Flying the flag
Fifty years ago Aristotle Onassis was probably the world’s best-known shipowner. Such was the success of the Greek-Argentine tycoon that his wealth helped to bring the term ‘shipping magnate’ into popular parlance and Onassis cemented his celebrity by marrying Jackie Kennedy, the widow of the American president.
Today’s candidates for the title of world’s largest shipowner are a lot less glamorous, although China Cosco Shipping has a claim with the world’s biggest fleet of tankers and bulk carriers.
Other contenders are the shipping finance subsidiaries of the Chinese banks, which have become major owners themselves over the last five years. ICBC Financial Leasing is the largest, leasing out more than 320 vessels in a portfolio worth at least $9 billion.
Indeed China’s merchant fleet has more than tripled in tonnage terms over the last decade and the implications for the rest of the shipping world could be momentous as Beijing bids for further control over the maritime sector.
Who’s at the helm?
Working out the world’s shipowners by nationality is a challenge: ownership is generally defined by the location of the parent company but the realities of a secretive and fast-moving sector mean that the final figures are always open to interpretation.
Share of Chinese control of the world’s oil tankers
The Japanese fleet – the second largest – is a little easier to quantify as its vessels need to be flagged and controlled in Japan to qualify for domestic tax breaks.
Owners from Greece, the largest national grouping, can be harder to pin down – they might be living in Monaco or London, flagging their vessels in the Marshall Islands, and running their fleets from offices in Hong Kong or Singapore.
The ownership data for China is also complicated by whether to include Hong Kong-registered vessels. Nonetheless, the estimate from last year is that the Chinese have the world’s third largest fleet at 9% of the world’s tonnage, trailing the Japanese (13%) and the Greeks (16%).
At the head of the China-owned fleet is Cosco and China Merchants and the number of vessels under national control is growing rapidly, with a threefold expansion of Chinese ownership over the last decade to about 140 million gross tonnes (excluding Hong Kong-registered ships), according to Clarksons Research.
Most of the Greek shipping firms are family-controlled, with a focus on vessels in the bulker and tanker sectors. Japan’s ships are privately owned as well, although tax concessions from the government have been hugely influential in bolstering domestic ownership. In China the state plays a more direct role through the operational activities of majors like Cosco and the lending of the shipping finance subsidiaries at the state-owned banks. The Chinese owners are some of the biggest and best-capitalised, which makes them more active in the newbuild market, where they have been ordering a growing share of the largest vessels.
Vessel ownership is determined by where the controlling company is located and not where the ship is registered, because owners often employ so-called ‘flags of convenience’ from jurisdictions like Panama and Liberia to reduce their operating costs.
Smaller, independent owners have more of a presence in the secondary market in China, says Basil Karatzas, who runs New York-based Karatzas Marine Advisory. He describes owners of this type as well-connected businesspeople who buy dry bulk carriers and persuade their local steel mills to charter them for the supply of raw materials. “We’ve seen a lot of second-hand ships sold to Chinese customers in this way,” he says. “A typical target is a 10-year old vessel in the $3 million to $7 million range, which is about twice its scrap value so it’s not a hugely significant amount of cash to put at risk. If they can lock up a year’s charter with a steel mill, the shipowners can cover most of their capital”.
Nonetheless it is the orders for larger vessels that get more of the headlines and the average size of the ships in the Chinese fleet has almost doubled over the last decade, highlighting the deliveries of larger tankers, bulk carriers and container ships.
Contributing to the trend are diktats from the central government that more of the country’s trade should be transported on ships owned by companies from China.
Weight in deadweight tonnes of the largest Capesize ships
The first signal of the policy came in the oil industry, where China depends on imports for more than half of its consumption. Most of it arrives by sea and Beijing has been pushing for a larger tanker fleet for years, encouraging its shipping firms to buy bigger ships under the banner of “national oil, nationally carried”.
State-owned operators like Cosco and China Merchants have responded enthusiastically, ordering significant numbers of VLCCs (very large crude carriers). Leading the charge is China VLCC, a subsidiary of China Merchant Energy Shipping, which was established just three years ago but is now the largest operator of oil tankers worldwide, with 40 vessels in operation and orders for 13 more. Cosco’s fleet of the same type of vessels is only a little smaller.
Fifteen years ago, the Chinese owned about 2% of the world’s oil tankers but today they control closer to 15% of the fleet and they have a greater share of the order book.
The strategy of establishing more control of how the key industrial commodities are transported has been similar for shipments of iron ore, where China’s shipping interests clashed with Brazilian miner Vale over how iron ore would be shipped from Latin America (see sidebar). Vale eventually capitulated, selling most of the ships to the Chinese and leasing them back on long-term contracts. Last year the Chinese majors splashed out $3.5 billion on orders for 30 more of the mega-ships in what looks like an attempt to control more of the freight rates on the Brazil-China route into the future.
