Expectations of robust growth in the China-owned merchant ship fleet this year have been reinforced by expansion during the first half. Additional container ships, tankers and bulk carriers contributed a large increment. The trend looks set to continue, as many new vessels are on order for delivery over the next few years.
Further reorganisation progress among Chinese state-owned shipping companies seen in recent months is another aspect. Changes under way are designed to improve efficiency and boost competitiveness, enhancing financial performance amid difficult global circumstances in the main market sectors.
An enlarging fleet
In the past two years, stronger fleet growth returned to the China-owned fleet. After a previous deceleration, increases of 7 percent in 2015 and 8 percent in 2016 were seen, measured in gross tons capacity. Based on provisional Clarksons Research calculations, the first half of this year saw an increase of 5 percent (comparing the fleet at the end of last year with the total at end-June 2017). Numerous newbuilding deliveries were recorded.
At mid-2017 the entire China-owned commercial fleet, excluding Hong Kong-owned vessels, reached 147.2 million gross tonnes. This volume comprises the world’s third largest by owner nationality, at 11.5 percent of the global total. Greece is the biggest, and Japan is number two.
During the first half of this year bulk carriers, the largest part of the fleet, increased by 3 percent, reaching 77.5m gt. Tanker capacity was up by 8 percent to 27.4m gt, while in the container ship segment a 9 percent rise to 23.5m gt occurred. Gas carriers, liquefied natural gas (LNG) and liquefied petroleum gas (LPG), experienced an 18 percent increase to 2.6m gt.
Ships’ cargo carrying capacity (or, more correctly, total lifting capacity) is expressed here in gross tonnes, because this is a common measurement. Usually, bulk carriers and tankers are measured by deadweight tonnes, container ships by the teu (twenty-foot equivalent unit) and gas carriers by cubic metres. Another statistical point is that vessel ownership nationality is defined by the country where the parent owning company is located.
Additions and employment
Among notable changes in the China-owned fleet during the 2017 first half, newbuilding deliveries of large ships were prominent. According to reports, six tankers of between 308,000 dwt and 319,000 dwt, in the very large crude carrier (VLCC) size category were delivered. Two LNG carriers of 174,000 cubic metres were completed. A number of new 9,400 teu container ships joined the fleet, while numerous capesize bulk carriers in the 180-210,000 dwt size group also were delivered. Further units may be added when more complete information is available.
Where are these and other ships employed? Many new vessels, as well as a large portion of the existing fleet, participate on routes connecting China with import suppliers or, in some cases, export markets. Some are employed in international ‘cross trades’ where China is not involved. Yet other, often smaller, vessels participate partly or wholly in the Chinese coastal trade, a huge protected market limited mainly to Chinese registered, owned and operated tonnage.
An analysis published several weeks ago by Clarksons Research revealed that the China-owned fleet frequently visits ports in China. Currently as much as 74 percent of port calls by ships in this fleet (based on tankers and bulk carriers only) are at domestic ports. The result contrasts with employment of these vessels by some other top shipowning countries. Japan-owned ships home port visits comprised about 53 percent of the total while, for the number one owning country Greece, a low 9 percent was observed.
Organisational changes are also prominent. As well as the mega-merger between COSCO and China Shipping Group last year, another large merger of state-owned shipping companies was arranged but not fully implemented. During the first half of 2017 reports suggested that the Chinese government was applying pressure for China Merchants Group, and Sinotrans & CSC Holdings, to completely integrate their businesses, signs of which later emerged.
What can be achieved by such amalgamations? Consolidation is widely recommended as a necessary step towards competing more strongly and achieving greater market share, an especially valuable attribute when over-capacity prevails and markets are weak. Increasing efficiency, reducing costs, benefiting from business ‘synergies’ and leveraging economies of scale are all seen as useful advantages of this process. But historical examples show that the improved financial performance anticipated sometimes proves difficult to attain.
The China-owned fleet is now dominated by the two new groupings, COSCO and China Merchants. Numerous other companies also own ships, some of which are leasing and financing businesses connected with Chinese and foreign operators.
Another consolidation of great significance for the global shipping industry has begun, involving a state-owned Chinese company and a foreign ship operator. In mid-July this year the Hong-Kong owned Orient Overseas Container Line (OOCL), the world’s seventh biggest container service operator, with 66 owned ships totalling about 440,000 teu, agreed a $6.3 billion takeover by China’s COSCO.
Analysis by Drewry Maritime Research characterises OOCL as being ‘a very well-run company’. The combined COSCO-OOCL operation is placed in the number three position among container lines, after leaders Maersk and MSC. Based on June 2017 data, calculations showed an existing COSCO-OOCL fleet totalling 2,185,000 teu capacity, equivalent to an 11 percent share of the world container ship total. Both COSCO and OOCL are members of the Ocean Alliance of container shipping lines which, it is suggested, will be beneficial in facilitating the merger.
A possible obstacle is foreshadowed by a comment that the takeover is likely to prove ‘tricky and sensitive’. The deal is subject to approval by various regulators in Europe and the USA as well as China, who will consider competition aspects.
