lloyd s list exclusive china report for ships

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Looking aheadWhats around the corner

or Chinese shipping

September 2012 | www.lloydslist.com


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www.lloydslist.com September 2012

China 5

Chinas commercial maritime world is poised or a new level o leadership,but di cult decisions have to be madeReady for reform

P h o

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A s s o c

i a t e d P r e s s


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6 China

September 2012 www.lloydslist.com

overview Tom Leander

No doubt about it: 2012 has beena tough year or Chinas ship-owners and shipbuilders. Evenwell-regarded companies havebeen running losses. China

Shipping Development, a shipping unit o thestate-owned China Shipping Group that had

escaped reporting in red since it was listed inHong Kong over a decade ago, posted a rst-hal loss o Yuan461m ($73m). China Cosco,the Hong Kong-listed unit o China OceanShipping, continued a string o losses. Thecompany, Chinas largest shipping company,haemorrhaged Yuan16.5bn in shipping-relatedlosses in the 18 months to June 30, 2012. Thesecompanies representing di erent poles o China shipping achievement as well as di er-ent approaches on how to run a state shippinggiant are su ering rom low rates in dry bulkshipping markets. Likewise, the box line unito China Cosco and Hong Kong-listed ChinaShipping Container Lines, also owned by ChinaShipping, missed out on gains that other globalplayers enjoyed during the market-wide ratesrise weighed down by low rates in Chinesecoastal shipping.

Shipyards also ace challenges. Chinas twolargest state-owned shipping conglomerates China State Shipbuilding Corp and ChinaShipbuilding Industry Co may not releasetheir nancial results, but both companieshave announced their intent to build revenue

outside o their traditional commercial ship-building businesses to diversi y rom allingdemand and historically low ship prices. Thetwo most prominent non-state shipyards, HongKong-listed Rongsheng Heavy Industries andSingapore-listed Yangzijiang Shipbuilding stillreported pro ts in the second quarter. Both areseeking to move into o shore shipbuilding asall o Chinas shipbuilders ace up to a all inorders and cancellations.

New orders at Chinese yards dropped 51%to 11.6m dwt between January and July year

on year, according to China Association o the National Shipbuilding Industry. Cancella-tions in the rst hal o 2012 totalled 41 shipso nearly 2.6m dwt, equivalent to 130% o the

ull-year cancellations last year. Major Chinese yards, says Cansi, have the capacity to com-plete vessels amounting to 70m dwt a year,while total orders or the yards were 100m dwt,implying that the yards will be employed atleast or several years more.

The losses in shipping and the struggles

acing Chinas yards have been the subject o some government discussion. Until now, how-ever, the government has hinted at courses o action rather than laid down a concrete plan,but it is taking shippings problems seriously.In April, the Ministry o Transport, the NationalDevelopment and Re orm Commission and theMinistry o Finance announced they would lookinto an aid package to the shipping industry.They had planned to submit a proposal to theState Council or approval by the end o June,although there has been an apparent delay as

no delivered proposal has been announced. Theinvolvement o the NDRC and nance ministryindicates that the government is aware o thegravity o the situation: the transport ministry

is usually the sole government department thatshapes and pushes shipping policy. At the timeo the announcement, discussions betweengovernment departments were expected to becomprehensive and wide-ranging, with talk-ing points that included restructuring industryplayers and tax re orms.

While the government has been silent onthose two, it has allowed an open debate onalliances between cargo owners and ship-ping companies that could bolster shipping.In particular, the government has consideredreserving cargoes or strategic commoditiesand energy products or national ag vessels.The proposal ollows complaints by Chi-nese shipowners that they are less protected

rom oreign competition than other Chineseindustries. It is questionable whether this isthe case, but it is true that Chinas shipown-

ers must compete with oreign companies orimport and export business. However, they areprotected in domestic shipping markets, a verylarge proportion o their business.

Ta k n p nt: The government

is looking into thechallenges acing

shipping lines andshipyards

Photo: Associated Press

The government has hinted at

courses of action rather than laiddown a concrete plan, but it is taking shippings problems seriously


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8 China


Many theories are bruited about the slowun olding o shipping policy, among them that2012 is the year o Chinas once-in-a-decadechange in leadership, which many believe isslated or October. The atmosphere o transi-tion would make it difcult to nd a consensusand enact a major change in shipping policyuntil a ter the new political line-up is settled.But, broadly, it is worth asking to what degreethe government really wants to lend direct aid

to the shipping industry.One indicator o ambiguity in the govern-

ments response to the woes o state-ownedshipping entities is the Vale case. Chineseshipowners have presented several argu-ments against Vales eet o 400,000 dwt verylarge ore carriers entering Chinas ports. Theprimary one is that the vessels are too big toenter Chinas ports sa ely, but the China Ship-owners Association has added that Valesdeployment o the mega-vessels would hurtthe nations already-su ering dry bulk ownersby stealing their business and driving downrates. The Ministry o Transport tilted in Chinashipowners avour with a circular in Januarythat e ectively barred entry o the Valemaxships into Chinas ports. But the language itused is ambiguous and the Transport Min-istry and the NDRC have appeared to havebeen willing to give other constituencies anear. Most recently, as part o the governmentsstimulus package announced in the rst weeko September, the NDRC approved a project

or Ningbo-Zhoushan Port to build two berthsthat could handle Valemax-size vessels. Vale

has been in talks with ports and steelmakersto build support with other constituencies inChinas economy that might see the deploy-ment o these VLOCs as avourable to theirbusinesses. For ports, it obviously wouldmean more volume. For steelmakers, Valesplan will reduce the miners cost o transport

rom Brazil greatly, allowing it to o er cheap-er high quality ore. The shipowners attemptto bar the Brazilian vessels may zzle in thea termath o what looks more like a classic US-style lobbying ght than a cosseted industry

demanding and getting avourable treatmentrom its government.The singular problem o Cosco appears to

be the touchstone issue acing Chinas ship-

ping. Although its chie executive Ma Zehuahas denied any interest except that o sa ety,Cosco has been the main orce behind thepush in the China Shipowners Associations

campaign against Vale. But the problemsacing Cosco will not be solved by protection-

ist measures against oreign shipowners, andthose problems threaten to spill over ontoother state-owned carriers.

