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China-owned fleet’s brisk growth

Vigorous expansion in the China-owned fleet of ships over the past two years looks set to persist in the next twelve months and further ahead. Large numbers of new tankers, bulk carriers, container ships and other vessels are scheduled to begin operating. While some fleet growth drivers are hard to predict, a strong upwards trend seems likely.

Organisational changes are accompanying enlargement of the fleet’s carrying capacity. Reorganising Chinese state-owned shipping companies has progressed. Consolidation into much bigger businesses aims to facilitate efficiency improvements and enhance competitiveness, boosting financial performance.

Resuming a powerful wave

Stronger fleet expansion has returned. In 2016 the China-owned merchant ship fleet grew by an estimated 7 percent for the second consecutive year, after decelerating quite dramatically over several years to only 2 percent growth in 2014, according to Clarksons Research figures. During last year, although newbuilding deliveries were lower than seen in the previous twelve months, reduced scrapping and other changes contributed.

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

At the end of 2016 the entire China-owned fleet, excluding Hong Kong-owned tonnage, reached 139.3 million gross tonnes, a three-fold expansion over one decade. This volume still comprises the world’s third largest by owner nationality, at 11 percent of the global total. Greece is in the top position, and number two is Japan.

The bulk carrier fleet, China’s largest segment, has seen relatively slow 0-3 percent increases in the past few years, reaching a total of just over 75m gt at the end of last year. Meanwhile growth in tanker capacity has rebounded after slowing to almost nil in 2014, growing by 8-10 percent annually to 25m gt at end-2016.

In the container segment, the past three years have seen remarkably fast expansion. This included 16 percent growth last year to 21m gt following a 26 percent rise in the preceding twelve months. Among other notable changes, the gas carrier fleet of liquefied natural gas (LNG) and liquefied petroleum gas (LPG) vessels has almost doubled over the past three years, reaching 2.2m gt.

Ship’s 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 is defined by the country where the parent owning company is located.

Notable fleet features

Last year, based on the figures already discussed, the entire China-owned merchant ship fleet’s tonnage growth was almost 9m gt, compared with growth of 8.3m gt in the previous twelve months. This sequence enabled the percentage rate of increase to remain stable at 7 percent. But changes in key influences varied.

In 2015 overall fleet expansion accelerated, reflecting higher newbuilding deliveries and second-hand purchases than seen in the preceding year, coupled with lower scrapping and lower second-hand sales. In 2016 all components fell, according to Clarksons Research provisional calculations. Newbuilding deliveries, scrapping and second-hand purchases and sales declined at varying rates, the result of which was a larger net tonnage growth figure.

Figures for second-hand purchases and sales by owners based in China appear to mainly reflect transactions with foreign owners. However, some transactions may represent deals between domestic Chinese owners.

Coupled with rising capacity, the number of individual ships in the China-owned fleet has risen, although not proportionately. A decade ago at the end of 2006 there were 4,304 ships, with an average size of 10,987 gt. Ten years later, at the end of last year, there were 6,985 ships with an average size of 19,941 gt. This 81 percent growth in the average ship size, over a relatively short period, emphasises the effects of introducing many more huge tankers, bulk carriers and container ships.

Observed employment patterns confirm that the largest part of this fleet participates in international trade. Cargoes are carried to or from China, or in cross trades between other countries. A substantial number of ships, the remainder, is employed partly or often wholly in the Chinese coastal trade, a massive protected market restricted mainly to Chinese registered, owned and operated tonnage.

Just over half of the entire fleet operates under foreign flags, mostly open registries. The latest, end-2015, breakdown published by the United Nations Conference on Trade and Development (UNCTAD) shows 53 percent flagged out, although this percentage (which has remained stable in the past few years) includes a large volume registered under the Hong Kong flag. Advantages of foreign flag registration include greater operational, financial and regulatory flexibility compared with the Chinese flag.

Consolidation and upgrading

The impact of government policy initiatives on the Chinese fleet’s organisation and development over the past twelve months has been pervasive. Mergers among the big state-owned shipping companies were completed. Scrapping subsidies continued, providing benefits for fleet renewal.

Consolidation on a vast scale occurred when COSCO merged with China Shipping Group in the first quarter of 2016. Both state-owned groups operated extensive fleets involved in many sectors, and provided many maritime services. Consequently it was a complex task. Later in 2016 there was another rearrangement between state-owned shipping companies. China Merchants Group completed its acquisition of Sinotrans & CSC Holdings. A further amalgamation last year was a merger of the valemax operations of China Merchants and ICBC Leasing.

These dramatic upheavals among the companies with the largest Chinese shipping operations have changed the China-owned fleet’s profile. Amid difficult global circumstances in many sectors, the aim is reorganisation to increase efficiency, reduce costs, improve competitiveness and boost financial performance, benefiting from greater economies of scale in the world marketplace.

Fleet renewal has been assisted by the government’s continuing shipping subsidy scheme, which was extended until the end of this year. Only China-flagged ships are eligible for inclusion. Shipowners participating in the scheme are required to place newbuilding orders at Chinese shipbuilders with a tonnage at least equivalent to the tonnage being scrapped in domestic recycling yards.

Becoming more prominent: the players

The China-owned fleet is 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. A number of companies expanded their fleets during the past twelve months.

