Daily updates at www.sinoshipnews.com China’s FLNG ambitions Call for better accommodation blocks Propulsion special report ‘I would have done things differently’ Exclusive interview with Nobu Su AUTUMN 2014 www.sinoshipnews.com Textiles giant moves into shipping Supply chain stitched
As ever SinoShip’s 12 correspondents across six cities in Greater China have tracked down a series of interesting shipowners to interview for our profile section. Chen Jianhua, the boss of textile giant Hengli, explains the rationale for entering shipowning in our cover story, while in Taipei we catch up with one of the great casualties of the shipping downturn, Nobu Su. There’s also an interview with one of the largest Yantze tanker operators while throughout the magazine there is a very strong offshore focus. Features this issue are LNG, propulsion and law.
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Transcript
Daily
updates at
www.sinoshipnews.com
China’s FLNG ambitions
Call for better accommodation blocks
Propulsion special report
‘I would have done things differently’Exclusive interviewwith Nobu Su
AUTUMN 2014 www.sinoshipnews.com
Textiles giant moves into shippingSupply chain stitched
MTU Asia Pte. Ltd. | Phone: +65 68615922
1SinoShip Autumn 2014
ContEntS ■ ■ ■
■ ■ ■ Regulars 3 Editor’s Comment
5 Economy
7 Lines
9 Yards
11 Offshore
12 Finance
13 Commodities
15 Logistics
■ ■ ■ Profiles 17 Chen Jianhua
19 Nobu Su
20 Ren Zeyou
21 Shi Wei
■ ■ ■ Features 23 LNG
27 Propulsion
31 Law
■ ■ ■ Hubs 34 Shanghai
35 Taipei
37 Hong Kong
■ ■ ■ Reviews 38 Books
■ ■ ■ Opinions 39 Bei Hong
41 Andrew Craig-Bennett
We are still facing a series of challenges, including a more competitive market and a worsening environment
— Ren Zeyou, founder, Zesheng Group 20
Whatever market pick up there will be, it won’t last for a long time
— Nobu Su, chairman, Today Makes Tomorrow 19
The relatively low downpayment is very attractive, but a lot of financing uncertainty could be removed which would attract more orders into shipyards
— Evan Claar, chairman, CBI-MMEER12
As a country, China can only benefit from overcapacity and generally low freight rates
—Dr Helmut Sohmen, chairman, BW Group 3
Offshore platform operators are slowing down their orders as the oil companies are temporarily cutting expenditure— Shi Wei, executive director, Cosco Shipyard 21
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3SinoShip Autumn 2014
up FRont ■ ■ ■
WHEN THE dECiSiON was made to found SinoShip close to three years ago it was done in the knowledge that China was already the king of cargoes and would likely plough on to become truly the dominant force in the maritime sphere – it has not disappointed in this regard.
Once again China flexed its muscles in world shipping at the start of summer – eve-ryone else better get used to this; the People’s Republic is not for turning.
China smashed P3, a proposed mega alliance between the top three container-lines, Maersk, MSC and CMA CGM, just as it downed Brazilian miner’s plans to deploy giant 400,000 dwt bulkers to China. The com-mon link between these two events, despite the official announcement coming from government ministries, has been the mari-time lobbyist-in-chief, the China Shipowners’ Association (CSA). The CSA works very hard behind the scenes to get its members’ view-point across well to the government.
despite assurances from Maersk that everything is in place for a smooth start to its P3 replacement, 2M, a vessel sharing agree-ment (VSA) with MSC, there must be some concern at the two liners’ European head-quarters as the CSA has already made some public comments against the proposed VSA.
Still, it is very much a fluid, two-way street when it comes to the CSA, its leading state-run members and the government. Following years of heavy losses, Beijing made clear that any more state funds would come only if the top lines were willing to col-laborate. What we have seen since are the nation’s top containerlines coming together on certain routes and just recently China Merchants and Sinotrans & CSC forming a tanker partnership. Not everyone is happy with this enforced betrothal, however, as a number of smaller shipowners have made clear of late in a public letter saying that Cosco, China Shipping and Sinotrans, who are now working together on China – Japan routes, have too much control that market segment.
