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China-owned ships: A rapid rise to become the world’s largest Fleets

Ships operated by owners based in China have become increasingly prominent on the world’s sea routes. China-owned container ships, bulk carriers, tankers and other vessels are seen more frequently in
18 Mar 2015 08:00
China-owned ships: A rapid rise to become the world’s largest Fleets
Chinese-owned fleet

Ships operated by owners based in China have become increasingly prominent on the world’s sea routes.

China-owned container ships, bulk carriers, tankers and other vessels are seen more frequently in ports around the world.

These ships now constitute the third largest fleet as identified by ownership and control nationality, following Greece in the number one position and Japan at number two.

And the China-owned fleet is set to become much larger, one indication of which is a huge volume of new vessels on order at shipbuilding yards.

This article looks at how and why rapid fleet expansion has evolved, and who are the major players.

Fleet growth has evolved alongside the spectacular advance of China’s seaborne trade since the early 2000s.

Many second-hand ships have been bought by Chinese owners from foreign companies, while newbuilding vessels have been acquired on a vast scale.

But the China-owned fleet’s enlargement has generally lagged behind the growth of the country’s import and export cargo movements.

This widening gap may be reduced over the years ahead.

The fleet’s tidal surge

During the past 10 years, the China-owned fleet has more than tripled in size.

From 37.7 million gross tons at the end of 2004, total capacity rose by 216 per cent to reach 119.2 million gross tons at end-2014, according to figures compiled by Clarkson Research and shown in the graph, including all ships of 100 gross tons and above.

This pace of growth was faster than seen in the entire world fleet; consequently China’s share of the global total increased from six per cent to just over 10 per cent.

Expansion has been seen in all the vessel-type categories. The bulk carrier fleet saw the most rapid advance, especially since 2008.

Between 2004 and 2014, this fleet almost quadrupled to 69.2 million gross tons, forming the largest portion of China-owned tonnage.

The tanker and container ship fleets tripled in size over the past decade to 21.2 million gross tons and 13.7 million gross tons respectively at end-2014.

All other ship types together grew less rapidly by 76 per cent, to reach 15.1 million gross tons.

Included in this ‘other ships’ category are gas carriers, multi-purpose and general cargo ships, roll on-roll off vessels and vehicle carriers, cruise and passenger ships and offshore vessels.

A large part of these fleets is involved in international trade, but many ships are employed wholly within the huge Chinese coastal cargo movements.

Chinese characteristics

Fleet tonnage expansion involved a huge rise in the number of individual China-owned vessels trading, from 3.821 at the end of 2004, to 6532 at end-2014, based on Clarkson data.

The percentage rise, 71 per cent over the decade was well below that of gross tonnage, owing to a rising average vessel size.

At the beginning, the average vessel size employed was 9859 gross tons, rising to 18,242 gross tons at the end, an 85 per cent increase.

One significant characteristic of the current fleet is the predominance of relatively young ships.

At the end of 2014, based on the number of vessels, 80 per cent of tankers were less than ten years old (built 2005-2014).

The comparable figure for bulk carriers was 68 per cent, and for container ships 51 per cent. Modern ships usually have superior operating advantages, being more efficient and more economical.

While much of the fleet growth reflected new ships purchased, China’s shipowners’ vessel purchases on the international second-hand market also comprised a major part.

In 2014, for example, a 5.7 million gross tons total was bought, according to Clarkson, although 56 per cent of the number of vessels resulted from transactions with domestic owners.

Second-hand purchases often have substantial advantages for buyers, including immediate availability for trading and, often, involve lower capital expenditure than a comparable new-building vessel.

Although growth in the China-owned fleet has been impressive over the past decade as a whole, annual growth varied greatly, within a two percent to 25 per cent range.

The fastest annual advances were seen in 2009 and 2010, when there were two consecutive 25 per cent surges.

Since then, a marked deceleration has occurred, down to only a modest two per cent in 2014, when the bulk carrier fleet’s capacity actually diminished marginally, and tanker fleet capacity was flat.

Policy and economics drivers

Accompanying this fleet evolution, several recent signs of broad action by China’s government on aspects of shipping policy have been seen.