Between the lines o the weak results romthree o Chinas major shipping companieslies a running saga o weaker earnings in thecoastal trades. Chinas two top coastal opera-tors, Cosco and China Shipping Development,

ace alling demand or transporting coal andother commodities within Chinas border.

According to CSD, sluggish coal demand,greater use o hydropower, increases in import-ed coal, the relative high level o coal inventoryand rapid growth in new shipping capacity hurt

its domestic bulk shipments.. For China Cosco,the situation looked dire. Dry bulk coastal ship-ping volumes ell 20% during the rst hal o 2012 to 15m tonnes. In contrast, volumes on the

international shipping lanes ell 17%. The com-pany did not break down its revenues by tradelanes; however its total dry bulk revenues ell32% year on year to Yuan8.2bn or the period.

Spot rates on the two most importantdomestic coal shipment routes, rom northChina to south China and rom north Chinato east China, also dropped 30% during theperiod, according to CSD.

Nevertheless, Cosco said in its 2012 interimreport, The group will increase its marketshare in the coastal shipping markets by

expanding its shipping eets. Cosco had 18dry bulk ships on order as o June 30.Coscos underlying troubles come because a

large portion o its dry bulk eet is chartered-in.

It is worth asking to what degree thegovernment really wants to lend directaid to the shipping industry

Da n an a:

With a transitionin leadership expected

later this year, it isunlikely that any change

to shipping policy willbe enacted in the

short term


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China 9

Some 42%, or 13.5m dwt, o China Coscos drybulk tonnage was chartered in as o June 30.Many o the 130 chartered vessels are on expen-sive long-term contracts, that continue to rackup costs even as volumes drop.

Coscos losses are expected to continuethrough this year one analyst predicted thatit would repeat its Yuan10bn loss o 2011. ChinaCosco is listed in Shanghai as well as HongKong and there ore is subject to a stringent rule

o the Shanghai Exchange or companies thatrecord two consecutive years o losses. It willbe listed on special treatment in January i itposts a loss this year. I it loses money in 2013,it will ace delisting. In Hong Kong, Coscos Hshare was removed rom the Hang Seng ChinaEnterprises Index on September 10, owing tothe companys deep hal -year loss.

Coscos stock has been trading belowHK$3.00 since September. In July, someinvestment banks thought the share pricehad bottomed and bought shares, causing

a spike to HK$3.80. There is still a eeling inthe market that Cosco will eventually securea government rescue, but whether that rescuewill mean the sale o one o its units to the

parent or some other restructuring is anyonesguess. Very likely, a restructuring will seek toensure that the rapid and costly expansionat the heart o Coscos troubles now will nothappen again.

There have also been demands or re ormin Chinas shipyard industry, including thegeneral manager o CSIC Sun Po calling orconsolidation in January. In March, the Min-istry o Industry and In ormation Technology

called or 70% o Chinas shipbuilding capacityto be concentrated under the 10 largest ship-builders. Chinese authorities have restructuredindustries mining, steelmaking be oreand analysts suggest that the goal is notunreachable, given time. Currently the top 20shipbuilders in the nation account or 63% o the shipbuilding capacity, according to WorldShipyard Monitor numbers. Along with plans

or structural improvements in the industry,the MIIT also set out ambitious goals. Chi-nas shipbuilders should garner Yuan1.2trn

($189.7bn) in revenues by 2015 and increasetheir annual shipbuilding exports to morethan $80bn both gures are about double2010 levels.

These seem ambitious goals, indeed. Parto the plan is to ratchet up skills and produc-tion in higher-value shipbuilding lique ednatural gas and o shore vessels, to name twotypes.

The government has shown no sign that itwill act on the yard consolidation plan soon.The prospect o unemployment in a period o dwindling economic growth is one obviousimpediment.

The government appears to be waitingout the shipping crisis, perhaps with theprospect that it could avoid the whole busi-ness o re orm. This could work in shipping.Some separate solution could be orged orCosco without resorting to such measuresas reserving cargoes. But in the shipbuild-ing sector, consolidation will be necessary toallow dying shipyards to die and promisingshipyards to expand. The move would attractnew capital and give momentum to the pushto bring Chinas yards to the level o South

Korean shipbuilders. Looked at in this light,Chinas reluctance to re orm is an elementthat South Koreas shipyards are counting onto stay ahead.


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11/32


China 11

Chinese companies will start to design and developnew products as well as manu acture them

A new era for China exports

Path ay tnn at n:

The real threatto China comes

rom technologyimprovementsthat will make itcheaper or Westerncountries tomanu acture in theirhome market

eXPorTS Tom Leander

The phrase made in China is aboutto get a new meaning. At a recentpanel discussion in Hong Kong,a nance executive rom a boxline had an encouraging view o

changes that will emerge in China. The subjectwas the much-heralded rebalancing o Chinaseconomy towards domestic consumption andaway rom an export-driven economy.

He said that domestic consumption couldnot ully replace the importance o exports toChinas economy and ollowed this with anoriginal take.

Things are manu actured in China, buttheyre not made there. Products are designedand largely inanced elsewhere, and thenChina manu actures them and exports them,he said.

The next phase will come when Chinesecompanies design and develop new products,as well as manu acture them, or the world.These goods will be in demand in a growing

Asia. He said carriers with a China and intra-Asia ocus would bene t.This is a sensible message. There has been

no shortage o hype about the end o a cheap

China and the ight o multinational manu ac-turers to markets with cheaper labour costs inAsia and even back to the US.

