China's economic growth, and this will be a major worry for the country's freight transport sector over the medium term; nevertheless, the nation's economy is continuing to expand at a rapid rate, with one of the highest economic growth outlooks globally. While China's y-o-y real GDP growth is estimated to have slowed to 7.7% in 2012 - quite a drop from the 9.1(% change y-o-y) real GDP growth recorded in 2011 - in 2013 BMI has forecast a marginally slower pace in y-o-y real GDP growth of 7.5%.

2013 Still Slowing, But Not So Drastically
China Real GDP growth (% change y-o-y)

Another positive for China's freight transport sector in 2013 is the steady recovery of the country's main export partners, the US and Europe. The US recovery, while slow, is steady, with the country's economy forecast to expand by 2.3% in 2013 on the 2.2% estimated growth in 2012. In Europe a recovery is set to get underway in 2013 after a number of European states' economic growth double-dipped into recession in 2012. The eurozone, which can be seen as an economic bellwether for Europe, witnessed an estimated 0.7% decline in its real GDP growth rate in 2012, with BMI predicting a 0.1(% change y-o-y) rise in the growth rate in 2013.

Exports Ticking Up
China Exports, Real Growth, (% Change y-o-y)

This brighter export outlook is highlighted in our export forecasts for China, with our Country Risk team forecasting the country's real export growth to increase by 6.5% in 2013, which is up from an estimated 4.2% in 2012.

Road Freight

Growth Defying Slowdown

Road freight dominates China's domestic freight transport sector forecast to account for 79.9% of the total freight carried in 2013 (measured by the total of projected freight carried by road, rail and inland waterway).

BMI believes that it is this dominance that has somewhat sheltered the road haulage sector from the country's slowing economic growth. While the country's real GDP growth is estimated to have grown by 7.7% change y-o-y in 2012 down from 9.1% in 2011, China's road freight volumes have been barely affected. In 2012, the sector reported a y-o-y growth of 14.5% to reach 32.2bn tonnes, just slightly down from the 14.9% growth in 2011.

Robust Road Growth Defying Macro Slowdown
China Road Freight ('000 Tonnes)

We believe that this steady slowing growth will continue, with road freight to be the least impacted of the freight modes by China's slowing economic growth. In 2013 we forecast the country's road freight volumes to grow by 13.8% to 36.7bn tonnes. Over the medium term, we project a growth of 38.5%, an annual average growth rate of 11% to take road freight volumes to 54.3bn tonnes in 2017.

This growth will not only ensure that road freight remains the dominant mode in China's freight transport sector, but that its market share will continue to expand. In 2007, road freight accounted for 73.4% of China's total freight; by 2017 we project this to have expanded to 82.6%.

Dominating And Set To Expand
LHC: 2007 % of Total China Freight. RHC: 2017 % of Total China Freight

This trend goes against what we are witnessing elsewhere, as countries around the globa try and combat pollution and congestion by aiming to decrease their reliance on road freight in favour of other modes. BMI believes that with China still in the development stage, both in its economic growth and freight transport development, road freight reliance is natural and that it will take some time before a shift can start to take place.

Inland Waterway

Developing On The Back Of Factory Move Trend

China's inland waterways have overtaken rail in the country's freight mix, to hold second position. Waterways' role in the freight mix has increased in line with the move from factories away from the coastal regions further inland. This has seen the development of the Yangtze River, China's major waterway, as a vital freight option. As production has moved further up the reaches of the Yangtze Delta, so has the pressure on China's internal freight network to ensure they are still connected to the coast for seamless export.

Water Playing A More Prominent Role
China Rail Freight ('000 tonnes) & China Inland Waterway Freight ('000 tonnes)

The Yangtze River is an ideal choice for many shippers; the natural waterway has been dredged to enable the passage of larger vessels and the river connects with China's largest container port, the Port of Shanghai, thereby offering a complete export supply chain for shippers.

This demand has led shipping volumes on the Yangtze River to increase four-fold over the past decade, with the waterway handling 1.78bn tonnes in 2012.

BMI expects China's freight demand on its waterways to continue over the medium term. While a tougher export environment and slowing domestic growth lead to a slowing in freight volume growth on the country's inland waterways in 2012 y-o-y growth remained robust at 7.65% taking total volumes carried on the nation's waterway networks to 4.6bn tonnes. In 2013 we project this slowing in growth to continue, but the drop in growth y-o-y will not be so strong as that witnessed between 2011 and 2012, with BMI forecasting a y-o-y increase of 6.3%, in line with the strengthening export outlook.

Connecting To The Interior
Yangtze River Map

Over the medium term as the migration of factories away from the coast continues BMI forecasts growth in inland waterway trade to continue increasing with a projected growth of 42.4% forecast over the medium term, an annual average increase of 7.3% projected, which will take inland waterway freight volumes to 6.5bn tonnes in 2017.

This projected growth will see China's inland waterways retain their second rank in the country's freight mix with a market share remaining static at around 10%.

While BMI highlights a bright outlook for the country's waterway sector over the medium term, we do highlight the beginning of a trend that could put negative pressure on the development of this freight mode in the longer term. As highlighted the country's inland waterway freight role has expanded on the back of a move by factories inland, just as factories have moved from the coast the trend for seeking cheap labour will continue to drive factory moves and we are starting to see Vietnam develop into Asia's new factory.

BMI believes that China's inland waterways will stay play a major role in the country's supply chain even during such a transition, but it is likely that the country's waterway network will start to play more of an import role, rather than an export one.