Financing the fleet
Another feature in how ownership of the world’s merchant fleet is changing is ship finance, where the Chinese banks have become powerful players.
Until recently the European banks provided most of the loans, explains Jonathan Silver, head of Shipping at Norton Rose Fulbright in Hong Kong. But when the European lenders started backing away from the sector following the financial crisis a decade ago, the Chinese lenders began to offer more of the loans themselves.
Initially the support came from commercial banks like Bank of China and later from policy lenders, led by China Development Bank. But in 2013 the banks started taking a back seat to a new breed of leasing company that finances the construction of new ships and then leases the finished vessels back to their operators at a profit.
“Shipowners are using sale-and-leasebacks to refinance existing loans and to pay for contracts with yards for newbuilds,” Silver explains. “The customer might put down 10% of the ship’s price in equity but it then novates [substitutes] the contract, getting the capital from the lessor to meet the payments for building the vessel. The lessee pays off the principal and the interest over the duration of the lease and at the end of the period there is usually some kind of purchase option.”
Silver says that lease finance has flourished because shipowners have been finding it harder to get bank loans. As state-owned enterprises, the lessors don’t have the same difficulties finding finance and they enjoy much lower costs of capital than traditional owners, who are seen as more of a credit risk.
The lessees have welcomed the new arrangements because the leasing deals generally incorporate higher loan-to-value ratios than bank loans and they are structured over longer tenors that stretch out the repayment schedules.
The lessors are split into two main groups. Larger shipbuilders like CSSC have leasing divisions that provide funding for orders from their yards but most of the ship financiers are subsidiaries of the main banking groups, focusing purely on financial returns. Remarks in March from Mao Wanyuan, a director at the China Banking Regulatory Commission, suggested there were 23 financial institutions providing ship lease finance, with a portfolio of 989 vessels valued at Rmb114 billion ($16.5 billion). ICBC Leasing is the biggest, with Minsheng Financial Leasing and Bank of Communications Financial Leasing also significant players.
Almost all of the early leases had a national flavour involving Chinese yards or Chinese counterparties, and the lessors prioritised longer-term contracts with reliable customers, such as the biggest miners and steel firms. More recently they have started to do business with parties lacking the same national connection and they have been coming into contact with smaller, independent customers – potentially much riskier propositions. Another feature of the landscape is an increase in ‘operating leases’ in which the lessor retains ownership of the vessels at the end of the contracts. The industry is so new that few of these leases have reached their natural conclusions, so the industry is waiting to see whether the Chinese can manage their multi-billion dollar portfolios profitably.
The gathering storm
Karatzas argues that shipping is set for a period of transformative change as the Chinese start to assert more control. One trend is that more of the country’s international trade will be carried on Chinese vessels in the same way that a greater share of its imports of oil and iron ore have shifted to Chinese operators. Another is that commercial capacity is going to concentrate around larger lines and shipyards, some of which will emerge as national champions.
“Previously China’s shipping sector was relatively unstructured with a lot of duplication. There were five companies competing in tankering, another five battling in the container trade, and five shipyards chasing every new contract,” he claims. “But that’s starting to change as the government brings the bigger names together. We are seeing it in the way that Cosco is being built up and in the campaigns to close the weaker shipyards.”
How Vale was vanquished
More than two-thirds of the world’s seaborne iron ore heads for China’s steel mills. The large majority comes from Australia, although Brazilian iron ore giant Vale competes with Rio Tinto, BHP and Fortescue, the leading Australian miners.
In the bigger picture this is part of the process in which the Chinese are moving from their position as the primary customer of the industry into a role in which they are a leading supplier. And the opportunity is growing for China’s shipping firms to play the national card, especially when state-controlled customers are involved. “If a vessel owned by a company from another country is bidding with a Chinese competitor for a contract, who is going to win the business?” Karatzas asks. “I think it’s logical to assume that the government is going to want the Chinese ship to be preferred, whether that is stated openly or not.”
The broader argument is that Chinese firms are taking control of the largest vessels, buying stakes in more of the world’s ports, and benefiting from more financial and political support from their government, much of it under the aegis of Beijing’s backing for Belt and Road infrastructure investment.
Karatzas also says that too many of shipping’s traditional participants don’t seem to appreciate how much the fundamentals are changing. Many of the world’s shipowners have made most of their returns by trading the asset values of their vessels rather than making a profit from operating them. Their strategy is to try to time the economic cycle, buying ships during downturns for cents on the dollar and managing them through a period of negative cash flows as they wait for better times. When the value of the vessels increases, they sell for a profit.
The warning from Karatzas is that shipowners are adopting a business-as-usual approach and basing their bets on picking up vessels at bargain prices and waiting for the recovery in values.
But that’s a strategy that may not survive as the Chinese accumulate larger fleets of their own that seem set for dominant positions across many of the world’s trade flows. “All of these new vessels will take a lot of the volatility out of the market for the independent shipowners and the strategy of buying low and selling high becomes a lot less viable,” he predicts.
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