To be sure, China is increasingly less cheap.According to a study, The Future or MNCs

in China, by accounting rm KPMG, Chinasminimum wages have risen steadily since 2005and are now higher than minimum wages inmany Asian countries.

Chinas minimum wage has risen rom $59 amonth in 2005 to $160 a month in 2011. Month-ly minimum wages were $50, $76, and $155 orBangladesh, Vietnam and Indonesia in 2011.


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12 China


The end to a cheap China

2005$59

Chinas minimum monthly wages have risen steadily since 2005,and are now higher than minimum wages in many Asian countries

2011$160

Bangladesh2011

$55

Vietnam2011

$76

Indonesia2011

$155

2008$112Some businesses have begun transplanting

their manu acturing back to the US, and thetrend is just beginning.

Google, to name one, plans to manu actureits Nexus 7 tablet in the US.

Reshoring has less to do with the rising costo labour than with advances in automation.

What is going to accelerate the trend isnt,as people believe, the rising cost o Chineselabour or a rising yuan, says Vivek Wadhwa,

a director o research at the Centre or Entre-preneurs and Research Commercialisation atDuke University in North Carolina, writing inthe journal Foreign Policy in July.

The real threat to China comes rom tech-nology.

Technical advances will soon lead to thesame hollowing out o Chinas manu acturingindustry that they have to US industry overthe past two decades.

Robotics and arti cial intelligence and newtechniques such as three-dimensional print-ing o products a technique that greatlysimpli es the manu acture o complex goods

will allow companies a cheaper means tomake goods in the US. That does not translateinto more jobs or US workers, o course, but

could lower company costs. The argumenthinges on the slow progress in innovation inChina.

They havent cracked the nut yet on howto innovate, writes Mr Wadhwa.

It is surely a matter o time.However, as the KPMG study points out,

That does not mean the end o China as theworlds manu acturer. China exports almostas much annually as the rest o emerging Asiacombined, at $1.9trn compared with $2trn in2011. Further underscoring the point, the

accounting irm writes, some o Chinaslargest container ports also have vastly morecapacity than entire countries, such as Indiaor Vietnam.

The more likely outcome is that compa-nies in the US, Europe and China will engagein manu acturing as a more local enterprise,

shaving transport costs. As a consequence,raw materials will be sourced nearby wherepossible and supply chains will see structuralchanges.

North A rica is a commonly cited locale witha big uture in so-called nearsourcing. Therobust intra-Asia maritime trades have alreadybeen nourished by nearsourcing, with com-ponents assembled in cheaper markets thanChina and eventually transported to China orassembly on onward export.

But i the uturists are as good as their word,

a European car manu acturer will build in itshome country or sale there and or export.Raw materials might have to be sourced

rom a ar, but will be sourced nearer the man-

u acturing centre. As the trend accelerates, itwill reduce the need or shipping.

I recent history is any guide, Chinascompanies will be just as competitive at thistransition to automation as US or Europeanones.

They already have an example.The chie executive o Taiwans Hon Hai,

also known as Foxconn, a maker o nished

products or Apple among others and one o Chinas largest employers, said last Augustthat Hon Hai would install up to 1m robots toreplace much o the companys China work-

orce by the end o 2013.Innovation will come, too. We have yet to

see a ully made-in-China era, in which goodsare dreamed up, designed and manu acturedwith advance techniques and exported or saleby Chinese-owned companies rather than or-eign multinationals.

China will have its own Apple, Google, Sony,

Nissan and Samsung. While the day o ever-rising exports based on cheap China may bedone, the rise o made in China exports isonly beginning.

They havent cracked the nut yeton how to innovateVivek Wadhwa, Centre or Entrepreneurs and Research Commercialisation

S u c : KPMG


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China 15

China has an appetite or raw materials, and is making wise policy decisions in the aceo slowing growth but its main problem is one it cannot control: external demand

Western stresses frameChinas outlook

CHiNA remAiNS STroNg iN fACe of eCoNomiC CHAlleNgeSLast year, a Lloyds List new analysis made the claim that Chinas hunger or raw materials thisyear and its rapid expansion o domestically built and fagged vessels suggest the country canweather a downturn among its wealthies t customers and a slowing home economy.

Back then, Lloyds List identi ed how Chinas strategy [is] designed to meet two outcomeshead-on; a rebound in export-led growth or an uptick in Chinas domestic economic activity andtrade with developing countries ollowing a Western downturn.

Almost one year on, does our analysis stand?Certainly, one o those outcomes has occurred: a serious Western downturn. Rather than

pure bad news rom North America, the root cause has been the development o a multi-layeredrecession in Europe. This, as our report explains, has inescapably infuenced China, just as it hasthe rest o the world economy.

As or our other concern, we report that China is still ready to adopt a greater leap orwardor the Chinese consumer. Other issues are however more immediately pressing or Beijing.

Here, we are thinking about the other hot topic alongside the Eurozone crisis: Chinas apparentslowdown.

What will these two actors an increasingly asthmatic West and a Chinese behemoth sheddingmomentum mean or assessing the next year o Chinas maritime strategy? Read on and nd out.For now, su ce to say, we eel our original assessment was correct China remains strong andpoised to cope with any immediately imaginable storm.

oUTlooK Edward Price

China is slowing down, but threequestions remain: why, to whatextent and how will it a ect theinternational maritime sector?

Earlier this year, the Chinesegovernment cut back its own projection o 8% growth to 7.5%, ollowing weaker exportdemand rom Europe and the US, and the slow-down in Chinese domestic consumption.

Earlier this month, The Economist summedup the situation in China as ollows: Indus-trial output has slowed sharply; stocks o unsold goods are piling up; and Shanghaisstock market is at a three-year low. It added:For the rst time this century, in 2012 Chinasgrowth rate may dip below 8%.