As an addendum to all this discussion, the other day i was chatting with the chair-man of the BW Group, dr Helmut Sohmen, and he provided an interesting contrarian view about China's shipping rise.
China is playing a very long-term game with its overall shipping plans, Sohmen said, while discussing the growing Chinese shipbuilding capacity, rising export/import volumes, and increasing investment in ship-owning, both private and state-owned.
“Let's face it,” he said, “as a country, China can only benefit from overcapacity and gen-erally low freight rates.”
China may well be on the way to becom-ing the most powerful commercial shipping nation around, but its route to the top will undoubtedly ruffle quite a few feathers.
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THE SERViCES SECTOR appears to be holding up China’s economic growth at present. HSBC reported the sector expanded at its fast-est pace in 15 months in June. However, the services sector is notoriously difficult to quantify in China.
Matthew Crabbe, a con-sumer sector analyst, recently wrote in his new book Mythbusting China’s Numbers that, “There is a great deal of the services sector in China that continues to go underre-ported, despite the increased coverage of services sectors in the last economic census data…and yet the private services sector is one of the
strongest growth components in employment generation in the economy.”
However, this service sector growth does seem to mean that, with the growth in manufacturing in the first half of the year, China’s economy has stabilised somewhat from last year.
A combination of enhanced factory activity and a growth in services has meant a mini-boom in consumer sales of late, in line with the Beijing government’s long-term drive to rebalance the economy away from exports and investment towards domestic produc-tion and consumption. The services sector accounts for
approximately 45% of China's gross domestic product (GdP) and now accounts for almost half of all jobs in the country and the major area of new job creation.
This new buoyancy may mean that the currently
sluggish property market will get a shot in the arm later in the year. However, exports remain sluggish (and manufac-turing for export job creation close to plateauing) while high local government debt levels remain as key risks. Still, the ruling Communist Party appears happy to let the economy grow as it is and, while on a trip to Germany, premier Li Keqiang ruled out any more stimulus spending in the economy. Li reiterated, albeit cautiously, that 7.4% remained China’s GdP growth target for 2014. The iMF says it expects growth in the region of 7.4% this year though the World Bank predicts 7.6 % (see chart below).
However, for those in ship-ping the slippage in export orders may be of concern. it is hoped that export recovery will start to show through in the numbers in the third quarter of the year and show, perhaps, a 10% growth over the same time last year, according to the China General Administration of Customs. Chinese manufac-turers report renewed orders from the US as America’s econ-omy continues to improve and, rather than stimulus, Beijing is likely to offer a raft of incen-tives (tax breaks, improved cur-rency transaction regulations and credit insurance) targeted at incentivising smaller manu-facturers to better chase and win export orders.
Once again perhaps we look to the old adage that ‘as goes China, so goes the world’ in that increased demand for exports from China can be seen as an indicator that global growth is bouncing back strongly and once more needs the workshop of the world.
Services drive growth, but exports are coming back
Other nations would bite your arm off for 7.6% GDP growth, argues Paul French
China GDp predictions
Year % GDP growth
2013 7.72014 7.62015 7.52016 7.2Source: World Bank
Increased demand for Chinese exports is an indicator that global growth is bouncing back strongly
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The power of the China Shipowners’ Association (CSA) was in evidence once again. The grouping, which persuaded Beijing to ban valemax bulkers from calling in China, was also behind the denying of the creation of the P3 container alliance of Maersk, MSC and CMA CGM. The CSA is now also lobbying authorities to try and thwart 2M, a vessel sharing agreement between Maersk and MSC. Separately, in a moment of domestic infighting, a number of smaller Chinese lines have hit out at the market imbalance created by the so-called C3 grouping. C3 is made up of Cosco, China Shipping and Sinotrans, who jointly operate container services on Japan routes.
