China’s state apparatus has shown it can quickly restructure the economy away from a reliance on unreliable partners, highlighted by its increased production of low-sulphur marine fuel ahead of IMO 2020
China may be the world’s largest economy, but slowing growth is a global worry. Official figures show Chinese industrial production grew by just 4.4% in August compared to the same month in 2018. In July the year-on-year growth was 4.8%, the worst figure for 17 years. The slowdown is firmly blamed on the ongoing trade war with the US – the world’s second-largest economy – the origins of which date back to long before Donald Trump’s time as President. The US wants China to close the trade gap by US$200Bn and will use tariffs to achieve this aim. China has very little leverage, as its imports from the US include vital commodities such as soya beans and crude oil, but fundamentally China does not wish to lose face to President Trump.
China kept crude oil off the tariff list for a long as possible, but was essentially forced into playing that hand this year, with a tariff of just 10%. China has built up one of the largest crude oil tanker fleets in the world, and Chinese leasing companies have also taken on a significant portion of ship finance, effectively stepping in after private equity fled the scene. For instance, ICBC Financial Leasing is the registered owner of 48 tankers, ranging from VLCC to handy tankers, with foreign operators such as BP and Scorpio Tankers. VesselsValue places the value of the ICBC Financial Leasing tanker fleet at US$1.65Bn.
In the short-term, the recent outbreak of swine flu is China is decimating pig herds and as a result it has lifted tariffs on pork and soya beans. As noted, crude oil was kept off the tariff list, as historically, China had been a reliable importer of US crude – a positive boom for large tanker tonne-mile demand. As BIMCO’s chief shipping analyst Peter Sand notes, in 2017, Chinese imports accounted for 23% of total US crude oil exports. In 2018, that number was 22% during the first seven months; in August 2018 the share fell to 0%.
“For the crude oil tanker shipping industry distances often matter more than volumes,” says Mr Sand. “Even though volumes were record high, tonne-mile demand dropped by 19% from July to August, due to the shift in trade patterns. Exports to Asia are by far the most important. When measuring the tanker demand in tonnes-miles (TM), exports of US crude oil to Asia generated 70% of TM-demand on that trade in August – down from 78% in June and 75% in July.”
According to BIMCO, Chinese traders returned to purchasing US crude oil in early October, having demonstrated quite effectively in the meantime that it could source adequate volumes of crude from other parties.
China imported 1.2M tonnes of US crude oil in June 2019, over 1M tonnes more than in the previous month. This follows months of zero imports of US crude oil between August and October 2018 and in January 2019, and mere trickles of imports in other months.
Mr Sand commented “From being a very consistent and significant buyer of US crude oil until the trade war changed it all, China was back above 1M tonnes in June 2019. As China stopped buying in August 2018, South Korea became the number one destination for US seaborne crude oil, taking 1.5M tonnes on average per month in 2019, and setting a record of 2.3M tonnes in June 2019.”
He added “From a shipping perspective, long-haul exports to Asia are great. As China retreated last year, India, Taiwan, Japan and Singapore stepped up alongside South Korea to keep the very long sailing distances around. Tonne-mile demand was also at a record high in June.”
Belligerent trading partners
In the long-term, there will be more of the same. China is committed to driving out the surplus capacity of its domestic industries, becoming less reliant on external sources, and reducing pollution. It is a supply-side agenda aimed at building a sustainable, consumer-led economy, less reliant on belligerent trading partners like the US.
This includes building up its own refining capacity. Stage one of this goal involved limiting the capacity of the less efficient independent ‘tea-pot’ refiners to import crude oil and feedstock until they had achieved certain pollution controls and limited excess capacity. According to Platts, since 2015 around 95M tonnes per year of excess refinery capacity has been removed, although the oil price monitoring service also noted that this capacity was so under-utilised as to have limited impact on the headline output.