Chinas slowdown is not necessarily aproblem. ICAP Shipping sees the situation asa care ully engineered economic slowdown,meaning Chinas slowdown is actually both

understood and under control. The Chinesegovernment has chosen not to aggressivelypromote growth as it did in late 2008, pre er-ring instead its pursuit o rebalancing.

According to Hou Zhenbo, a Chinesenational and an economist working or theNigerian presidency, There are clear signs tosuggest that China has started to re-orientatetowards a bigger consumer economy espe-cially since the steady and then acceleratedappreciation o the remnimbi be ore and a terthe nancial crisis

Further, the government has also realisedhow important it is to emphasise the role o consumption-led growth as exports to EU/UScontinues to deteriorate in recent times

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Sources: Lloyds List Intelligence/Clarksons

Chinese/Hong Kong owned eet (vessels over 10,000 dwt) by type

Bulk 121.9m dwt

Tanker 41.1m dwt

Container 15.6m dwt

General cargo 5.9m dwt

Gas tanker 0.8m dwt

Ro-ro 0.8m dwt

Other 2.4m dwt

Grain imports

LNG imports

2009 45m tonnes

2009 13m cu m

2010 60m tonnes

2010 22m cu m

2011 57m tonnes

2011 28m cu m

2012 (to date) 68m tonnes

2012 (to date) 21m cu m

Coal imports

Iron ore imports

2009 126m tonnes

2009 628m tonnes

2010 167m tonnes

2010 628m tonnes

2011 202m tonnes

2011 687m tonnes




China 17


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18 China


Aware o its problems, China has acted.The country has cut its key interest rates twicesince the start o June, bringing the benchmarklending rate down to 6%, and reduced reserverequirements. The Asian giant has other tools atits disposal enviable scal leeway, or exam-ple, or policy options such as li ting restrictionson speculation in the property market to reversesluggishness in the sector.

Taking this into account, it appears that

China will escape a hard landing.The term hard landing tends to be thrown

around loosely, says Capital Economics chie Asia economist Mark Williams. The keyelements o a hard landing are that growthslows signi cantly, and that it remains slow,and that policymakers are unable to create arapid rebound.

A hard landing or China would implythat the policy transmission mechanism thatallowed China to recover so quickly in 2009 hasbroken, says Mr Williams. I see no reason tobelieve that is the case.

We must also not orget that a Chineseslowdown still involves growth that the Westwould kill to obtain. According to ICAP Ship-pings August 2012 monthly report, importso iron ore into China in [the rst hal o ] 2012are 9.3% above the same period last year anddomestic crude steel production is up 1.5% year on year.

Additionally coal imports, both thermal andmetallurgical, or the January to July period areup 51.4% year on year, says the ICAP report.

In our piece last year, China well placed to

weather slump, Lloyds List argued Chinashunger or raw materials such as iron oreand other key elements o industrial activitywould continue. We were right: I there is anyslowdown in China, it is certainly not nega-tively a ecting the major bulk trade ows intothe country and there ore the related shippingmarket, says ICAP Shipping.

The picture on Chinese energy demandis somewhat mixed, but still robust. On thekey indicator o Chinas lique ed natural gasimports, 2012 is set to outpace 2011s 28m cu m.

At the same time, in July, China imported21.83m tonnes o crude oil, a nine-month low,and 20.2m tonnes o coal in July, a all rom therecord 27.19m tonnes in June.

But the global economy is teetering and Europe

is to blame. We are in or a serious bump and Iwould not rule out a new global recession, saysBenjamin Hackett o Hackett Associates.Theproblem is not China, it is Europe.

Europe is Chinas largest trading partnerand China [has been] hit by a lack o exportmarket, [and] its economy is slowing downrapidly as a result, he adds.

Mr Hackett is on the money. SeaIntel Mari-time Analysis Lars Jensen agrees: I thinkthe slowdown we see in [China export] num-bers is more a re ection o the tremendous

economic problems aced by Europe in gen-eral, and Southern Europe in particular.So, while China still has an appetite or raw

materials, and is making wise policy decisions

in the ace o slowing growth, its main prob-

lem remains one it cannot control: externaldemand. Chinas main customers in Europeare simply not buying as much o what Chinahas to sell. As Lloyds List recently reported,European imports o containerised goods romAsia plummeted in July, with an unprecedent-ed 13.2% year-on-year reduction in westbound volumes at a time o the year when trade condi-tions should be strong.

Data rom Container Trades Statistics,compiled rom container lines own li tings,show total Asia to Europe containerised trade

in act slumped to 1.2m teu in July, down rom1.3m teu in the same month last year.According to CTS director Peter Webber, we

must also take into account how July 2011

The term hard landing tends to bethrown around looselyMark Williams, Capital Economics

ma k t ut k: China has been hit

by changes in exportdemand and its

economy is slowingdown as a result



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20/32

20 China


was the highest overall month [ or westbound volumes] in the whole o 2011. That makesthe drop o in July 2012 less dramatic, but itis still pretty disastrous reading or anyoneinterested in the health o the world economy.

So, a disruptive Europe, but China is stillhungry and looking or global opportunities.A recent Clarkson Research Services reportmakes clear the ongoing success o Chinasrelationship with the developing world: the

main sources o worldwide trade growth [are]non-mainlane routes.It adds: Despite concerns over the slowing

pace o Chinese economic growth [however],

intra-Asian trade is expected to remain rela-tively strong this year.

That leads us to what could spoil the party:domestic politics in China. In sum, the threatto the Asian nations master plan has alwaysbeen potential domestic unrest, somethingwhich has so ar ailed to materialise in theslowdown.