The internal restructure of Sinotrans&CSC has finally made a substantial step. The group has established a dedicated shipping department which will put all its shipping units under one roof, based in Shanghai. Sinotrans&CSC is expected to register the ship-ping department as a separate
company by the end of this year and potentially list it later.
China Shipping launched an internal discipline inves-tigation on the group’s 1,344 management personnel. The group is cracking down on any-one who has been doing their own business beyond their day jobs. The National Audit Office released an audit this June on group, noting how the company has violated several financial regulations.
China Shipping Tanker (CST) paid a total of RMB1.66bn to Sinochem international Corporation and Shanghai Shipping Group to take a 40% stake in Shanghai North Sea Shipping. North Sea mainly provides petrochemical ship-ping services between domestic coastal ports and Yangtze river ports. it currently operates eight owned tankers and has four chartered tankers.
China’s massive anti-graft cam-paign has snared a high profile shipping company in dalian. Haichang Group, a diverse conglomerate involved in prop-erty, oil, tourism and shipping, stands accused by the National Audit Office of having mis-used funds given to it by local authorities. instead of buying
overseas technology, as origi-nally directed, Haichang, one of China’s larger private tanker players, used the cash to buy vineyards in France. Haichang now owns more than 10 vine-yards in France.
Dorian LPG, a Greek VLGC player, has entered into a memorandum of understand-ing (MOU) with HNA Logistics to explore opportunities in the LPG logistics market.
Hong Kong-based East Sunrise Group has signed with China Shipbuilding industry Corporation (CSiC) for ten jack-up platforms. The total value of the contract is around RMB10bn.
Hengli Shipping, a new shipping company based in dalian, received the first of ten 15,000 dwt bulkers it ordered at Jiangsu Haitong Offshore Engineering. The rest will be delivered by the end of this year. Hengli Shipping is the
shipping arm of Hengli Group, a multi-sector enterprise which is in the fields of petrochemi-cals, engineering plastics, real estate and financing.
Eastern Media International (EMI), a Taiwan-based enter-prise which is engaged in bulk shipping, tourism, digital media and real estate, is con-sidering quitting the shipping sector after its current charter-ing contracts expire. According to Shang-Wen Liao, president of EMi, one capesize bulker char-tering contract will expire in April 2016 and the chartering contracts of the other 12 pan-amax bulkers will gradually expire before the end of 2019. Liao said the company will not extend these contracts and will look to quit the shipping sector, and move its focus to media, e-commerce and trade.
Shanghai-listed multi-sector enterprise Orient International is planning to expand its bulk shipping business through subsidiary Shanghai Newseas Navigation. The company announced plans to use about RMB1bn in raised funds to expand the bulker fleet of Shanghai Newseas Navigation over the next three to five years with seven second-hand bulkers eyed. Newseas currently owns three bulkers.
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9SinoShip Autumn 2014
CHiNA CONTiNUES TO grap-ple with rampant overcapac-ity at its shipyards and a new round of consolidation is likely following the news that the Ministry of industry and information Technology (MiiT) has decided to make a ‘white list’ of shipyards. Those that fail to get onto the list will strug-gle to get loans from financial institutions. The cash taps will be turned off, strangling ship-yard supply, or at least that is the idea.
As it stands worldwide ship-yard supply capacity comes to around 100m gt, at least double actual demand, with China very much to blame for most of the extreme growth in yard capacity seen in the past 10 years.
MiiT is demanding ship-builders hand in reports on a
wide range of factors: current orders, the state of their pro-duction facilities, research and development efforts, quality control mechanisms and envi-ronmental protection measures. This information is then set against against government-set criteria.
Companies will be evaluated based on order backlogs, fresh orders and recent output. To survive, shipbuilders must soak up as many orders as they can before the deadline, thought
to be at the end of this year, hence ongoing attractive prices and available delivery slots at many yards across the People’s Republic.
The white list could well be tampered with, however, as analysts warn, local authorities, concerned about the disrup-tion potentially caused by yard closures, will look to inflate statistics of yards in their region to ensure they make it on to the list. Moreover, experts are convinced that there has been – and will be through to the end of the year – a spike in phantom orders at Chinese yards.
