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On the horizon

The story of the shipping container dates back to the 1930s and a truck driver who had a brainwave as he waited to make a dockyard delivery: instead of unloading his truck, why not just hoist the contents directly onto the ship?

Today virtually all of the 20-foot boxes that carry the world’s goods are manufactured in China. And in another sign of how the Chinese are making waves in the shipping world, a shortage of new boxes has seen prices spike significantly.

A tax on toxic emissions comes into effect next year and manufacturers must coat their containers with environmentally friendly paint. The immediate impact is that more than two-thirds of the production line has slowed down as the factories are retooled. Prices for new containers were up more than two-thirds from last year to $2,200 a box by the end of June, stinging the shipping firms at a time when they seemed set to emerge from their worst slump in decades.

The container crunch is another sign of why shipping veterans such as Tim Huxley and Richard Hext watch events in China so closely. The reach of China’s economy has made it a beacon for the sector. But what about the accompanying question: are the Chinese going to take control of the shipping world?

 

Big is beautiful

After a long downturn, the shipping industry is betting that scale will bring back profits: smaller shipyards are closing down; bulk carriers are ordering larger vessels to carry commodities; gigantic containerships are being put to work on the main trade routes; and container lines are grouping together into global alliances.

Size matters more than ever and on this principle alone the Chinese should have a competitive edge. Their economy consumes the bulk of the world’s raw materials and generates the largest proportion of its exports. Their shipping lines own and operate the fastest-growing fleets of containerships, tankers and dry bulk carriers. Their terminal operators have been adding to their portfolios of ports and their banks are offering the most readily available finance.

In this regard it’s no surprise that the Chinese are being cast as pivotal players. Shipping firms from China have more momentum than their peers and their country is still underrepresented in the industry relative to its share of international trade. China is playing catch-up and the rest of the shipping world has little choice but to adjust.

 

Playing the national card

Trends like these have prompted fears that the Chinese are trying to take over the industry or at least that they want to bend it to their will.

Some of these efforts have been sponsored directly by the government, such as the campaign to build up an oil tanker fleet under Chinese ownership on energy security grounds. Others have enjoyed more implicit support, including Beijing’s backing for its shipowners in their confrontation with Vale on control of shipments of iron ore from Brazil.

The mega-mergers of China’s giants – most notably the combination of Cosco and China Shipping – have led to warnings from industry insiders like Basil Karatzas that the Chinese will divert more of their trade to their national lines.

Indeed, Karatzas thinks that they have a plan to move from a role as customers of the shipping sector to one in which they call the shots.

Talk of national strategies in shipping needs some context, however. Europe’s shipping conglomerates have been defined as much by the families that control them as their countries of origin, and shipping titans that describe themselves in narrowly national terms look outdated in a world where supply chains extend across borders and time zones.

The raison d’être of the world’s maritime leaders is that they have a presence around the globe – and that makes them international by design.

In fact, there’s even an argument that cities are more important than countries on the maritime map, as globalising and urbanising trends shift the focus to a smaller number of mega-hubs. China has its own share of contenders in this category, not least Shanghai, which is pressing its claim as the world’s maritime capital. But there are plenty of other candidates in other countries for the same title (see sidebar). China certainly isn’t dominant yet.

 

Policy or profit?

Competitors of China’s shipping interests complain that they are benefiting from too much government support. In many cases, they’re right: Chinese firms have an easier time getting loans from the state banks and they have been piggybacking on policy priorities like the Belt and Road plan to make new investments in ports and fleets.

But identifying who might be pulling the strings on a coherent national strategy for shipping is a challenge. Government ministries trumpet plans and targets on a regular basis but implementation is often unfocused and outcomes are unclear. Interests that might look ‘national’ at first glance can also turn out to be fragmented and contradictory. Some of the battles being fought inside Chinese shipping are hardly unique to the sector – central government versus local, province versus province, and state-controlled versus private sector, to name just three.

But the shipping industry is also home to a range of competing concerns that makes national consensus harder to achieve. Boom times for the shipbuilders aren’t always a positive for the shipping lines as a flood of new vessels crimps freight and charter rates. A surge in new ship supply puts pressure on asset prices, alarming owners and investors. Ship financiers have different concerns to their clients in structuring loans and leases, while port operators make their money from maximising the fees from the ships that visit. Helping all of these parties to win at once is an impossibility.

Another suggestion is that China’s policymakers want their shipping firms to shoulder the financial burden of an unprofitable sector for the greater good. In this respect the fleets and yards are loss leaders for the nation. The ultimate goal is control of the world’s trade lanes and the benefits that it brings to ‘China Inc’.

Cosco would serve as the flag bearer for this kind of strategy, underpinned by its wide-ranging resources: it already owns and operates a vast array of bulk and container vessels; it has stakes in many of the world’s ports; and it has the capacity to build and finance more of its own fleet.

Yet the complexities in stitching these assets together are daunting. Companies like Maersk combine ownership of container lines and container terminals, but none of the majors have come close to mastering the seas in an all-encompassing way.

Such a task is demanded of a national champion laid so low by the meltdown in freight and charter rates a decade ago that it needed rescue by the state. And Cosco will have to achieve its Herculean endeavour as the industry transforms. The supply chain is already reshaping as manufacturing capacity shifts to countries like Bangladesh and Vietnam, while near-shoring of production closer to the largest markets in Europe and North America could also see more redrawing of the world’s shipping lanes.

The rise of digital services like Netflix and Kindle threatens more of the physical shipments of consumer goods in general and the advent of 3D printing and the ‘sharing economy’ could have a similar impact on flows of industrial materials. Even if it can establish an international empire, Cosco arguably might find itself as master of a diminishing domain.

 

Tracking China’s champions

Some of the talk of maritime mastery might be a little overblown, but where will China’s shipping firms make the most progress in the next few years?

Over the medium term its container lines are going to grab more business in many of the main trade lanes, increasing their share to something closer to China’s proportion of global trade.

More immediately, its bulk carriers and tankers will carry more of the country’s imports, buoyed by the delivery of a new fleet of megavessels to operators like China Merchants and Cosco.

Both companies will expand their presence across the world’s ports and container terminals, often under the Belt and Road banner. Ports like Piraeus in Greece are crucial test cases: if the pioneer projects go well, they will serve as beachheads for another wave of investment in cross-border trade and transport.

Back at home in the Chinese shipyards, the focus will be quality rather than quantity. The weaker shipbuilders will close down, much to the relief of the industry at large. However, Beijing will push the survivors to challenge the Korean shipbuilders in higher-end vessels like gas tankers and the giant containerships, and to catch up with the Europeans on the next generation of cruise liners.

And of course, the Chinese banks will be providing a larger share of the financing for all this activity – indeed, another key feature of the years ahead is how astutely they manage their loans and lease books.

That’s the short summary of how China is shaping the shipping world. Not yet dominant but still a determining force – and a much more integral part of the shipping world than a generation ago.


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