Some o the recent data releases havebeen extremely disappointing, but there is

little evidence so ar o labour market stress,says Capital Economics Mr Williams.It used to be said that the Chinese govern-

ment would not risk growth dropping below

8% because that would lead to an upsurge insocial tensions. I suspect that one reason poli-cymakers have not intervened more orce ullyis that the eared job losses havent material-ised. That means immediate concerns aboutthe downturn have lessened.

Mr Hou agrees: I dont believe [Chinese]society would run into turmoil i the econ-omy slows rom an 8% growth rate to a 5%growth rate.

However, that could cause a suddenlay-o among the export-dependent manu-

acturing sector. How to channel such apotentially destabilising number o peopleinto anything productive could de initelybe a challenge. But bear in mind that pastregime change in China have always come

rom the peasantry.Having said that, I believe in the

extremely likely event o a China slow down,the party might attempt to grant a ew morepolitical reedoms.

Still, i all those Chinese jobs that camealong with exporting to the West are no longercritical, does China need the West anymore?

Yes it does, says SeaIntels Mr Jensen,even i it has a large and growing homemarket in both China and Asia, a substantialpart o the income needed in China and Asiastems rom the exports to the West. A drasticslowdown will have negative impact on China although not as severe as i t would have hadsay ve to 10 years ago.

Mr Hou shares this view: Although thegoal is to build a consumer economy, this

journey will take quite some time simplybecause there are still plenty poor people inChina.

In November, the director o the ChinaGrowth Centre Linda Yueh told Lloyds List:China runs the risk o a slowdown...with theworld economy slowing.

At the time, Lloyds List described that view on China as gloomy. We were right.There is a much more complicated pictureemerging, one o an Asian giant able to sur ,rather than risk, a stagnant world economy.

China does have problems but nonethe-less, the country remains well placed not onlyto survive a global slump, but also continuedoing well actually pretty well.

A substantial part of the incomeneeded in China and Asia stems fromthe exports to the WestLars Jensen, SeaIntel Maritime Analysis

manu actu ncus: A substantial

part o the incomeneeded in China andthe rest o Asia stems

rom exports to theWest


21/32

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22 China


Demand in the worlds sturdiest trade lanes is changing as Chinas export growth slows

The intra-Asia shift

Np sp ct :The markedslowdown oChinese exports tothe rest o Asia inAugust may point tochanging intra-Asiatrade patterns

CoNTAiNerS Tom Leander

Chinas carriers are con ronted witha decline in trade rom Europeand a slow revival o trade withthe United States. But the intra-Asia arena maritime has always

been a world apart much more varied inthe types o trades it covers and respondingto di erent trade demands depending on theparticular trade lane.

Flexibility on these trades is an importantprerequisite to success. SITC, a Hong Kong-listed, Chinese-owned container operator,reminded rivals o this in mid-September. Chie executive Yang Xianxiang told the press thathe believes that SITC will see its revenues risenine- old over the next decade, mirroring theexpected growth in Asian economies. Mr Yangnoted that the bigger ships that major opera-tors are now deploying on intra-Asia tradelanes do not threaten SITC, because bigger vessels do not translate into better service.

SITCs service model has been to invest ina smaller class o boxships, keep costs low,and tie up maritime transport with a growing

logistics operation in China. SITC ships aresmall and exible enough to operate in mostsecond-tier ports in Asia, an advantage that thebigger ships lack.

SITCs intra-Asia model supported a pro tor the 2012 rst hal o $41.7m, down 51% rom

the same period in 2011. Does the drop in pro -its indicate that SITC is a little overcon dent inits own intra-Asia uture?

SITC aces more competition as lines divertlarger ships rom the ailing Asia-Europe tradeinto the intra-Asia arena. Thats one prob-

lem: the other is slowing China growth andthe impact that this contraction will have onChinas Asian trading partners that could coolthe intra-Asia trades or the near term.

Chinas dwindling trade to the Associa-tion o Southeast Asian Nations countries in

August 2012 is an example. Chinese exportgrowth to Asean countries stands out as thestrongest contributor to overall growth, saysJohn Windham o Barclays Capital. However,

we think the pace o deceleration has beensigni cant. In August, exports to Asean were

only $1.5bn more than in August 2011. This is asigni cant drop rom the average o each o theprevious three months this year, when exportgrowth stood at $3.3bn. All trade destinations


23/32


China 23

in Asean showed a lag during August, with theexception o Malaysia. Has China stu ed theAsean channel? asks Mr Windham.

Imports rom China to Malaysia have beenparticularly strong this year. Barclays Capitalestimates that they could almost reach 12% o Malaysias gross domestic product in 2012. Thatis up rom just below 10% last year. Malaysiasimports were strong in capital goods, such asautomobiles, auto parts, power equipment, andheavy machinery.

However, total China export growth orAsean was 10.3% in August year on year and orother major Asean trading destinations August year-on-year growth in percentages was in the

single-digit range.When compared with July 2012, August

shows a marked slowdown in Chinas exportsto all Asean countries, with the exception o Singapore, where exports were up almost 3%month on month. Exports to Indonesia ell 28%month on month, while exports to the Philip-pines were down about 4%. Even Malaysiashowed a tapering o , with month-on-monthexports rom China dropping 5%.

Whether this is a one-month anomaly ishard to say. Inventory versus shipment data

rom China generally suggest that the pipelineis backing up as demand drops. Emil Wolter,an analyst with Macquarie Securities in Sin-gapore, notes that inventories in China have

been rising sharply relative to shipments.The back-up re ects a slowdown in trade

rom Europe, but also the August slowdownin Asean.

Barclays Mr Windham notes that whileChina is strong in exports o capital goods,this portion o growth in its export port olio

is waning. Mobile handsets have been the keydriver or Chinas export growth or the past 18months. Growth in mobile handsets jumped62% in August year on year and accounted orabout two thirds o the $4.7bn year-on-yearincrease in total China exports or the month.O lower value goods, home urnishings wereup in August, as well.