China's political advisory body convened a meeting this August to discuss the develop-ment of the nation’s shipbuild-ing and the issue of overcapac-ity and echoed the white list
concept, suggesting cash would be made available only to effi-cient companies.
Mandarins in Beijing have intimidated in the past that they would like to mirror shipbuilding development in Korea where eight to 10 big yard groups account for the vast majority of orders; the eventual aim in China is to have less than 30 giant yards competing for the vast majority of orders.
“The white list is a way to ensure others fade to black,” commented one shipbuilding analyst in Hong Kong.
Zhang Guangqin, president of the China Association of the National Shipbuilding industry (Cansi), reckons capacity has mercifully topped out among his membership.
“Capacity infrastructure has reached its peak. Chinese yards should no longer rely on the past business strategy of invest-ing to expand capacity and assets,” Zhang told local media in mid-August. Consolidation will continue for the next few years, he added.
despite the tough times, figures for the first half show China topping the world for both commercial ships and off-shore orders.
Chinese yards won a total of 40.8m dwt ship orders in the first six months, up 78.2% com-pared with the previous year. The nation’s order backlog grew to 152.1m dwt, up 39.5% com-pared with the same period last year. On top of that, the nation scored $7.9bn in offshore orders.
yARDS ■ ■ ■
‘The white list is a way to ensure others fade to black’ Beijing has set strict new parameters for shipbuilders to qualify for future funding
78.2% Growth in new orders
in China in the first six months
11SinoShip Autumn 2014
YOU COULd ALMOST hear the groans from across the Yellow Sea when China energy giant China National Offshore Oil Corp (CNOOC) announced plans this July to build a floating liquefied natural gas (FLNG) vessel for use in the South China Sea, stepping into yet another territory that has been the purview of Korean shipyards to date.
FLNG ships are ocean-based liquefaction plants that can be positioned above reserves to chill extracted gas and load it into LNG tankers for delivery, a technology that could make fields too remote or too small to develop using undersea pipe-lines viable for production.
CNOOC’s chief deepwa-ter researcher Xie Bin told a seminar recently: "For disputed waters, we need to be self-suffi-cient because we can't expect onshore support from any neighbouring nations.” Xie was referring to China’s recent for-ays further and further into the South China Sea that has irked its neighbours as it searches for oil and gas in contested areas.
The company is currently doing a pre-feasibility study and is talking to international engineering companies about a possible joint design of the vessel.
According to an official from CNOOC, the aim is to develop an FLNG plant that could han-dle up to 2.4m tonnes of gas per year and operate at a depth of 1,500 m.
CNOOC earlier announced that its research and devel-opment arm together with
two Chinese universities had designed a small-scale FLNG vessel with a capacity of about 5,000 tonnes of gas per year.
Wang Jinlian, secretary-gen-eral of the China Association of the National Shipbuilding industry, said the government was ready to finance research and development and offer tax incentives for any local manufacturing work needed to build such floating liquefaction plants.
About 10 FLNG facilities
are being planned globally with a handful under construc-tion, among them the biggest, Prelude, owned by Royal dutch Shell and due to be producing from an offshore Australian field by 2017. Shell has shied away from offering estimates of Prelude’s likely cost, but analysts say it could be more than $12bn. China’s first FLNG is likely to cost several billion dollars too.
While CNOOC may choose to build the FLNG at one its own yards, there will be a raft of Chinese firms chasing the business including, no doubt, Hudong-Zhonghua and dalian Shipbuilding. However, likely leading the pack is Shanghai’s Wison. This June, Wison pre-sented two technically and commercially feasible con-cepts to Cott Oil and Gas for the Pandora gas field project in the Gulf of Papua, includ-ing one that involves an FLNG design. Wison’s design is a 1m tonne per year offshore FLNG vessel incorporating gas clean up, liquefaction and storage for 170,000 cu m.
oFFShoRE ■ ■ ■
CNOOC unveils ambitious floating gas quest There’ll be a scramble as yards jostle for a prestigious offshore contract worth billions, writes Sam Chambers
CNG world first
THE WORLd'S FiRST compressed natural gas (CNG) carrier has been ordered by Pelayaran Bahtera Adhiguna, a subsidiary of indonesia's state-owned power company Perusahaan Listrik Negara (PT PLN). The ship, to be classed by American class society ABS, will be built in China with speculation that Qingdao Wuchuan Heavy industry has won the contract
The CNG ship has been designed by China's CiMC Ocean Engineering design & Research institute.
