Shipping

Rocking the boat

Tanker rates soar as Cosco hit by US sanctions

VLCC-w

Blacklisted: Cosco tankers

“My formula for success? Rise early, work late, strike oil,” explained Jean Paul Getty, one of the wealthiest Americans who ever lived.

But the money being made in the oil industry this month is going to the people that carry the crude rather than the ones who find it, after the US Treasury Department sanctioned Chinese shipping giant Cosco for carrying Iranian oil and gas.

Two Dalian-based units of the state-controlled group were cited in the move at the end of September, alongside another four tanker operators from China.

The wider impact has been a boom in charter rates, especially for the largest oil tankers, which have skyrocketed in price from about $25,000 a day at the beginning of September to more than $300,000 as of the start of this week.

There are other factors driving up prices, including a blacklisting of vessels that have called at Venezuelan ports, as well as the loss of about 60 supertankers that are having their engines fitted with scrubbers in advance of the introduction of sulphur emissions rules at the end of December. However, it was news of the ban on the Cosco subsidiaries that supercharged the spikes, in part because brokers steered clear of Cosco contracts in general amid uncertainty as to how the blacklisting would be applied.

Analysts said that Cosco’s complicated management structure, with so many different entities under the control of the state-owned parent, added to the confusion.

Cosco operates a fleet of more than a thousand vessels but the blacklisting extends to about 50 tankers, including 26 VLCCs, or very large crude carriers.

Combined with the boats already out of action for engine refits, the move against Cosco has taken out of action about a tenth of the world’s tanker fleet. That’s bad news for refiners like Sinopec, which have to pay more to transport the crude that they turn into consumable products. But it’s a celebratory story for other tanker owners, especially of VLCCs operating on the Middle East to China route, where charter prices have seen the biggest lift.

Bloomberg reported this week that rates are so high that the purchase of a second-hand supertanker can be covered by two or three voyages, compared to more typical payback periods of about a decade.

Tim Huxley, a longtime reader of WiC and the founder of Mandarin Shipping in Hong Kong, reckons that rates in the region of $300,000 aren’t likely to persist for a prolonged period, although fabulous profits are on offer to people who have vessels in play in the meantime.

“There have already been small increases in ship valuations but if you were able to buy a ship today, you would not be in a position to load a cargo for at least a month or more so it is really the owners who have ships in or around the main loading areas right now who will benefit,” he told WiC. “But a modern large tanker has a breakeven of around $27,000 per day, so these rates are a massive boost to the earnings of listed companies like Euronav. Let’s just hope it doesn’t prompt a rush of owners heading to the shipyards and ordering new ships – historically, an excess of supply is what kills markets and it takes years to recover from over-building.”

The sanctioning of the Cosco subsidiaries will exasperate Beijing as another signal of Washington’s international reach, following similar campaigns against Chinese telecom giants ZTE and Huawei. The commercial threat to Cosco isn’t quite as existential, although the Chinese were said to be considering asking the White House to relax the ban as part of the trade negotiations in Washington last weekend.

The case serves as another warning to Chinese firms about the risks of doing business with Iran, at a time when the White House is pursuing a policy of “maximum pressure” to curb Iranian energy exports. Beijing bridles against these efforts, seeing them as a constraint on its sovereign right to trade with other nations. But analysts said that fears of further retribution were behind the decision of the Chinese oil giant CNPC to drop a $5 billion investment in Iran’s South Pars gas field at the beginning of October.

This seemed to contradict an earlier report by the respected publication Petroleum Economist that China had committed to invest $280 billion in the Iranian oil sector over the next five years (see WiC466). 

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INTERNET & TECH

The predator – or the prey?

Dronemaker DJI in new bid to win over government clients in the US

Jul 5, 2019 (WiC 458)

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DJI-wAn aerial threat to the US…

DJI, the world’s top drone brand, grabbed headlines this week when a man filming his family at the beach in Florida suddenly realised that a shark was circling his kids.

The footage shows them splashing frantically out of the water, with the shark just a few feet further out to sea.

Paradoxically DJI has been the one feeling hunted in American political circles over the last few weeks, following a warning from the Department of Homeland Security in May that companies were risking their data security by operating Chinese-made drones.

There was more hostile coverage at a hearing of the US Senate last month, which discussed DJI’s “near monopoly” on drone technology marketed in the US.

That dominance isn’t just in how the drones fly but also in the way they take photos and retain data, warned Harry Wingo, one of the expert witnesses. “American geospatial information is flown to Chinese data centres at an unprecedented level. This literally gives a Chinese company a view from above of our nation,” he claimed.

DJI reiterated that its drones don’t share any data unless the pilot expressly authorises it. “They do not automatically send flight data to China or anywhere else,” it insisted. “This data stays solely on the drone and on the pilot’s mobile device.”

However, the Shenzhen-based giant seems to have accepted that actions will speak louder than words in winning over more of the American market, especially among clients from the public sector.

Last month it announced that it would be repurposing one of its warehouses in California as an assembly plant for a new version of a drone that’s popular with federal and local government agencies. By putting it together on American soil, it hopes to meet the stipulations under the Trade Agreement Act, which restrict some government agencies to purchasing products made in the US. Most of its existing government customers have been relying on waivers to circumvent the trade law. However, DJI is worried that the tech row with Washington is changing the mood and it that it could be barred from selling to government agencies without fuller certification.

In another bid to reassure its corporate customers that it isn’t spying on them, DJI is promoting a new operating mode called Government Edition, which prevents its drones from transferring data to third parties or back to DJI itself.

It says that the protocols mean that information can only be transmitted to controllers specified by their operators, although whether this wins over an increasingly suspicious political audience remains to be seen.

DJI’s high profile in the US is a mark of its commercial success – the estimates at the Senate subcommittee were that it accounts for 70% of drone sales worldwide. But sales to hobbyists haven’t been growing as fast as before: enthusiasts don’t make new purchases every couple of years as they might with their smartphones and DJI knows it needs to look more to companies and the public sector as future customers.

Analysts have already detected some of that shift in the fact that DJI hasn’t launched a new recreational product so far this year, while the industry talk is that more of the profits are going to come from sales of software and services as the market matures, and less from hardware.

That is going to bring customers who are much more cautious about how their information is transmitted and stored, putting pressure on DJI to prove that it has ring-fenced their data. The public relations war is already being waged. The US military banned operation of Chinese-made drones two years ago but a letter to the subcommittee highlighted how other state agencies were relying on them to save lives. In one case, police in New York deployed a DJI drone to defuse a stand-off with a gunman. In another case in California the police put up a drone to find a lost boy. And in a third, park wardens in Texas used one to find two missing kayakers.

 

 

 

 

Keeping track, Jul 12, 2019: It didn’t last long. We reported last week on the skyrocketing of oil tanker charter rates after the US imposed sanctions on Chinese shipping behemoth Cosco. Daily rates for the largest tankers rose from about $25,000 at the beginning of September to $300,000 in mid-October. This proved a windfall for tanker owners with vessels operating on the Middle East to China route. By Monday the market had settled and prices had dropped back to $100,000. All the same, that was still a boon for tanker owners, many of whom operate on break-even daily rates of about $27,000.


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