The problem with healthy growth in mobilephone handsets is that it does not have themultiplier e ect on the economy as growth incapital goods such as, say, ships. For every US

dollar o iPhone exports rom China, Barclaysestimates, only about 11% stays in China. Withships, a ar great portion o value stays in China via labour, suppliers and shipyard pro t.

Much o the value-add in technology prod-ucts is captured outside o China, says MrWindham.

Here is a stark reminder that the cost o advancing up the value chain in manu actur-ing products or export is a tendency towardsgoods that return less bene t to the local

economy.A declining multiplier e ect eventually

translates into slower local growth, which hasan impact on import demand.

August was just one month. Asias hungeror capital goods rom China will undoubt-

edly re-emerge as countries like Indonesiacontinue to show strong internal growth,decoupling rom economic trends in Europe,the US and even China. SITCs plan to servicethe regions growth looks sound, but mayeventually call or a change in emphasis.

As Chinas export growth slows, the uturemantra may morph rom China trades withthe rest o Asia and more All o Asia is trad-ing more with itsel .

Asias hunger for capital goods from

China will undoubtedly re-emerge ascountries like Indonesia continue toshow strong internal growth

C nn ct dtun s:

Mobile handsetshave been the keydriver or Chinasexport growth in thelast 18 months


Export growth inmobile handsets

62%in August(year on year)


24/32

24 China


China Shipping Development is taking measures toght the capacity glut on intercoastal trades

Strategy in bulk

T an S nf n : CSD is

also makingheadway in

extracting moree ciency rom

its feet

Photo: Dietmar Hasenpusch

Dry bulktonnage due or

delivery to Chineseowners in 2012

8.9mdwt

DrY BUlK Tom L eander

Chinas top shipping companiesare struggling mightily with two

scourges at once: global overca-pacity and a slowdown in Chinaseconomy.

China Shipping Development, the HongKong-listed operator that is also Chinas second-largest dry bulk carrier, is sometimes creditedwith having made wise bets in dry bulk even asthe shipping crisis hammered its state-ownedcolleague China Cosco.

Nevertheless, CSD recorded a loss o Yuan461.2m ($72.6m) in the January-Juneperiod, its rst hal -year loss since it went public,

and reversing a year-ago pro t o Yuan701.2m.With alling reight rates due to overcapacity,CSDs revenue ell 8.6% rom a year earlier toYuan5.6bn in the six-month period.

Pundits have applauded CSDs model, whichcontrasts so markedly with that o China Cosco.

CSD has avoured long-term relationships withChinese power stations, steel mills and mines ormuch o its dry bulk revenue, so that much o itsbusiness is tied up in Chinas intercoastal trades.

However, the business is exposed to spot-market pricing, and this year has seen thecountrys intercoastal trades ace mountingovercapacity. Does CSDs model still hold?

Foreign- agged ships are prohibited romengaging in Chinas coastal shipping, but theprotection this o ers is limited because Chinasowners have a tremendous amount o dry bulk

tonnage on order: some 8.9m dwt is due ordelivery in 2012 and 6.5m dwt in 2013. Coscoalone had 18 dry bulk ships on order as o June 30, according to a July report by Macquarie.

Much o this tonnage is destined or thecountrys intercoastal trades because o the

depressed rates outlook on the internationaltrades. CSD alone expects delivery o about 1.5mdwt o panamax and handymax tonnage totalin 2012 and in 2013.

I Chinas economy was growing at the ratesthat the world has come to see as amiliar between 9%-10%, say then much o thecapacity would be absorbed without a signi -cant drop in rates. But the toll o the capacityadditions is re ected in the decline o Shang-hai Shipping Exchanges China Coastal BulkFreight Index, which produces an average

based on reight rates or all signi cant domes-tic dry bulk trades.The index averaged 1,333 points or the rst

hal , down 22% year on year. Spot rates or the


25/32


China 25

C a d p:Spot rates or thetwo most importantdomestic coalroutes ell 30% inthe rst six monthso this year

two most important domestic coal shipmentroutes, rom north China to south China and

rom north China to east China, dropped 30%during the period, according to CSD.

But the capacity problem has hit Chinashipping at a time when demand or inter-coastal shipping has been hit by a slowdownin growth.

The slowdown in domestic consumption ispronounced, and is due to multiple causes,but one is obvious: with the economy growingat a slower rate, demand or thermal coal hasdropped at power plants.

Annual growth in coal- red power gen-eration in the second quarter ell below 2%,according to a report rom Macquarie analystMatty Zhao. The report anticipates year-on-year demand will rise to 4% in the thirdquarter, which nevertheless remains a slowrate o growth.

In contrast, Chinas hydropower utilisation isprojected to increase 42% in the second quarter year on year and 57% in the third quarter.

Hydropower has been growing or manyreasons it had a strong 38% growth rate inthe second quarter o 2011, or example ashydropower stations came online. This year

in particular has seen record rain all add totheir use.

The rain all has been extraordinary; insouthern China twice the amount o rain ellin June than last year. In June, China produced75bn-80bn kW/hr o hydropower, according toUS-based Commodore Research, up rom 66kW/hr in June 2011.

Weak demand and increased hydropow-er have contributed to a telling gure thatMacquarie cites: by June, growth rates ordomestic coal throughput at Chinas ports

had allen to 2.7% or the year to date, downrom 20% growth a year ago.Contributing to the lower domestic through-

put has been a growing price advantage or

imported coal. Coal sold on the Newcastleindex was at a 14% premium to Chinese coal in

mid-June. Local coal is more expensive due tothe high costs o transport on Chinas cloggedrail system and o extraction.

So CSD, which previously did so much toprotect itsel rom the world downturn in drybulk shipping, looks to be acing a tough year.