Orders imply fleet growth
China’s merchant ship fleet capacity will be greatly determined by many new vessels ordered from shipyards for delivery in the remainder of this year and 2018, as well as later. However, capacity expansion will be affected also by scrapping of older ships and by second-hand purchases and sales, influences which are not straightforward or easy to predict.
As calculated at mid-2017 orders at shipbuilding yards placed by China-based owners, for all vessel types and sizes, comprised 405 ships amounting to 24.2m gt, according to Clarksons Research. The total was equivalent to just over 16 percent of China’s existing fleet. Within this total, 6.8m gt or 28 percent was scheduled for delivery in second half 2017 and 55 percent next year. The actual timing of newbuilding deliveries may differ from that scheduled, however.
Among notable vessel types on order, container ships in the 19-21,000 teu ULBC (ultra-large box carrier) size group, and 9,400-14,500 teu range, are prominent. Tanker newbuildings for the China-owned fleet include VLCC 300-319,000 dwt orders. Also, a second phase of the valemax 400,000 dwt ore carriers category is approaching, with a further thirty ships ordered for Chinese shipowners. Additionally, numerous bulk carriers in the capesize category have been ordered.
Perceptions of robust future fleet enlargement are reinforced by an underlying theme. A long-stated Chinese government aim is to ensure that a greater proportion of the country’s vast seaborne trade is transported in ships owned and controlled by companies based in China. The extensive container ship, VLCC tanker and valemax ore carrier newbuilding programmes are consistent with this broad objective.
The leading tanker owning company, China VLCC, in May this year was reputed to control the world’s largest fleet of VLCCs. This operation is a subsidiary of China Merchants (it was originally jointly owned with Sinotrans & CSC, which has merged with China Merchants), controlling 41 ships and having placed orders for 12 newbuildings to be delivered during the remainder of this year and 2018. Reports suggested that additional acquisitions were being considered, intended to further enlarge fleet capacity.
Noteworthy also was a report indicating that Chinese owner Shandong Shipping had been looking at possible secondhand VLCC purchases, adding to its involvement in the bulk carrier and gas sectors. A key motivation for buying large tankers appeared to be to provide extra, more economical transportation for crude oil imports by small private independent refiners. These refiners, known as ‘teapots’, many of which are located in Shandong province, have seen a great expansion of their imports after receiving larger allocations of government quotas.
In the container sector one commentator has suggested, perhaps controversially and apparently based on supposition, that China’s target is to achieve the number one position in the container ship operator world ranking. Both commercial and geopolitical logic, it is argued, point in this direction. That contention is based on an impression that China is anxious to protect supply chains, while strengthening its defence and security presence. It is suggested that a much larger container shipping involvement can assist in attaining these objectives.
An elevated role
Other aspects relevant to the upwards fleet trend are visible. How does China’s Belt and Road Initiative (also known as ‘One Belt, One Road’ or OBOR) relate positively to the China-owned merchant ship fleet? The BRI’s main physical feature is a planned huge scheme of infrastructure projects intended to improve trade connectivity across a wide geographical area. The ‘Road’ part of the title represents the ‘21st Century Maritime Silk Road’ concept, a sea route pattern stretching from the South China Sea and South East Asia, through the Indian Ocean and Middle East area, into the Eastern Mediterranean.
Port developments progressing in a number of foreign locations link the Road’s sea routes with elements of the land routes in the ‘Silk Road Economic Belt’, the second portion of the grand scheme. China’s merchant fleet expansion can be related in part to this scheme, although actual shipping services on the sea routes or associated with these have not been accorded as much attention as the improvement of port facilities.
Illustrating how shipping services are evolving, recent news highlighted COSCO Shipping Specialized Carriers Company, which operates 120 ships including multipurpose and heavy lift tonnage. These vessels are often employed beyond BRI countries, to many destinations in Africa and South America. Cargoes of construction materials needed for building power plants, factories, roads and railways are carried, as well as a wide range of heavy plant and machinery and manufactured goods.
Attention has been drawn also to a category of the China-owned fleet where ship employment is fully controlled by foreign companies. This feature occurs where vessels are bought by Chinese companies for leasing to foreign operators. Prominent providers of this type of lease finance are International Commercial Bank of China (ICBC), Minsheng Bank, and Bank of Communications (BoCom). Many container ships have been financed. A total $11.5 billion was reportedly invested in shipping by Chinese leasing groups during 2016.
One news item suggested that, if future market weakness resulted in foreign companies defaulting on payments due to Chinese financiers under leasing arrangements, potentially China could gain a more powerful influence over the global shipping industry. In response, a leading shipbroker contended that such an opinion appeared to be an exaggeration.
Adopting a broad viewpoint, strong evidence points to the China-owned merchant ships fleet experiencing further substantial growth in the years ahead. Partly this may reflect more financing of vessels, leased to foreign shipping companies, which have full long-term operational control. Mostly, however, shipping companies based in China seem likely to be the operators of additional tonnage joining the nationally-owned fleet. Although some uncertainty surrounds the exact pace, a solid upwards fleet trend can be predicted.
Article by Richard Scott, associate, China Centre (Maritime), Solent University and managing director, Bulk Shipping Analysis
Article arranged on behalf of Hellenic Shipping News Worldwide