Shipping

Ruling the waves

Industry expert Basil Karatzas on China’s quest to dominate global shipping

Basil Karatzas w

Karatzas: China has invested $50 billion in port infrastructure globally

The shipping industry, whether for dry bulk, tanker, containership or offshore assets, has been suffering from a monumentally weak freight rate environment for years. The Baltic Dry Index (BDI), the shipping sector’s proxy, came close to an all-time high at 13,000 points in May 2008. But in February last year, it dropped to an all-time low of 296 points.

A wave of overbuilding of new vessels and subsequent tonnage overcapacity at a time of declining trading volumes are the immediate drivers for the industry’s poor state. News about shipping these days is dominated by headlines of companies filing for bankruptcy. There is no better example than Hanjin Shipping: a court in Seoul has just declared the former South Korean shipping leader bankrupt and ordered it liquidated, a move that the Wall Street Journal has described as “the shipping industry’s largest ever collapse”.

Many independent shipowners are looking to exploit the anaemic state of the market by buying up proverbial ‘cheap ships’ under the assumption that history repeats itself and that eventually these acquisitions will be more rewardingly priced.

Similarly, bigger shipowners with larger fleets and better access to the capital markets are looking to expand their market share by buying fleets of ships.

Effectively, now that the market is at distressed levels, shipowners small and large are looking to economically grow their fleets under the presumption that better days are ahead of us.

‘What goes down, eventually will go up’ is the mantra of the moment.

Taking a step back, shipping is a derivative industry in the sense that cargo ships are used to transport raw materials and processed or finished products between production and consumption sites.

Demand for transport (shipping) is derived from the demand for these commodities and cargoes, as no-one wants to charter a cargo vessel just for the fun of it.

In this way, the shipping industry is an integral part – a floating pipeline or highway, figuratively – of the worldwide supply chain, and a crucial interlink for international trade, international relations and globalisation.

In other words, shipping is part of a much bigger picture.

Many shipowners – primarily those in the Western world – have dedicated their efforts to growing their fleets by any means. Their assumption once again is that history repeats itself, and that old trading patterns will reappear, shipping will recover and that regulations and technology won’t present a disruptive force for the sector.

After all, buying ships cheaply when the market is bad, taking prudent risk without overleveraging, and having a decent amount of luck in micro-timing the market has worked reasonably well during the last 40 years.

Aristotle Onassis, a shipping tycoon of just such an era, once compared shipowners to taxi drivers upon whom passengers (read cargoes) were dependent to reach their destination. A charterer raises their hand for a ship at a port around the world, a ship is chartered for that voyage, and upon delivery of the cargo to the agreed destination, the shipowner is left to find another cargo in the spot market and live with the market’s vicissitudes.

However, could things really be different this time? Could the strategy of just buying ships or going after market share turn out to be wrong?

In late 2001, China joined the World Trade Organisation (WTO) and its market share for the worldwide trade of imports and exports almost tripled by 2015, to 10% and 14%, respectively.

In absolute terms, China imported 2.1 billion tonnes of raw materials and goods in 2015, and exported 36 million TEUs of containerised cargo in the prior year. To put that into perspective, 5,500 of the world’s largest dry bulk vessels (China-maxes of 400,000 deadweight tonnes) and 1,800 of the world’s largest containerships (20,000 TEU) would have to be used to hold such tremendous quantities of cargo.

China was the predominant reason that the Baltic Dry Index reached stratospheric levels in 2008 as at that time its economy was growing at more than 15% and its factories needed all the commodities they could get. Fast forward almost 10 years, however, and shipping is in a much tougher spot. With the world’s economies ex-China growing at low single digits, if at all, there has been little demand for cargo, besides cargo to and from China. And here it seems is where the strategies for shipping diverge. While Western shipping interests are expanding fleet capacity based on the assumption that there will be a market recovery eventually and ships will find speculative employment in the spot market, Chinese shipping interests take a different view of market trends, and the world as a whole.

In a special issue in November 2016, Week in China reported extensively on the ‘One Belt, One Road’ (OBOR) initiative, a visionary multi-trillion project that intends to connect China with 4.4 billion people in 65 countries and generate 40% of the world’s GDP.

Whether this initiative will fulfil its claim as ‘China’s Marshall Plan in the 21st century’ remains to be seen, but one cannot miss the holistic approach: as China goes after natural resources and raw materials for the import needs of its economy (and consumer markets from the export side of the economy), its leaders view the “belt” as too sensitive to be left in the hands of speculative shipowners and traders.

In addition to its massive investment in a trans-continental rail system that reaches the mainland of Europe, by 2015 China had interests in two-thirds of the world’s top 50 ports, according to an extensive report by the Financial Times (entitled ‘How China Rules the Waves’).

Since 2010, China has invested close to $50 billion in port infrastructure at 40 locations along the New Silk Road including terminals or ports as geographically diverse as Houston and Miami in the United States, Piraeus in Greece, Gwadar in Pakistan, and Darwin in Australia.

Ports worldwide where Chinese companies have invested were estimated to be handling 67% of the world’s total container volumes in 2015, up from 39% in 2010.

China’s top five containership carriers have almost matched Maersk’s (the world’s largest containership company, founded in 1904) market share in less than a decade at about 18%. Chinese and Hong Kong-flagged vessels now number almost 8,000, tying with those of Panama, the world’s largest open registry regime, for second place in the world (after Indonesia’s registry, an archipelago nation of 10,000 islands where most ships are suited only for local trade).

In short, China’s approach has been to invest strategically in port infrastructure, logistics, shipping and transport that effectively provides a functioning conveyor belt from the mines and oil wells of the world (for raw materials to China) and back to the consumer countries.

China’s strategy for shipping has been more than just buying ships and expanding their shipowning capacity (as it did by acquiring the 35 Valemax ore carriers from Vale; see WiC254). It can be argued that it’s more about having holistic, bottom-up control of the supply chain across strategic points around the world.

Where there is crisis, there is also opportunity, and the parties best prepared to capitalise on such opportunities are usually the ones with the strongest balance sheets or the best strategic assets.

The present shipping crisis is such an opportunity – some have even said that it’s the opportunity of a lifetime. And while Western shipowners are speculatively building up their fleets – doing so in a way that’s decoupled from the cargoes and underlying trade – China is grabbing the chance to grow its merchant fleet inexpensively and get a bigger market share of the maritime transport market.

It is doing so in a much more strategic way than Western shipowners because of its access to the cargoes and its greater control of the supply chain. Such a strategic expansion not only curtails market opportunities for Western shipowners but also provides a ‘ceiling’ for any anticipated recovery in the market by curtailing volatility and shaving ‘market peaks’.

A shipping market rebound would likely take longer to materialise and future freight markets should be expected to be less volatile, since the Chinese are covering a substantial part of their trade with their own captive fleet.

The expression “this time it’s different” could not be more applicable than for the present situation in the shipping world.

Basil M Karatzas is a regular reader of WiC and is the founder and CEO of Karatzas Marine Advisors, a shipbrokerage and shipping finance advisory firm based in New York City (www.karatzas.com).


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