The percentage o domestic cargoes undercontracts o a reightment at CSD has droppedthis year to 60% rom 80% in 2011, according toa Macquarie Research report earlier this year.

But CSD has been taking steps to improveits position. Regarding coal shipments, itbrought in COAs or domestic transport in2012 or 43.7m tonnes o thermal coal. The

COA rates were higher than spot market rates,the company said in its interim report.

CSD has also made headway in extract-ing more efciency rom its ore carriers. Fordomestic iron-ore transport, the companysaid in its interim report, CSD had achieved[a] remarkable improvement in both the ship-ping scale and operating results, havingadded eight very large ore carriers o 230,000dwt and our VLOCs o 300,000 dwt.

CSD reported that the 12 VLOCs brought inYuan638m in revenues at an operating grossmargin o 20.1%. It was the growth highlighto the groups dry bulk operating activities,CSD said.

Because CSD has been care ul to tie up asubstantial portion o its owned vessels still some 60% in Macquaries reckoning,perhaps more given recent new coal transportCOAs on long-term contracts, its exposureto the intercoastal spot market has a ceiling.It may also be gaining a lead in extracting ef-ciencies rom economies o scale rom thoselarger vessels. Dont count CSD out just yet.

The capacity problem has hit Chinashipping at a time when demand for intercoastal shipping has been hit bya slowdown in growth


26/32

26 China


Experts disagree over how many vessels China will require,and whether Chinas yards are ready build these ships ast enough

Getting the gas to China

lNg Tom Leander

China is ramping up its lique-

ied natural gas imports as itincreases gas consumption inits energy mix, but experts disa-gree over how many vessels will

be required to meet Chinese demand, andwhether Chinas yards are capable o meet-ing the governments targets or LNG shipsupply.

Chinas 12th ive-year plan through 2015aims to increase natural gas consumption in

China to 260bn cu m by 2015 rom the 129bncu m that the country consumed in 2011.

Some 35%, or 90bn cu m, o natural gas willhave to be imported. I taken at ace value tomean that the totals imports will come via LNGshipping, that import gure would require 60carriers. Its important to remember that somenatural gas will be imported via pipelines aless expensive option than LNG shipping.

Estimates o actual uture Chinese LNGdemand depend on price, domestic produc-

tion and the balance between pipeline gasand LNG shipping in meeting supplementarydemand.

Chinese vessel demand will depend onwhat percentage o LNG imports China wishesto carry on home-built vessels right now, thegovernments stated goal is or LNG importedon China-owned ships to rise to 50%.

Suggestions that China could need up to60 new LNG ships in the next ive years seemhigh. Lloyds List Intelligence analysis sug-

2011 (actual)

Imports (cu m)

28m Imports (cu m)

2020 (estimate)

140m

2016 (estimate)

Imports (cu m)

71m

leet forecast Estimated future Chinese demand for ships to service Chinese LNG imports

Vessels

needed

23

Chinese

max

5

Chinese

min

n/a

Vessels

needed

38

Chinese

max

19

Chinese

min

8

Vessels

needed

75

Chinese

max

33

Chinese

min

16S u c :Lloyds ListIntelligence


27/32


China 27

And in early September, Hudong-Zhonghuawon a contract yet again, this time to build upto six 174,000 cu m lique ed natural gas car-riers or a joint venture between Sinopec andChina Shipping Development.

Nantong Mingde is the wild card. News inJuly o Cambridge Energy and shipyard Nan-tong Mingdes preliminary agreement to builda eet o LNG carriers came out o nowhere,according to the insider.

The agreement has revived discussion aboutChinas LNG capability.

That deal, while not exactly ar- etched,aces a long road to reality. It requires Cam-

bridge and the yard to co-design and buildup to 21 LNG ships, but gives scant details.Cambridge must rst nd nancing, which atthe very least will require export credit bank

money.Nantong Mingde told Lloyds List that Cam-

bridge is in talks with China DevelopmentBank, which has agreed to provide 70% o thecapital o rst batch o up to ve vessels andthat the remaining 30% will be committed byCambridge.

Bermuda-listed Cambridge did not returnemails.

Cambridge itsel is an enigma. It says onits website that it plans to export natural gas

rom the US and to build and own 125,000 cu

m-138,000 cu m carriers to do so. But the USexports only 2m tonnes a year, and Cambridgeapparently has no deal yet to export rom theUS.

lNg app ach:Chinese LNG vessel

demand will alsodepend on what

percentage oLNG imports China

wishes to carryon Chinese-built

carriers

China consumed

129bncu m o natual

gas in 2011

gests that to carry 50% o its LNG imports,Chinas need or new home-built LNG shipscould be as many as 14 new ships by 2016. By2020 this could rise to more than 30.

Chinese LNG import demand could riseto an estimated 30m tonnes (85bn cu m) a year in 2015, the maximum it can based onimport terminal capacity. I all planned LNGterminals are built, Chinas maximum capac-ity will be around 45m tonnes (127bn cu m)

a year by 2018.I China imports 30m tonnes (85bn cu m)

a year by 2016, hal sourced rom Australiaand hal rom the US via the Panama Canal,then it will need at least 38 vessels o 160,000cu m to service this demand. I vessels romthe US sailed via the Cape o Good Hope, anadditional 12 ships would be required.

This means a maximum o around 50 ves-sels would be needed to service Chinese LNGdemand in 2016.

While there has been no ofcial announce-

ment that the government will not acceptoreign owners controlling some o this trade,it is generally assumed that, or now at least,the development o Chinas LNG eet will

happen in Chinese yards via orders by ChinaNational O shore Oil Co, Sinopec and Petro-china, the three state-controlled giants thatdominate the nations LNG industry.

