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From：ASB

Time：2016-03-15

Many new large tankers, bulk carriers and container ships will be delivered to shipowners in China during 2016. These vessels will greatly augment the fleet of China-owned ships, contributing to further robust growth after last year’s sharply accelerating upwards trend.

Accompanying this fleet capacity expansion is organisational reform. Plans to reorganise Chinese state-owned shipowning companies, announced last year, prescribe consolidation into bigger enterprises designed to improve efficiency and profitability. It is a massive upheaval. This article examines recent changes and what these imply for future progress.

A stronger wave returns

In 2015, as shown by the graph below, a changing pace occurred when the China-owned fleet’s growth picked up sharply to 8 percent, after decelerating over several years to only 2 percent in 2014, based on Clarksons Research figures. Within the fleet as a whole last year, newbuilding ship deliveries increased, scrapping decreased, secondhand purchases rose while secondhand sales fell. Among vessel types, one especially notable feature was a huge surge in container ship capacity, expanding that segment by about one-third.

includes all tankers; bulk carriers 10K dwt & over excludes Hong-Kong owned / source: Clarksons Research

The China-owned merchant ship fleet, excluding tonnage owned in Hong Kong, is the world’s third largest by nationality of owner with 11 percent of the global total, but is still well below number two Japan and Greece in the top position. Elevation to the number three slot has reflected rapid expansion, averaging 13 percent annually in the past seven years from 2009 to 2015. In the first part of that period the fleet grew at an exceptionally fast rate, since when a continuous slowing preceded last year’s growth resurgence.

Over an entire decade, the China-owned fleet expanded almost three-fold, from under 44 million gross tonnes at the end of 2005, to over 130m gt at the end of 2015. The bulk carrier segment started and finished as by far the largest element but its growth over the period, at 240 percent to 72m gt, was less than the whole merchant fleet’s percentage rise. Tankers increased by 185 percent to 23m gt, while the container ship segment almost quadrupled in size to reach 19m gt, from a relatively small 5m gt at the decade’s beginning.

There was substantial growth in the ‘other ship types’ category as well. This category includes gas carriers (liquefied natural gas and liquefied petroleum gas), multi-purpose and general cargo ships, roll on-roll off vessels and vehicle carriers, cruise and passenger ships and offshore vessels. A 74 percent overall increase in the group was seen over the past decade, raising the total to almost 16m gt.

Gross tonnes are used here to illustrate cargo carrying capacity, because this is a convenient common measurement when aggregating different ship types. 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 ownership of vessels is defined by the country where the parent owning company is located, although location is not always immediately obvious and sometimes requires interpretation and subjective judgement.

Distinctive characteristics

Last year’s growth resurgence in the China-owned merchant fleet resulted from large variations in the pace of all the main components. Newbuilding ships delivered to Chinese owners from shipbuilders rose by 23 percent to reach 10.6m gt, while sales for demolition (recycling) were 25 percent lower at 5.1m gt, based on Clarksons Research data.

Also, Chinese owners raised their purchases of secondhand tonnage by 9 percent, to 6.3m gt while sharply reducing sales on the secondhand market by 45 percent, down to 2.8m gt. However, these figures are only indicative, because some purchases and sales took place between domestic owners, not to or from foreign owners on the international market.

Rising fleet capacity involved growing numbers of individual vessels, but these advanced less rapidly because of strong growth in the average ship size. From 4,004 ships at end-2005, the vessel number increased to 6,663 at end-2015, a 66 percent expansion, compared with a 199 percent expansion in gross tonnage carrying capacity. Calculations based on these figures show that the average size of ship in the fleet grew by 80 percent from 10,887m gt, to 19,550 gt.

The largest part of the China-owned merchant ship fleet participates in international trade, carrying cargo to and from China or in ‘cross trades’ between other countries. The remainder, a substantial capacity volume, operates in the Chinese coastal trade which is a protected market, mainly restricted to Chinese registered, owned and operated vessels.

A major ship tonnage proportion participating in international trade is operated under open registries or ‘flags’. According to UNCTAD figures, at the end of 2014 just over half (53 percent) of the China-owned merchant ship fleet was registered under foreign flags, although this includes tonnage registered in Hong-Kong, while the remaining 47 percent was registered under the national flag. Advantages derived from foreign flag registration include greater operational, financial and regulatory flexibility than available under the national scheme.

