Tianjin: A Future in Pieces

August 24, 2015
Editor(s): Jonathan Truong
Writer(s): Adriana Lidwina, Tracey Lin, Priya Surash-Kumar, Li Cheng, Sunita Rani

Recently, two seismic explosions in the port city of Tianjin, China has left the city in devastation and ruin. Being merely 30 seconds apart, both explosions at a chemical warehouse killed at least 110 people, displaced hundreds due to fears of airborne chemical contamination and injured at least 700. With the first blast as powerful as “three tonnes of TNT detonating” and the second being an equivalent of “21 tonnes”, the explosions shattered windows within 2 mile radius, threw large shipping containers like toys and obliterated goods and buildings down to rubble.

With ongoing efforts to neutralise highly toxic chemicals on site and airborne, the intensity of the blast continues to remain an undercurrent as enraged locals demand transparent answers from officials. Chinese Propaganda officials battle a litany of ‘inappropriate’ comments and blogs, resulting in “50 websites and 360 social media accounts” suspended. Adding to the political turmoil, the string of past industrial accidents in China blatantly underscores the lack of adequate safety measures pertaining to the storage of hazardous material. Given Tianjin’s status as a “free-trade zone”, a hub for Fortune 500 companies and its reputation as the 3rd fastest growing city in China, many are now questioning the obsession for fast paced economic growth at the expense of rigorous, yet costly safety measures.

As the largest port in Northern China, the Port of Tianjin is the main maritime gateway to Beijing, placed only 170km from China’s capital. With heavy investment into its development yielding large dividends for the Chinese government, the port can also lay claim to being:

  • The largest man-made port in mainland China
  • The world’s 3rd largest port in Total Cargo Volume measured by Metric Tons (477 million tons)
  • The world’s 10thth leading port in handling container traffic of 13 million of TEU (footnote: abbreviation for twenty-foot equivalent unit, which is an inexact unit of cargo capacity often used to describe the capacity of container ships and container terminals) containers

To get a better understanding of the scale, take Australia for comparison. In 2013, according to American Association of Port Authorities, the Total Cargo Volume and Container throughput for the largest Australian ports are 372 million (Port Hedland, ranked 8th) and 2.5 million TEU (Melbourne Port, ranked 57th ).

Source: Wikipedia

Credit Suisse analysts estimate that insurance and reinsurance firms suffered significant losses as much as $1.5bn. Furthermore, US company, Fitch Ratings, also stated that ‘chances are, the insured loss has reached far beyond that estimate and may be as much as $1.5bn depending on their reinsurance protection regime and the degree of risk accumulation within the affected areas’. It should also be noted that additional costs may also be incurred given the bottleneck caused by port closure, limiting the logistics and supply of goods that is transported via Tianjin.

The main concern however, is the spread of chemical substances stored within the explosion radius. Although assured by authorities that experts are monitoring and working to neutralize the toxins, a large amount of seepage has occurred into the waters surrounding the port and city, containing lethal quantities of substances such as arsenic. Cleaning the contamination of the waterways and airborne pollution may prove to be financially costly, but the huge loss of life in both flora and fauna in the area will also have intangible costs now that could drastically affect the ecosystem in the future.

 Source: ChinaFotoPress

Based on the loss level, there is a strong likelihood that the event would also trigger global repercussions for the foreign reinsurance industry as they may be forced to bear some of the cost and increased exposure to insurance-linked securities (ILS) funds. However, any impacts will likely to be minimal as China’s insurance protection policies make it a country where local reinsurance players are most likely to be exposed.

Fitch Ratings also believes that the claims from the blast are likely to undermine the financial performance of the major property and casualty insurers with high accumulation in affected areas. In terms of the major player affected, Fitch adds that PICC Property and Casualty Company, Ping An Property and Casualty Insurance Company of China, China Pacific Property Insurance and Taiping General Insurance are the most active insurers in the region, which amounts to 77% non-life insurance premiums underwritten while the others are covered by the local government insurance policy.

Other industries were also affected by the blast. With more than 8,000 vehicles destroyed during the explosion, this may lead to a short term shortfall in supply for well-known brands such as Volkswagen and Renault. In addition, the medical and life insurances are likely to be substantial. A majority of the affected victims are either covered by the government or under their personal life insurance. Each injured, depending on the extent of injury, can claim compensation between CNY20,000 (3130.45 USD) and CNY35,000 (5478.29 USD) while CNY50,000 (7826.13 USD) in the event of death.

Source: ChinaFotoPress

This incident provides a severe warning to the Chinese authorities to review and improve their supply chain safety regulations. Due to the large scale loss of life and caused by the recent blast brought down Tianjin’s reputation as the third-fastest growing region on the mainland, it could also bring down the reputations of the port-trading industry in the eyes of both Chinese and global traders. 

These prevention methods can be done by the passing of a policy that tightens the prohibition on the trade of hazardous products and stricter product inspections. It is also encouraged that reconstruction measures to rebuild the devastated port is being done with resources that comprised of only highly innovative assets and materials that could conduct these inspections automatically, therefore emphasizing the port products’ safety to its users. By doing so, outside investors might regain their interests on trading through the Tianjin port given these assurances.

However, it is important to note that Chinese authorities must also prioritize the disclosure of the existence of any current safety regulations, as well as any plans on further developments, in order to salvage the loss of faith. Full disclosure would cure the confusion amongst the local activists and foreign investors over the current media statements that seem to contradict the reality of the aftermath.

Although many fingers will be pointed at those responsible for the lax behaviour in regards to safety measures and monitoring of port operations, more attention must be placed into preventing the environmental disaster that is continuing to spread, otherwise the negative externalities caused today may have a harsh impact on future generations.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

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Jonathan Truong

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Adriana Lidwina

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Tracey Lin

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Priya Surash-Kumar

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Li Cheng

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Sunita Rani

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