The government has designated seven shipyards as eligible to build LNG vessels; but onlyone shipyard has so ar succeeded. Shanghai-based Hudong Zhongua has built ve LNGcarriers. The six other designated yards areRongsheng Heavy Industries, Dalian Ship-

building Industries, Jiangnan Shipyard, WisonO shore and Marine, Shanghai WaigaoqiaoShipbuilding and Nantong Mingde.

Hudong Zonghua was selected again as the venue to build our LNG carriers or a joint venture between Japans Mitsui OSK Linesand China Shipping Development launchedlast year to build our LNG carriers to serveExxonMobils Papua New Guinea and GorgonJansz LNG projects.

The carriers will be used or a 20-year con-tract with ExxonMobil starting in 2015. They

will transport an estimated 4m tonnes o LNGa year rom Papua New Guinea and Australiato China. The deal to build the our ships isestimated to be worth $800m.

The government has designatedseven shipyards as eligible to buildLNG vessels; but only one shipyard

has so far succeeded


28/32

Download at:lloydslist.com/appsLloyds is the registered trade mark of the Society incorporated by the Lloyds Act 1871 by the name of Lloyds

Sponsored by


29/32


China 29

SHiPBUilDiNg Tom Leander

Japan has bet its shipbuilding

uture on accelerating its abilityto build ships or a world in which

uel efciency will give companieseconomic advantage. South Korea,

too, has ocused on better ship designs. SouthKorea in particular has nabbed the higher- value shipbuilding niche, leading the worldin lique ed natural gas carrier constructionand o shore vessel building. In this latter eld,Singapore has developed a remarkable special-ity, with an emphasis on deepwater and harsh

environment rigs.China has entered the high-value game late.How soon will it compete with the other Asiansuccess stories?

Although the Chinese shipping industryat large has been distracted by the qualityo its survival, some yards have turned theirattention to innovation and the uture. Someshipyards have incorporated research anddevelopment into their programmes and havethe capability to build ships with lower uelconsumption.

These include Rongsheng Heavy Industriesand the rst tier o state-owned shipbuilders.

Rongsheng has o shore ambitions. Chie executive Chen Qiang said earlier this year that

he anticipated 40% o total new orders wouldcome rom o shore contracts by 2015.Local media reported that 40% o new rev-

enue as opposed to new orders would be

o shore-related by that date. The error roiledRongshengs stock price, driving it up 14% ina single day until it collapsed when it turnedout not to be true.

Shareholders want to see o shore involve-ment, too.

Rongsheng won an order rom PrimePointOil & Gas to build two drilling rigs, including asemi-submersible barge rig and a tender bargerig, with an option to build another o each.Analysts said the deal would bring between$300m-$400m in revenue.

The other major non-state shipbuilder thathas announced a diversi cation into o shorebuilding is Yangzijiang Shipbuilding, listed inSingapore.

It may have entered the game late, but China could catch upin the race to build more complex and greener ships quickly

Moving up thevalue chain

expand dh z ns: Chinese yardsare increasinglydiversi ying intoo shore and LNGshipbuilding


30/32

30 China


The shipbuilder said earlier this year that itwould invest Yuan4bn ($633m) over the nexttwo years to develop a base in China to accel-erate its o shore business.

Yangzijiang has launched a subsidiaryin China, called YZJ O shore Engineering(China) Co, on land that it owns in Taicang,near Shanghai. Part o the unding or thecompany comes rom a joint venture betweenYangzijiang and Qatar Investment, a sover-eign und based in Singapore.

The joint venture will invest $100m or a40% stake in the Chinese entity. Yangzijiang

currently holds the remaining 60%.Several state-owned companies are devel-

oping o shore and LNG building capability.Cosco (Corp) Singapore, the Singapore-

listed unit o state-owned China OceanShipping that owns shipyards throughoutChina, is also looking more to o shore-relat-ed earnings to diversi y against its traditionalshipbuilding activity.

Year-to-date o shore-related orders atthe end o June reached $1.1bn. Yards withinthe Cosco (Corp) Singapore old have been

building expertise ast in o shore. CoscoDalian is scheduled to deliver a dynamically-positioning 3 drillship being built or DalianDeepwater in October 2012.

The pure government arm o Chinas o -shore push is China State Shipbuilding Corp,which controls two subsidiaries that areactive in o shore and LNG building.

Hudong Zhonghua is building all the LNG vessels currently on order in China, whileShanghai Waigaoqiao Shipbuilding has

built three loating production, storage ando loading vessels, according to Clarksons.Waigaoqiao also delivered its irst deepwa-ter semi-submersible drilling rig in 2011 toChina National O shore Oil corp .

CSSC says it has o shore building capa-bility at our o its other yards; JiangnanChangxing, Guangzhou Longxue, ShanghaiChongming and Lingang.

CSSCs push into o shore has been rela-tively slow. Nonetheless, the state-ownedgiant has devoted time and investment to

improving design capability or a rangeo o shore vessels. It has also launched astandardisation programme or jack-up rigconstruction at Waigaoqiao shipyard.

The project will run through 2015, is over-seen by the Shanghai Municipal Bureau o Quality and Technical Supervision and aimsto encourage design and deployment o newtechnologies that can be incorporated intoChinas o shore building e ort.

Sceptics have plenty to go on when assess-

ing Chinas high-value bid. But the scepticsare usually wrong when they evaluate Chi-nas ability to master new technology andinnovate.

Chinas high-value e ort has several ac-tors supporting it. For one, it is based onenergy demand, and where a nation needsenergy, it will always ind money to supportits extraction and transport.

Moreover, the sector provides ertileground or uture value investors: witnessthe Qatar and Yangzijiang tie-up. Finally,

the market now has several non-state andstate-owned competitors vying in the samearena. The ormer may well keep the latteron its toes.

It is worth asking to what degree thegovernment really wants to lend directaid to the shipping industry

o sha b t ns: Yangzijiang willinvest $633m inthe next two yearsto develop a baseto accelerate itso shore business


31/32

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