This expansion in refining capacity is geared to meeting the demands of China’s chemical industry, which is earmarked as a value-adding sector. However, the expansion has also added some oil product surplus. According to the Sinopec Economics and Development Research Institute (SEDRI), private companies are driving the expansion and two of these – Hengli Petrochemical and Zhejiang Petrochemical, each with a capacity of 20M tonnes per year – will add about 10M tonnes of new oil products to the domestic market in 2020. SEDRI notes that this is much higher than the domestic demand growth of 6M tonnes.
This extra capacity will serve the domestic market, and some will also serve the requirement to produce low-sulphur marine fuel. Xinde Marine News chief executive Gary Chen reports that low-sulphur marine fuel is the favoured option for China to meet IMO 2020 requirements.
Speaking to UK and Chinese shipping representatives at the UK-China Maritime Services Exchange forum held during London International Shipping Week (LISW), Mr Chen said “Most Chinese shipowners and operators do not regard the scrubber as an efficient solution, as they (scrubbers) lower utilisation and require extra energy and maintenance.”
He noted that the preferred option to comply with IMO 2020 among Chinese shipowners and operators is to burn low sulphur fuel.
“Currently, the supply of low sulphur fuel oil in China is very low,” Mr Chen said, noting that China has the world’s largest fleet (in numbers), the world’s largest port infrastructure and the third-largest refinery capacity in the world – all state-controlled.
“China’s largest oil refiner, Sinopec, said it will produce 10M tonnes of low-sulphur fuel oil by 2020, and it will be producing 50M tonnes by 2023,” said Mr Chen. “China’s other large refiner, China Petroleum & Chemical Corp, also announced it had converted nine refineries to produce low sulphur fuel oil,” he added.
This rapid shift in low sulphur fuel oil production is fully supported by the Chinese Government, which in October will announce that low sulphur marine oil refiners are to be given a tax rebate, allowing Chinese suppliers to offer low-sulphur marine fuel at competitive prices on and after 1 January 2020, according to Mr Chen.
The rapid expansion in China’s low-sulphur fuel oil capacity – which will provide security of supply and a competitive edge for its fleet thanks to the low price derived from the tax rebate – is in line with the Chinese state’s other initiative around marine pollution.
Mr Chen highlighted some of the changes that had already taken place in China and explained how these would affect foreign shipping. He cited new regulations, which came into effect on 1 January 2019, and which identify new emission control areas subject to new laws on burning high sulphur fuel.
These regulations extend the ultra-low sulphur region. “In the Yangtze River, vessels have to use ultra-low sulphur content marine fuel oil of 0.1% sulphur content and are being encouraged to use shore power,” Mr Chen said. “The Chinese Government has also prohibited the discharge of water from open-loop scrubbers,” he noted.
China’s extension of its emission control areas (ECA) to its entire coastline will encourage LNG-fuelled and other low-pollution shipping in the longer term.
The regulations are similar to those already applied to European ECAs. They set a sulphur content limit of 0.5% and will affect all vessels sailing within 12 nautical miles of the coast as well as when berthing.
And from 2020, the government may move to further tighten the sulphur limit to less than 0.1%, as it aims for 100% compliance with IMO’s global sulphur cap regulations.
Shippers operating in the new coastal ECA zones will likely have to carry dual fuels to comply with the regulations, accordingly to Wood Mackenzie. Clearly, clean-burning LNG-powered vessels such as chemical tankers will be advantaged.
Although the 12-mile limit is much softer than the up to 200-mile limits imposed in European ECAs, the regulations are highly significant because of the huge role China plays in international shipping. The regulations also apply to inland waterways, where there is a huge flow of goods to the interior provinces. According to Wood Mackenzie, nearly two thirds of China’s demand for bunker fuel of 650 kb/d is used in inland waterways, with the rest burned in coastal areas.
Most of the fuel used is oil and marine diesel and emits varying levels of sulphur. But since January 2019, China has imposed a unified specification for diesel known as China VI for marine use. Although China VI is more expensive than the high-sulphur fuel (HSFO) that is currently most in demand, HSFO-powered vessels will be banned on inland waters from 2019 unless they are fitted with scrubbers or other sulphur-reducing technology.