Rail Freight

Lagging, But Growth Opportunities Exist

China's rail freight sector was one of the modes worst hit by the slowing in China's economy in 2012 with rail freight volumes dipping by 0.69% to 3.9bn tonnes, down from a y-o-y growth of 7.9%. Despite China's economic growth continuing to slow BMI predicts rail freight volumes to start to pick up in 2013 with a growth of 3.5% to reach a projected 4bn tonnes.

BMI highlights that while the 2013 outlook for rail freight is brighter, the forecast 3.5% growth is still way below the 7.9% change y-o-y increase that the sector recorded in 2011 and supports BMI's view concerning China's import sector, which rail freight is heavily exposed to.

Although China's rail freight sector has been expanding its role in the container freight sector, the country's rail freight is still very much geared to meeting the demands of China's bulk sectors, with rail the primary freight mode used for the transport of commodities such as iron ore and coal. In 2013, therefore, we believe that in the first part of the year the country's railway sector will benefit from a stimulus package aimed at developing China's infrastructure sector, thereby leading to BMI's view that the transport of goods related to the construction sector and freighted by rail will benefit.

BMI believes that more diversification is required in China's rail freight sector, particularly toward containerised rail freight. This will in part lead rail to play a greater role in the country's lengthening export supply chain, as factories continue to move away from the coastal regions, but also as an alternative to shipping as progress is made to develop an Asia-Europe Landbridge, originating in China and stretching to Europe via Russia and Kazakhstan.

Rail To Player A Bigger Role
Asia-Europe Landbridge Map

Developments in these areas offer upside risk to our current medium-term forecasts for rail, with the mode projected to expand by 26.3% between 2013 and 2017 to 4.9bn tonnes an annual average increase of 4.8%.

BMI believes that despite this growth, rail's role in China's freight transport sector will continue to slip, as road carves out a greater market share. In 2007, rail accounted for 14% of the total; by 2017 we project this to have slipped to 7.5%.

In order to combat this, China's rail sector must look into better regional connections, as road has carved out dominance already in the domestic freight sector. China borders 13 countries, but there are two BMI believes rail freight would benefit from better connections with. The first is Mongolia, where a railway line linking the commodity-rich country with iron ore and coal-hungry China is being developed. The second is Vietnam, where links already exist, but could be further developed, as the country steadily takes on the mantle of factory of Asia and China's trade demands steadily develop to meet growing consumer needs.

Air Freight

High Growth Sector As China Becomes Consumer Electronics Hub

Despite considerable expansion in China's air freight sector in terms of connectivity, with ever greater numbers of international operators offering air cargo links to the country China's air freight levels dipped for their second consecutive year declining by 2% in 2012.

BMI believes that this decline was due to the general malaise in the global air freight sector with IATA reporting a global air freight levels had dipped by 1.9% and cargo volumes in the Asia Pacific region were down 6.2%.

Tough Operating Environment
Asia- Pacific Air Freight (% Change y-o-y)

We believe that there is considerable growth potential for air freight in China and that as the global air freight sector starts to recover, the country's potential will begin to be realised and volume will increase. In 2013, for example, we project air freight in the country to increase by 2.1% to 5.5mn tonnes. Over the medium term, a growth of 25% is forecast, an annual increase of 4.6% with air freight volumes projected to reach 6.8mn tonnes in 2017.

BMI has picked two areas to watch out for that are developing regions in China's air freight sector. The first is Chongqing, which is developing on the back of the Chinese government's Western China Development Strategy and is becoming an IT and electronics production hub. The other area to watch in BMI's opinion is Zhengzhou, which is manufacturing products for Apple.

Air freight has long been utilised for its speed, earning it clients in the food, horticulture and pharmaceuticals sector. It has also gained clients in high-end retail, an area that is prepared to pay higher transport costs. Increasingly, the consumer IT sector is utilising air freight. The launch of the latest IT gadget requires speed, as was witnessed with the launch of the Apple iPhone 5, with the product rapidly appearing in stores in September 2012 just weeks after its announcement.

The iPhone Effect
Global Air Freight (% Change y-o-y)

The requirement for speed is something only air freight can provide and the launch of the iPhone 5 highlighted the increased impact consumer electronics is having on the air freight sector. The product's launch marked an uptick in global air freight volumes in September 2012 ending two consecutive months of decline.

As China's manufacturing sector continues to develop its expertise and the country becomes a major consumer electronics producer air freight will be in even greater demand.


No Slowdown So Far

Despite a projected slowing in China's economic growth and fears surrounding how this could impact the country's import demand, BMI continues to have a robust growth outlook predicted for the country's port sector.

The country's maritime facilities are divided into catering for commodity imports such as iron ore, coal and crude oil and the exports of containers. Demand for iron ore, coal and crude oil is determined by the country's economic expansion. A slowing in the macroeconomic picture should therefore lead to a slowing demand for these imports, as yet we have not witnessed such a slowdown.

In December 2012 (latest available data), iron ore, coal and crude oil imports were up year on year with growth rates of 10.7%, 35.6% and 8%, respectively, with volume growth also strengthening. This we believe is in response to a stimulus plan aimed at developing the country's infrastructure. We believe the impact will last throughout Q113, but that a slowdown could start to play out, particularly in H213. This would then feed through to the nation's ports, leading to a potential slowing in growth.

Imports On The Up
China Imports of Iron Ore, Coal and Crude Oil (% Change y-o-y)

The ports will, however, benefit from a more positive export outlook. Container volumes through the nation's maritime facilities are projected to tick up as the US and European consumer markets recover.

This article is tagged to:
Sector: Freight Transport, Shipping
Geography: China, China

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