Policy priorities: upgrading and consolidation

During the past twelve months, official policies implemented by China’s government greatly assisted the country’s shipowning companies. One particular benefit was the announcement in June last year that scrapping subsidies will be continued, for a further two years. The original two-year subsidy scheme, due to expire at the end of 2015, was extended until the end of 2017.

Scrapping subsidies are restricted to China-flagged ships. Shipowners participating are required to place newbuilding orders at Chinese shipbuilders with a tonnage at least equivalent to the tonnage being scrapped in domestic recycling yards. This policy has assisted a number of Chinese owners with fleet renewal programmes, in a period when global market conditions in some sectors were poor, adversely affecting returns and profitability. Several shipowners have avoided corporate financial trading losses, as a result of the subsidies.

A perhaps more dramatic event within the past twelve months, in terms of its immediate global shipping market impact, was the government’s steps to implement consolidation in the state-owned fleet. This intention had been foreshadowed earlier in a reported strategy to support and modernise the shipping industry, including encouraging mergers and acquisitions. Consequently the broad aim was already visible, and only the precise timing of the first major move was a surprise.

At the beginning of August 2015 it was announced that a working committee of key executives from two state-owned shipowning companies – COSCO Group, and China Shipping Group – was being formed. An agreement on consolidation within a short period was thought likely to be followed by a full integration starting around 2017. A possibility of this move approaching had been envisaged by observers, after a joint venture was set up several months earlier in May between the two groups, to purchase secondhand several mega-size valemax ore carriers.

Subsequently, in November 2015, two more state-owned shipowning companies -China Merchants Group, and Sinotrans & CSC Holdings – were reported to have entered negotiations to agree a merger. It was commented that, compared with the COSCO/China Shipping combination, this merger was likely to prove more complex, given their widely differing activities.

Players and their fleets

The four large state-owned companies now in the process of merging into two huge enterprises – COSCO, China Shipping, China Merchants, and Sinotrans & CSC – dominate the China-owned fleet. There are numerous other companies owing ships as well, some of which are leasing and financing companies connected with Chinese and foreign operators.

Extensive company-owned fleets of specific vessel types can be identified. At the end of 2015 there were ten totalling 2m gt or more. The biggest, based on Clarksons Research figures, was China Shipping Container Line’s 76 container ships totalling 6.3m gt. The next biggest was the 34 tankers owned by China VLCC, a joint venture between China Merchants Energy Shipping (51 percent holding) and Sinotrans & CSC (49 percent), amounting to 5.4m gt. COSCO (HK) Shipping’s 85 bulk carriers totalling 4.5m gt were in third position, although when bulk carriers owned by other elements in the COSCO group are added, this fleet becomes much larger.

During the past twelve months the China-owned fleet has been augmented not only by many newbuilding deliveries but also by some remarkable major acquisitions of existing ships. In May last year COSCO bought four 400,000 dwt valemax ore carriers from Brazilian mining company Vale. A new joint-venture company was set up to operate these, China Ore Shipping, between COSCO (51 percent holding) and China Shipping Group (49 percent).

Soon after, in July, China Merchants Energy Shipping also confirmed the purchase of four valemaxes from Vale, and set up a subsidiary, China VLOC (an abbreviation for very large ore carrier) to operate these. This agreement was followed by the purchase in December by ICBC Financial Leasing, a subsidiary of Industrial and Commercial Bank of China, of a further four valemaxes.

These acquisitions, adding 4.8m dwt to the China-owned fleet, were preceded by an earlier pioneering deal in November 2013 when privately-owned Shandong Shipping bought four valemaxes. All the ships in this category purchased by Chinese owners have been chartered-back to Vale on long term twenty years or longer charters. The recent changes of ownership followed settlement of a dispute with the Chinese authorities, previously preventing valemaxes entering discharge ports in China.

A vast newbuilding orderbook

An indication of potential for future growth in China’s merchant ship fleet can be derived from the new vessels orderbook. The table summarises contracts for larger ships now under construction or scheduled to be built in the next three years.

CHINA-OWNED FLEET NEWBUILDING DELIVERIES SUMMARY

    number of ships (larger vessels only), scheduled delivery dates, as at January 2016

Source: compiled by Richard Scott from Clarksons Research and other data. Excludes Hong-Kong owned.