At the beginning of this year, the Ministry of Transport published details of aims for upgrading the country’s shipping industry and improving services and competitiveness in the global marketplace.

Previously, two months earlier, intentions to support and modernise China’s shipping were reported.

Specific items listed were encouragement of mergers and acquisitions and private investment involvement, together with development of cruise shipping.

More support from domestic financial institutions was encouraged. These policy objectives followed publication of guidelines for developing and supporting shipping, including tax changes and regulatory reform, while applying pressure on companies to improve and modernise their fleets.

The stated aim was to build an efficient, safe and environmentally friendly Chinese shipping system by 2020.

Previously, towards the end of 2013, a new scrapping subsidy plan was introduced by the Chinese government to benefit both shipping and shipbuilding industries in China over the period up to 2015.

The subsidy is restricted to China-flagged ships. Shipowners participating are required to place newbuilding orders with Chinese shipbuilders at least equivalent to the vessel tonnage being scrapped in domestic recycling yards.

This policy has assisted a number of Chinese shipowners with their fleet renewal programmes.

The plan was seen as being especially valuable for the coastal trading fleet operating under the China flag.

For some time, it has been clear that the Chinese government’s intention is to achieve a larger proportion of the country’s seaborne trade transported by ships owned by companies based within China.

This aim has been most visible in the VLCC (very large crude carrier) segment of the oil imports trade.

A trend of expanding global seaborne trade volumes, a major contributor to which comprises rising imports into, and exports from, China provides growing opportunities for participation by Chinese shipowners.

Cost-competitiveness enhances potential for involvement. These features, becoming well established over the past decade or longer, are the fundamental economic drivers of growth in the China-owned fleet of ships.

But there is some evidence that subdued freight rates on the international market, and therefore low profitability for shipowners, during many of the past few years, has deterred investment by Chinese companies.

In these circumstances, China-owned ships, employed in both China import or export trade and in international cross-trades, experience poor or mediocre investment returns.

Prominent players

Within the entire China-owned fleet of ships of all types, about two-fifths measured in gross tonnes is contributed by three state-owned enterprises.

These are: China Ocean Shipping Company (Group), usually known as COSCO; China Shipping Group (CSG); and Sinotrans & CSC.

Another prominent company, also state-owned, is China Merchants Group. The largest shipowner in the private sector is HOSCO.

A number of separate individual company fleets of specific vessel types are large parts.

Navigating further growth ahead

What is the outlook for future fleet development?

One clear indication is new ships currently on order for China-based shipowners.

At the end of 2014, Clarkson statistics show the total of these was 625 ships of 32.1 million gross tons, equivalent to 27 per cent of the capacity of the existing 119.2 million gross tons operational fleet.

This huge order volume was the largest by owner nationality, exceeding that of Greece (30.4m GT), Japan (15.4m GT) and Germany (11.0m GT).

Just over half of the China total volume, 16.4m GT is scheduled to be completed by shipyards and delivered to owners within the current year, 2015. A further 12.2m GT is due for delivery in 2016.

Although this new capacity being added implies fleet expansion, projections for China (and other countries) are often surrounded by great uncertainty. Aspects which are usually difficult to forecast reliably are numerous.

Major uncertainties include the timing of newbuilding deliveries (compared with the recorded order book schedule), and how much additional ordering will occur.

Also, scrapping of existing old or obsolete tonnage is hard to predict. The disposal of existing ships in the fleet to, and acquisitions from, owners located elsewhere (second-hand sale and purchase activity) is not accurately predictable either.

Nevertheless, signs point firmly towards continued enlargement of cargo-carrying capacity in the China-owned fleet of ships during this year, the Year of the Goat and further ahead.

The large-scale order book is a convincing indicator, and anecdotal evidence also demonstrates intentions to add tonnage.

Backed by a government strategy for shipping industry development, and accompanied by President Xi Jinping’s vision of a 21st century Maritime Silk Road, the China-owned fleet seems set to achieve greater prominence.

– This article was written by Richard Scott, Visiting Lecturer, China Maritime Centre, University of Greenwich & managing director of Bulk Shipping Analysis

 

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