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China shipbuilding plans threaten VLCC business

Posted to Far East Maritime (by on November 10, 2011

The tanker market is facing a bleak future as China restates its intention to control the transport of 50 percent of its crude oil needs by 2015.

Growth may have slowed in some mainland sectors this year, but it takes a lot of fuel to stoke an economy growing at 8.5 percent.

Oil imports rose by seven percent in the first half, reaching 130 million tonnes, enough to fill 434 supertankers. China is planning to radically boost its VLCC fleet, currently standing at 56, by ordering another 80 of the giant crude carriers.

So far there are 30 supertankers on order from mainland shipowners, reported the South China Morning Post, but the mainland’s orderbook is about to be shoved way out with those additional 80 vessels to be built in the next four years.

That will more than double the current fleet as the country’s top two shipping lines, state-owned Cosco and China Shipping, strike up joint ventures with state-owned oil companies, such as PetroChina and CNOOC.

With its insatiable thirst for foreign oil that keeps the wheels of its economy turning, it is easy to understand China’s strategy to control half of its own oil transportation. But it is equally understandable to see how the rest of the oil transporting industry sees the move as outrageous.

The massive capacity will flood the market and send ship charter rates plunging at a time when shipping can least afford it.

But even worse is that the foreign owned tanker fleets will have to try to compete against state owned shipping companies partnering with state owned oil companies financed by state owned banks. They will essentially be up against a giant subsidized entity that will control a huge chunk of the global crude oil transportation business. While the world’s tanker operators try to compete in a vicious free market environment, they will be battling against the world’s biggest cartel.

State owned entities are not the best managed companies whose approach to business tends to be goal oriented rather than profitability focused. Locking in their crude supply will be more of an in-house arrangement with the local oil companies, but it will ensure that a good 25 percent of the world’s crude oil cargo will be removed from the market.

With too many tankers chasing cargoes that are already declining, cutting such a large chunk out of the market while doubling the fleet size has associations like Bimco knocking back a shot of something sharp to steady the nerves.

Bimco says with the industry oversupplied it would make more sense for China’s shipping firms to buy existing ships idling away in lay-up or currently under construction rather than building scores more.

Its chief executive, Torben Skaanild, believes 50 supertankers should be taken out of the market, and was horrified that China planned instead to put 80 new VLCCS in. He used words like “catastrophe” and warned it would kill the tanker market.

He may be right, but with internal consumption in China expected to rise sharply over the next few years, there will be growing demand for crude oil transportation. And the mainland is certain to place its own interests first.