PT PLN's inaugural CNG ship, which will be dual-classed with the indonesian class society
Biro Klasifikasi indonesia, will be 110 m in length and offer sailing speeds of 14 knots. it is designed to offer a nominal CNG capacity of 2,200 cu m and will fly the indonesian flag.
BIG BROTHER Shell’s Prelude being built in Korea will be 50% larger than anything CNOOC plans
12 www.SinoShipnEwS.Com
■ ■ ■ FinAnCE
CHiNESE BANKS ARE more cautious about providing finance to the offshore industry to avoid overcapacity, accord-ing to Chinese bank representa-tives discussing China's offshore industry at the Marine Money Offshore event in dalian earlier this summer.
“Currently most shipyards see the offshore industry as the new growth point and want to enter the industry, however, lots of them don’t have enough capa-bility to build offshore prod-ucts,” said Gao Zefeng, assistant general manager, transport
finance department, at China Exim Bank.
“We are currently making a white list for shipyards involved in the offshore business, and we will only provide financing to the shipyards on the list,” Gao added.
“it’s not that we don’t sup-port smaller shipyards, we need
to avoid the overcapacity prob-lem in the shipbuilding market happening again in the offshore industry,” Gao explained.
Zhang Xu, deputy direc-tor, ship finance centre, China development Bank (CdB), agreed with Gao, and said CdB is putting together a similar list.
“The domestic shipyards will have to enhance their standards in order to get into the list, it will improve the overall standards of domestic shipyards and also lower the risks of the banks,” Zhang said.
delagates were told by a number of speakers about how prices for offshore products are declining, further squeezing yards’ profit margins. The cost of financing is increasing as the banks have increased interest rates for offshore financing, and payment terms have worsened. The advance payment percent-age has dropped to 10% or even lower from the 30% seen six years ago.
“The demand for jack-up rigs has dropped 25% in the first half of this year comparing with the same period of 2013, also there are more orders from specula-tive investors,” said Yu Fengping, president of dalian Shipbuilding industry Corporation (dSiC).
The event also attracted a number of owners including Evan Claar, chairman of the joint venture, known as CBi-MMEER, which has ordered a total of four multi-use accom-modation and construction sup-port jack-up units worth around $150m each at dSiC.
Claar called for Chinese yards to be more precise with their pricing if they are to get more offshore orders.
“The relatively low downpay-ment is very attractive,” he said, “but a lot of financing uncer-tainty could be removed which would attract more orders into the shipyards. For example, we are going through our construc-tion, i still don’t know with precision how much money we are going to need, nor do i know what the fee package is going to look like.”
Demand for jack-up rigs has dropped 25% in the first half
Banks put squeeze on China's towering offshore aspirationsJason Jiang went along to Marine Money’s recent offshore event in Dalian. Highlights below
CIMC increases finance focus
China international Marine Containers (CiMC), a major container manufacturer, is expanding its financial leasing business through its subsidiary, CiMC Financial Leasing.
“CiMC is expected to add RMB8bn financial leasing business this year,” Zeng Beihua, managing director of CiMC Financial Leasing, said this July.
According to Zeng, CiMC Financial Leasing currently manages about RMB10bn worth of assets. Among clients are containerlines MSC and CMA CGM, who tapped CiMC for a series of super post panamaxes.
CiMC is also planning an offshore finance business and high-end marine services at Qianhai, the special economic zone currently under development in Shenzhen. CiMC will team up with a Hong Kong financial institute to start the new business.
