Investor's Business Daily April 21, 2008
China Boosts Demand, Supply For Shipping
By Doug Tsuruoka
The fate of the world shipping industry seems wrapped in a Chinese fortune cookie these days.
Since 2003, China has kicked maritime cargo carriers into overdrive by importing huge amounts of raw materials to feed its economy.
The country is "a dynamo" for world shipping, says Richard T. du Moulin, president of Stamford, Conn.-based Intrepid Shipping, which manages eight ships.
"Its imports of iron and other ore have surpassed anything in world history," he said.
On the export side, container ships routinely haul cargos of finished goods from China to the U.S. and other ports.
"China is the No. 1 exporter of container cargo to the U.S.," said World Shipping Council Vice President Anne Kappel.
Until late last year, there were giant spikes in dry-cargo rates fed by China's voracious appetite for commodities. A trigger was China's switch to being a net coal importer in early 2007. Being the world's No. 1 steel maker also makes it a magnet for iron ore.
But a blowback from a slumping U.S. economy is hitting China, and its factories might end up churning out less for Wal-Mart (WMT) and other buyers in the months ahead. Some analysts fret that China's demand for shipping will cool if local production falters.
Ripples from a global slowdown are affecting shipping rates. The Baltic Dry Index, the industry's barometer for world dry-bulk shipping rates, plunged by half to 5,615 in January, after hitting an all-time high of 11,039 in November, mostly on demand from China and other Asian nations.
Du Moulin says dry-bulk rates have since rebounded and are holding steady despite falling from their "super peak" last year. The Baltic Dry Index stood at 8,350 on April 21.
Shipping rates impact just about everything in the global economy.
A.L. "Chip" Loomis, a maritime expert and trustee of the nonprofit Seamen's Church Institute of New York and New Jersey, notes that 93% of all goods in the world travel by sea.
Global shipping's outlook for the rest of the year is choppy — and all eyes are on China. Its iron ore imports are still moving at a healthy clip, rising 33% in February from a year earlier.
"Real demand for ships is very strong and there's lots of cargo moving," said du Moulin, who visited China in January. He says higher fuel prices are yet to seriously dent shipping activity. Nor have shippers seen a noticeable drop in dry-bulk and oil shipments to Asia, including China.
But Chinese regulators are edgy about decade-high inflation and are curbing growth. This could slow traffic at Chinese ports.
China's central bank decided last week to raise the deposit reserve requirement of commercial banks to a record 16%, the third such move this year.
"China (is willing to) bring about a recession in order to prevent inflation," said Dinosaur Securities analyst David Garrity.
Analysts also expect a fleet of new cargo ships to swamp the world markets in 2009 and 2010. Some say this will cause bulk shipping rates to fall — in spite of Chinese demand.
Maritime figures show there are about 9,000 ships under construction worldwide — more than at any time in history.
Other analysts say bottlenecks at Chinese ports will cause delays that keep bulk shipping rates relatively high.
Imports of raw materials currently account for the lion's share of shipping with China and the rest of Asia, du Moulin says. The materials are slated for big infrastructure projects. He says such shipments will continue even if container cargos of finished goods to the U.S. fall off.
Whatever happens in the current downturn, most experts agree that China is poised to have a major long-term impact on world shipping.
Most sea-based cargo to and from China today is carried by foreign- flagged ships.
The Chinese increasingly want their ships to have a piece of the action and have launched a major shipbuilding effort.
China overtook South Korea as the world's No. 1 shipbuilder by new orders in 2007, according to data compiled by ship broker Clarkson PLC. (China remains No. 2 by gross registered tonnage of new ships.)
The country boasts 150 shipyards, and its 1,775 Chinese-registered ships already place it among the top 10 merchant marines in the world in terms of tonnage.
China is also the world's largest container-shipping market, with Shanghai the second-largest container port after Singapore. Chinese firms are building the world's biggest shipyard in Shanghai. And local yards crank out everything from supertankers and container ships to small coastal vessels.
"China is extremely competitive when it comes to price in the world shipbuilding industry," said John Pike, head of research firm GlobalSecurity.org. "They aren't up to Japan or South Korea when it comes to first-rate quality. But if I'm prepared to squint a little bit when it comes to construction quality — I will go to China."
China State Shipbuilding, the nation's biggest ship maker, launched a $1.6 billion IPO on the Shanghai Stock Exchange in September. Several others — including China Shipbuilding Industry Corp. and Sinopacific Shipbuilding group — may do domestic or overseas IPOs later this year
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