Demand Slump Stumps Transporters

Fuel concerns

Besides falling demand, fuel costs are another concern for transportation companies.

The National Development and Reform Commission (NDRC), China's top economic planning body, cut fuel prices in mid-December. Gasoline prices were slashed to 5,580 yuan from 6,480 yuan per ton and diesel to 4,970 yuan from 6,070 yuan per ton. But such fuel prices were based on $83.5 per barrel of crude. International crude prices have since then fallen sharply to about $40 a barrel from $147.

Last month, the NDRC cut gasoline and diesel prices again by 140 yuan and 160 yuan per ton, or by 2 and 3.2 percent, respectively. Analysts said the cut will bring down the price of retail gasoline by a little more than 0.1 yuan a liter and is a sign that the government could cut retail fuel prices more frequently to take them closer to global market levels.

"Domestic fuel prices are still high and we anticipate further price cuts," said Zhu Jihua, president of Hangzhou Jihua Logistics Co Ltd. The price cut would not result in higher profits for his company, he noted.

"Our clients are all cutting costs because of the financial crisis. Now because of fuel price cuts, they would further slash their logistics expenditure and bargain for lower prices with us," said Zhu. He said he expects transportation prices to drop 5 percent in 2009.

The introduction of the fuel tax, however, seems to spell some good news for the industry. Beginning Jan 1, the gasoline tax increased from 0.2 yuan to 1 yuan per liter, while diesel tax rose from 0.1 yuan to 0.8 yuan a liter. But at the same time the government scrapped six categories of tolls for road maintenance and management.

"Replacing road maintenance fees with a fuel tax can alleviate transportation companies' burden to some degree, but in reality the positive effect is not that big," said Chu Xuejian, vice-president of Shanghai Logistics Society.

For now, the tolls on expressways and bridges remain unchanged. Fuel and road tolls alone account for 60-70 percent of the companies' total transportation costs. Road maintenance fees are also fixed costs for transportation firms while fuel taxes are not. So, the more you drive, the more you pay.

Take, for example, a truck with 5 ton load capacity, Song said, he would be paying less now if the truck runs for less than 5,000 km a month. But the costs would be higher than before if the truck runs more than 5,000 km a month.

The new policy is expected to force logistics companies to cut costs by switching to more fuel-efficient vehicles and optimizing their traffic networks, said An Jianghong, a logistics analyst with Anbound Group, a consulting firm based in Beijing.

As profit margins of traditional logistics services such as transportation and warehousing keep falling, one-stop supply chain management and other high value-added services are becoming new profit engines, analysts said.

Guangdong-based PG Logistics Group Co Ltd said its sales still maintained "a moderate growth" in 2008 mainly due to diversification of service.