China is now a lead indicator in the crude oil trades and the main driver of tanker demand; but while its post Covid-19-lockdown recovery has been remarkable, its trade dispute with the US continues to cast an ominous shadow
In early 2020, following an acrimonious and very public trade spat with the US, China agreed to increase its share of US energy exports, which was seen as a positive outcome for tanker trades in the so-called Phase One agreement.
That agreement was based on trade figures for 2017 and covered three broad areas: manufactured goods, agricultural goods, and energy. But then Covid-19 hit, resulting in a steep fall in global economic activity; by August 2020, China has only fulfilled 30% of its commitments to Phase One of the agreement.
In volume terms, the growth in Chinese imports of energy goods from the US had risen by 2.3M tonnes (20.8%) in the first eight months of 2020. However, the target in Phase One was for US$18.5Bn of energy products in 2020 and US$33.9Bn in 2021.
“The fact that trade of the goods included in the agreement is far behind the commitments is not surprising,” says BIMCO chief shipping analyst Peter Sand. “The targets were unrealistic, even when the deal was signed before the pandemic. However, the Phase One agreement marked the first non-escalation of the trade war, and so far, the agreement has managed to return the trade levels to close to the status-quo of 2017, restoring much of the volumes that were lost in 2018 and 2019”
The USA is returning as a major supplier to China and the trade war itself has become something of a sideshow; it has barely been mentioned during the US election campaign, even though the agreement is one of President’s Trump most tangible achievements.
“The agreement has managed to restore much of the volumes that were lost in 2018 and 2019”
The trade war has hardly impacted China’s recovery from the Covid-19 lockdown. This is partly due to China falling back to its main strategy of keeping the economy growing, which is no longer focussed on exports but internal growth.
The two tenets of the internal growth strategy are expanding industrialisation across China and building its urban infrastructure. These have been the driving forces behind its remarkable recovery. The official industrial production growth in China in August 2020 was up 5.6% compared to August 2019. By contrast, US industrial production growth in August 2020 was -7.7% year-on-year. China’s GDP is now forecast to grow by 1% in 2020, which does not seem all that remarkable until it is compared with global growth, which is forecast to slump -4.9% in 2020.
GPD growth is China is forecast at 8.2% next year, versus a global GDP growth forecast of 5.4% in 2021. With regards to global seaborne trade, Clarkson Research Services forecasts this will shrink by -4.4% across 2020, similar to the level seen in 2009 after the global financial crisis. But again China is providing evidence of its remarkable recovery: port call activity in April had returned to 2019 levels.
In the first six months of 2020, almost no VLCCs loaded in the US with crude oil for China, according to Poten & Partners. This was due to high freight rates, which made crude oil from the Middle East more competitive.
By August 2020, freight as a percentage of the cost of crude oil had fallen to 2.1% on the Middle East Gulf-to-China route on a VLCC, while on the US Gulf-to-East route, freight was 6.1% the cost of crude oil, according to Clarkson Research Services.
With freight rates now falling back, Poten & Partners notes that spot fixing of VLCCs from the US to China are on the rise. By the end of September 2020, 10 VLCCs are due to load with US crude oil for China.
Commenting on the situation, MSI director, oil and tanker markets Tim Smith said: “China has been the key driver of the crude market in 2020. The country’s oil demand and refining activity has recovered more quickly than other regions, exhibiting annual growth during Q3 where other major markets have seen declines. On top of relatively strong underlying demand, China also weighed in heavily in buying surplus oil during the height of global demand disruption in Q2. As a result, MSI estimates China’s crude oil imports will grow from 22% of the world total in 2019 to 25% in 2020, as overall crude trade drops as a result of production cuts.”
This is having an impact on the availability of VLCCs. Mr Smith said: “The intake of Chinese crude has resulted in major backlogs for tankers, particularly VLCCs. VLCCs have seen extended waiting times off China, with around 8-9M dwt tied up in this way in August and September (2020). This comprised nearly 40% of stationary (+20 days) tonnage across the VLCC fleet, up from about 15% at the end of May. Although the volume of tankers tied up in logistical bottlenecks and floating storage has fallen across Q3, the glut of oil being absorbed by China means that this decline has been more acutely felt in the Aframax and Suezmax segments. However, assuming China continues to clear the backlog, more VLCC supply is likely to become available in the market.”
Shipbuilding faces triumvirate of woes
Chinese shipbuilding is in trouble, according to representatives of Chinese shipyards speaking at the Capital Link webinar Chinese shipyards & International Shipowners. State-owned shipyard group COSCO Shipping Heavy Industries’ director Mr Swen Sun noted three serious situations developing on the newbuilding side: newbuilding shipyards are short of new orders; the exchange rate is problematic, particularly fluctuations between the Chinese RMB and the US dollar; and there has been a sharp increase in the price of steel plate.
You Lian Dockyards (Shekou) Limited’s vice president Mr Zhu Guiming also noted the impact of the Covid-19 pandemic. “The big challenge is the virus,” he said, “and the impact on the supply chain. But in this respect, other shipyards, not just in China, are in the same situation.”
Yangtze Shipyard’s deputy general Mr Zhang Tao said that although the shipbuilding market in China has been poor, so far in 2020, Yangtze Shipyard has delivered 33 vessels and has a target of 80 vessels, a considerable increase on the 2019 total. But he added: “Every year we need 50 vessels backlog to maintain the yard.” He warned that current the low prices being offered are “out of the market.”
The low prices on offer are a response to the decline in the orderbook in China, which fell by 4.5% between January and August 2020, according to the China Association of the National Shipbuilding Industry (CANSI). During that period, 15M dwt of contracts were placed, of which 13.6M dwt were for export. During the same period, 24.1M dwt of vessels were finished, which is down 7.1% on the year before, but overtakes the volume of new orders being taken during the same period, eating into the required backlog of 80M dwt. As at the end of August 2020, the backlog was 72.6M dwt, having shrunk by 8.2% so far in 2020; it is 11.6% lower than in 2019, according to CANSI.
The Chinese Government is said to be offering incentives for domestic owners and operators to order ships, including a 20% discount from state-owned yards. It is not known if this discount is being applied to the up to 30 VLCCs being contemplated by the privately-owned Zhejiang Rongsheng petrochemicals producer, but this order would go some way towards maintaining the backlog.
These issues aside, international owners on the webinar panel stressed China was still a favoured location for shipbuilding and retrofit installations. TMS Tankers Ltd’s managing director Demetrios Koukoulas said the group currently operated 64 ships (including 32 tankers) that had been built in China and 50 in South Korea. Mr Koukoulas referred to the TMS group’s experience in China: “We have carried out more than 200 drydockings in China, and since March 2019, we have had 53 vessels fitted with scrubbers in China.”
“China weighed in heavily in buying surplus oil during the height of global demand disruption in Q2”
“The number one pro (advantage) of dealing with Chinese yards is the one-man management,” said Mr Koukoula. “In other words, the yards grant decision-making power to the manager of the section, who accepts full responsibility. This is very important as it facilitates the problem-solving process,” he said. “They will also accept upgrades and improvements in specification, even during the production process,” he added. And while this does come at a price, in other Asian shipbuilding countries, the practice is not accepted and there is no deviation from specification.
One area among Chinese shipyards where there is room for improvement is in human resources. Mr Koukoulas said: “We have noted that young staff in the design and purchasing offices will move to another shipyard for just a relatively low improvement in salary. These are replaced on a project by younger, less experienced personnel. This causes delays in production. Other improvements required are efficient planning, better machinery and better materials.”