13SinoShip Autumn 2014
CommoDitiES ■ ■ ■
ESSENTiAL TO CHiNA’S relent-less urbanisation, aluminium is yet another of China’s fixes. it is increasingly producing more of this versatile metal than any other country for use through-out industries as diverse as construction, manufacturing and packaging. despite global oversupply, plant closures and rising production costs, China continues to expand its produc-tion capacity while struggling to secure sufficient raw ore.
According to Bloomberg, domestic bauxite supplied just over a third of China’s needs last year, with an additional 71.6m tonnes imported of which 48.7m tonnes were sourced from indonesia. Bauxite is refined into alumina and then trans-formed via electrolysis into aluminium. But since January, China has been forced to find alternative sources owing to the indonesian ban on ores to spur on its local processing industry.
Some observers speculate that the new indonesian presi-dent, Joko Widodo, may relax the export ban. if the ban holds, much of the indonesian bauxite industry may be shut down for several years as developing upstream facilities is expen-sive and time consuming. The Chinese alumina refiners were given the option that, if they committed to build facilities in
indonesia, they could continue imports until their refineries were operational. However, faced with domestic processing overcapacity and low profit-ability, such investment is not feasible.
Ahead of the ban, China’s aluminium producers stockpiled upwards of a year’s worth of sup-ply of raw material. Moreover, they have been actively seeking new sources to accommodate their ambitious plans for capac-ity expansion. Wood Mackenzie, a consultancy, estimates that Chinese bauxite demand will increase by 30% by 2018 and may reach as much as 240m tonnes by 2030.
China’s aluminium industry, like many others, is blighted by overcapacity and in need of restructuring. Falling prices and heavy losses have forced several Chinese smelters to shut down. As Beijing pushes to further shutter outdated, inefficient and polluting facilities, local govern-ments are pressed to preserve
jobs, often extending subsidies. despite some plant clo-
sures, China’s overall produc-tion capacity is ever-expanding. domestic producers are tapping into the billion tonnes of high quality bauxite reserves of Shanxi province. A new genera-tion of smelters is being built in northwest China, particularly in Xinjiang, owing to the region’s trillion tonnes of cheap ther-mal coal. Such ample low-cost energy is vital since electrical power accounts for almost half the cost of aluminium produc-tion, drawing nearly a tenth of China’s electrical capacity.
“if you strip away politics and environmental concerns, the bottom line is that China is consuming 25m tonnes [of aluminium] with an 8% long term annual growth rate,” Paul Adkins, managing director of the consultancy AZ China, tells SinoShip. “There will be a sub-stantial amount of new metal put into the market. While domestic bauxite production has accelerated, [China] is still nowhere near the ability to be self-sustainable.”
There is no alternative sup-plier of bauxite of a sufficient scale and quality to replace indonesia. “indonesia happened to be in the right place at the right time. The decision to stop exports [of ores] will become a
boon for shipping companies. Wherever China gets its mate-rial, it will be a longer journey. China is very heavily exploring West Africa, Jamaica, india, even Fiji. The threat is that China reverts to importing alumina, at 40% of the volume of bauxite. Alumina is always China’s Plan B. But China is already long on alumina refining capacity, so it is crazy to ship it from overseas,” says Adkins.
Australian capacity can only meet some of the demand, but comes coupled with higher production costs. india recently imposed export duties on baux-ite to support local aluminium producers faced with a shortage owing to mining curbs.
“The real big opportunity for China is West Africa, but it’s on the wrong side of the conti-nent. it has the longest journey plus the biggest political risk,” says Adkins. in June, Hongqiao, China’s largest non-state alu-minium producer, announced its intention to buy a mine situated in Guinea, the country endowed with the world’s larg-est bauxite reserves.
Since the local aluminium producers, mired with overcapac-ity, intense competition and con-flicted government interests are being forced to diversify sourcing, it is seaborne trade that is poised to benefit the most.