Some especially large fleets of specific vessel types, owned by individual companies or groups, are prominent. The largest existing at the end of last year were COSCO’s 206 bulk carriers totalling 10.6m gt, and 140 container ships totalling 10.5m gt (based on figures derived from Clarksons Research data). Other big tonnages were COSCO’s 7.9m gt tankers, and the tanker fleet owned by China Merchants subsidiary China VLCC, at 6.2m gt. BoCom Leasing, a subsidiary of the Bank of Communications owned a container ship fleet totalling 3.2m gt.

Among expanding categories, the fleet of China-owned 400,000 deadweight capacity valemax ore carriers increased last year. In June Industrial and Commercial Bank of China (ICBC) purchased a further three valemaxes from Brazilian mining company Vale, to join the four it had already bought. Two other shipowners – COSCO subsidiary China Ore Shipping, and China Merchants subsidiary China VLOC – had also each bought four valemaxes during 2015. In a preceding deal, Shandong Shipping leased four.

As a result, the number of valemaxes operated by Chinese owners has reached 19, over half the total 35 ships of this type operating. All vessels acquired have been chartered back to Vale on long term charters extending over twenty years or more. Acquisitions followed settlement of a dispute with the Chinese authorities which had prevented valemaxes entering discharge ports in China. The iron ore trade from Brazil to China is the main emphasis of employment.

Many newbuildings on order

Clear potential for future growth in China’s merchant ship fleet, over the next couple of years, is visible in the listings of new vessels which have been ordered from shipyards. The actual timing of newbuilding deliveries may differ from that reported, however.

As calculated at the beginning of this year, orders placed by China-based owners, for all vessel types and sizes, comprised 485 ships amounting to 28.8m gt. The total was equivalent to just over one-fifth of China’s 139.2m gt existing fleet, according to Clarksons Research. Within the 28.8m gt total, 13.0m gt or 45 percent was scheduled for delivery in 2017 and a similar 46 percent next year.

Compared with other leading shipowning countries, Chinese owners’ orderbook was the biggest. It exceeded that of Japan, 25.8m gt, and Greece, 18.5m gt.

China-owned fleet: newbuilding deliveries schedule

large ships, as at 1 January 2017 (excludes Hong Kong-owned)

number of ships, capacity (000 teu, dwt or cbm), scheduled delivery dates

2019 deliveries scheduled: 12 valemax 400,000 dwt totalling 4,800,000 dwt / source: compiled by Richard Scott from Clarksons Research order listings

The table shows newbuilding orders for larger ships only, scheduled for completion in 2017 and next year. Among notable highlights, container ships in the 19-21,000 teu ULBC (ultra-large box carrier) size group number 18. In the container ship size groups between 9,400 teu and 14,500 teu, a large number of the 36 vessels seem to be financing arrangements destined for charter to foreign container service operators.

Tanker newbuilding orders for the China-owned fleet are also prominent. In particular, VLCC (very large crude carrier) orders for 300-319,000 dwt ships number 30. Almost half, 14 ships, have been ordered by the China VLCC company (China Merchants).

Another notable category is the valemax 400,000 dwt ore carriers, a further 30 of which have been ordered by Chinese shipowners. Next year 18 are scheduled for delivery, followed by 12 in the next twelve months. A large part of this tonnage may directly replace older vessels currently employed in the Brazil to China iron ore trade, many of which are ore carriers converted several years ago from single-hull tankers. In addition, bulk carriers in the capesize category on order for China-based owners number 21, including 8 standard size ships, 9 newcastlemax and 3 larger wozmax vessels.

A strong wave could prevail

Continued growth in the China-owned merchant ship fleet over the next couple of years at least is likely, based on current indications. Yet, although the direction of the trend seems clear, many uncertainties surround estimates of the pace.

One question arising is whether vessels now on order will be mainly delivered on time, according to reported schedules, or how much ‘slippage’ will occur. Also, orderbooks could be augmented by additional new contracts. These are hard to predict except in general terms, a comment applicable as well to sales of existing ships for scrapping. Moreover, second-hand purchases from and sales to foreign shipowners are not usually accurately predictable.

Nevertheless, despite such imponderable aspects, an underlying theme reinforces expectations of possible robust future fleet expansion. A long-stated Chinese government aim is to see a greater proportion of the country’s vast seaborne trade transported in ships owned and controlled by companies based in China. The extensive VLCC and valemax newbuilding programmes are consistent with this objective.

Another broad theme is China’s ‘One Belt, One Road’ (OBOR) gigantic scheme of integrated transport and infrastructure projects. Port developments link elements of the Belt’s land routes with the Road’s sea routes. The ‘Road’ part of the title represents the concept of the twenty-first century Maritime Silk Road, a sea route stretching from the South China Sea and South East Asia, through the Indian Ocean and Middle East area, into the Eastern Mediterranean. Some of China’s fleet developments can be related to this grand plan.

While there is inevitably great uncertainty about the longer term trend, in the shorter-term, perhaps more predictable future, the China-owned fleet of merchant ships seems set to experience solid expansion. During the current Year of the Rooster, another large increase is foreseeable.
Source: Article by Richard Scott, associate, China Centre (Maritime), Southampton Solent University and managing director, Bulk Shipping Analysis

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