China is the de facto centre for scrubber and ballast water refits, with most owners choosing to undertake these during a vessel’s special survey drydocking. According to Clarkson Research Services (CRS), the tanker fleet could lose up to 10M dwt in capacity in the later stages of 2019 from vessels entering drydock for Eco retrofits. Although there is a slightly wider range of shipyards undertaking Eco retrofits in the tanker sector, CRS notes that Chinese shipyards continue to dominate. Chinese shipyards occupy the first 14 slots of the most popular locations to undertake retrofits, with Turkey and Singapore occupying the 15th and 16th positions.
Star Bulk Carriers Corp president Hamish Norton commented during LISW that on a recent visit to shipyards in China he saw vessels waiting three- or four-deep at pierheads for their drydock slots.
USA – China Trade War Timeline*
September 2011: Businessman Donald Trump tweeted: “China is neither an ally or a friend — they want to beat us and own our country.”
May 2016: Presidential candidate Donald Trump tweeted: “We can’t continue to allow China to rape our country and that’s what they’re doing. It’s the greatest theft in the history of the world.”
April 2016: US starts investigation into China’s steel imports into the USA.
November 2017: President Trump visits China.
February 2018: US imposes safeguard tariffs on solar panels from China.
March 2018: USA files compliant against China at the WTO.
March 2018: USA imposes 25% steel tariffs on several countries, including China.
April 2018: China imposes tariffs (15-25%) on 128 US products. Crude oil is not included.
April 2018: USA releases list of 1,334 Chinese products subject to a possible 25% tariff.
April 2018: China adds another 106 items, including soya beans and cars to list. Crude oil is not included.
May 2018: Trade talks in China. US demands China closes trade gap by US$200Bn within two years.
June 2018: Further trade talks in China. Both sides revise lists of potential items, but no agreement.
6 July 2018: USA starts collecting 25% tariff on revised list of 818 items.
10 July 2018: USA issues second list of possible 10% tariffs.
2 August 2018: USA issues third list of up to US$200Bn worth of Chinese goods on 25% tariff.
3 August 2018: China issues second list of 5,000 items to have tariffs. Crude oil is still not on the list.
14 August 2018: China files compliant at WTO against the USA.
23 August 2018: Both USA and China enact their second list of tariffs.
7 September 2018: President Trump threatens to add another tariff list, bring total US tariffs on China to US$500Bn, or approximately the same level of goods imported into the US from China in 2017.
22 September 2018: China cancels trade talks with the USA.
24 September 2018: Both sides launch their third lists of tariffs.
30 October 2018: USA announces tariffs on remaining Chinese goods.
9 November 2018: Trade talks resume.
19 November 2018: US issues controls on technology sales to China.
2 December 2018: Truce agreed.
January 2019: Trade talks resume.
February and March 2019: Extensive trade talks in China and USA.
April 2019: China bans fentanyl, an opioid manufactured in China but not in extensive use, but seen as an epidemic in the US. The move is seen as a concession by China.
May 2019: In a move seen by many as scuppering months of progress, President Trump insists that China must close the trade gap by US$200Bn (see May 2018).
May 2019: Trade talks fail and the US imposes tariffs on list 3 items and increases tariff from 10% to 25%.
May 2019: China invokes own tariffs on US$60Bn of goods (but not US crude oil).
June 2018: President Trump and Chinese Premier Xi meet ahead of G20 gathering.
July 2019: G20 truce collapses and Trumps hikes tariffs on US$325Bn worth of Chinese goods.
August 2019: China hints at higher US agricultural tariffs. Chinese companies suspend imports.
13 August 2019: USA modifies and lowers tariffs on some Chinese goods.
23 August 2019: China announces US$75Bn of tariffs on US goods.
1 September 2019: US$125Bn-worth of tariffs on Chinese goods start. China responds with the first tariff (5%) on US crude oil.
To date: China is imposing US$125Bn on US imports and the USA is imposing US$550Bn on Chinese imports.
Notes: * Abbreviated from a running timeline produced by Dezan Shira & Associates.