Many orders for ships below the specific size ranges included in the table have been placed with shipbuilders. The entire orderbook of all vessel sizes for China-based owners at the beginning of 2016, according to Clarksons Research, comprised 621 ships totalling 33.3m gt, equivalent to 26 percent of the existing 130m gt China operational fleet. Just over half, 18.5m gt, was scheduled for completion in 2016. This huge order volume was the world’s largest by owner nationality, exceeding that of Greece (29.4m gt) and Japan (25.4m gt).

Among notable highlights of the orderbook for ships contracted by owners based in China, the schedule shows container ships in the 19-20,000 teu ULBC (ultra-large box carrier) size group numbering 23, although apparently three of the five due for delivery this year will not be employed by Chinese container service operators. Other large container ships in three size bands (9,300-9,400 teu, 11,000 teu and 13.500-14,500 teu) have been ordered, totalling 43, including a substantial number which seem to be destined for charter to foreign operators.

Orders placed for large tankers are also a prominent feature. Multiple orders arranged last year raised the total orderbook for VLCC (very large crude carrier) tankers in the 308-320,000 dwt size group to 43, as at the beginning of this year. This total includes a noteworthy order for ten ships placed last December by the China VLCC joint venture, with delivery scheduled for 2017 and 2018. Other categories featuring are 157-160,000 dwt Suezmax tankers (numbering 6) and 114-115,000 dwt products tankers (numbering 8).

Standard capesize 180,000 dwt bulk carriers, numbering 11, comprise a major part of the large bulk carriers orderbook for delivery to China-based shipowners. Another major part consists of 208-210,000 dwt newcastlemax vessels, totalling 14, while the remaining four are 259,000 dwt wozmax ships. Another ship type category is large LNG carriers, comprising six of 174,000 cbm.

An additional mammoth order, not included in the table, was revealed in early March 2016. It had been widely expected for some time. Three Chinese shipping companies reportedly have agreed newbuilding contracts with shipbuilders in China for a further 30 valemax 400,000 dwt ore carriers, to be completed from 2018 onwards. This tonnage may directly replace older units currently employed in the Brazil to China iron ore trade, many of which are single-hull tankers converted to bulk carriers and approaching the end of a normal lifespan for such vessels.

Robust fleet expansion ahead

It seems fairly clear that several parts of China’s fleet are set to grow rapidly and substantially, despite assumed retirements of existing older or uneconomical ships. Newbuilding deliveries scheduled in the next two or three years, especially larger vessels, are voluminous and further additions to the orderbook are quite likely.

Nevertheless, there are uncertainties about the precise pace of expansion, which apply generally to fleets of other nationalities. Frequently, the delivery timing of a newbuilding ship from a shipbuilding yard is later than scheduled, for a variety of reasons. Additional future ordering is hard to predict. Scrapping of existing tonnage is also hard to predict, while second-hand sales to, and purchases from, owners located in other countries are often not foreseeable except in very broad terms.

What other clues point to the conclusion that strong growth in the China-owned fleet can be envisaged? One of the clearest signs is the Chinese government’s long-stated intention to see a greater proportion of the country’s vast seaborne trade transported by ships owned by companies based in China.

This aim has been most visible as a target in the VLCC tanker segment of the crude oil imports trade. Earlier reports suggested that the government’s target was as much as 85 percent of foreign seaborne crude oil purchases carried by Chinese controlled ships. A gigantic newbuilding order surge for up to eighty VLCCs was anticipated. Over the past couple of years many tankers of this type have joined the fleet and many more were contracted during 2015, partly fulfilling this aspiration.

A factor which may be exerting a restraining influence, to some extent, on China-based shipowners ordering further ships, is the slowing pace of China’s import and export trades. Also, there is more uncertainty about the future pace of global seaborne trade as a whole in most cargo sectors, and about prospects for world tonnage demand/supply balances and consequent effects on freight market rates. Chinese owners are active in numerous cross-trades between foreign countries, and some may be viewing the outlook more critically.

These reasons, albeit partly conjectural, suggest that some caution is justifiable about predicting sustained rapid growth in the cargo-carrying capacity of the China-owned fleet. Yet signs pointing to substantial expansion during 2016 – the Year of the Monkey – and into next year, at least, are prominently displayed.

Source: Article by Richard Scott, associate, China Centre (Maritime), Solent University & MD, Bulk Shipping Analysis