71.6m Tonnes of bauxite
China imported last year, of which 48.7m came from indonesia
Indonesia’s bauxite ban is the latest headache to an ailing industry, reports Mark Downing
Aluminum alarm
2014_244_ad_sino_ship_news_eng_outlines_08_14.indd 1 2014-08-14 7:56 AM
15SinoShip Autumn 2014
LoGiStiCS■ ■ ■
WiTH THE FAST development of China’s internet economy, e-commerce and logistics have become hot topics. According to a report released by the China E-Commerce Research Center (CECRC), China’s online sales volume reached RMB1,885bn ($305bn) in 2013, and 70% of the online sales business were completed by express with 50% of the express business coming from the e-commerce industry. in order to better control their supply chains, e-commerce companies in China have poured into the logistics indus-try, which has become a new battlefield in the struggle for mastery of the world’s most exciting online retail nation.Leading e-commerce companies including Jd, dangdang and Alibaba have all put logistics as an important part of their future development plans.
Chinese online shopping platform Jd, which listed on the NASdAQ in May, has signed an RMB2bn deal with the Nanjing local government to build a smart logistics centre in the city. Liu dongqiang, ceo of Jd, said last year that the company plans to invest RMB10bn in the next three years to develop its logis-tics business. Jd currently oper-ates seven warehousing facilities in China with plans to increase the number to 60 by 2015 and to add 10 automated warehouses by 2020.
Jd launched its Shanghai logistics centre – Asia No.1 – at the end of 2013, claiming that the facility is Asia’s largest warehousing facility with a usable area of some 230,000 sq m. Jd is currently building two
similar facilities in Shenyang and Guangzhou.
“We had no choice but to develop our own logistics busi-ness as the logistics costs in China are too high. it has greatly decreased our logistics costs in the whole supply chain,” Liu said, adding that currently logis-tics costs account for about 5.8% of Jd’s revenue.
Jd’s ‘Asia’s largest’ crown was taken away only seven months later with rival dangdang announcing in July that it has started operations of its largest warehousing facility, Galaxy No.1, in Tianjin. The facility is almost four times larger than Jd’s. dangdang also announced plans to develop 100 warehous-ing facilities in the next three years and expand its network to tier three and tier four cities.
“Currently the e-commerce market in the tier one and tier two cities is almost saturated,
lots of e-commerce compa-nies are looking to expand into smaller cities, even counties, which will create more chal-lenges on logistics. So we will invest more on logistics in the future in order to coordinate the business expansion of the com-pany,” said Ren Qiang, a senior director of dangdang.
However, Wang Haihui, ceo of fast developing online store, Yihaodian, is not a big fan of such massive warehousing facili-ties. “it is just wrong for e-com-merce companies to build such massive warehousing facilities,” he warned. “it is not really cost-effective, what really matters for e-commerce companies is inventory management,” Wang said, adding that Yihaodian is making efforts to decrease its inventory turnover cycle from the current 20 days to 10 in the coming year.
Alibaba, China’s top e-com-merce player, is currently devel-oping a nationwide logistics network which will support its RMB30bn online sales volume per day in the next five to eight years through its newly estab-lished joint venture Cainiao.
However, Alibaba said Cainiao will only be a fourth party smart logistics platform, which will connect all relevant parties in the e-commerce and logistics sector while Alibaba itself will never enter the express business.
“What we are doing now is to solve the logistics problems of the next decade,” said Wang Shuai, chief marketing officer of Alibaba.
Alibaba has also teamed up with state-run shipping line China Shipping Container Lines (CSCL) this July to create an integrated logistics platform which both China Shipping's clients and Alibaba's clients can use for online logistics price inquiries, ordering, settlement and goods tracking.
“E-commerce companies entering into the logistics sector will definitely bring pressure to express companies, forcing them to improve their services and establishing alliances, and conversely some express com-panies have plans to enter the e-commerce market,” said an official from the China Express Association.
SF Express, one of China’s largest express companies, started an online food market, sfbest.com, in 2012. it now deliv-ers food products to 68 cities in China as well as delivering fresh and frozen goods to nine cities in China.
The promising market has also attracted banks and financial institutions. China Merchants Bank (CMB) has introduced a new supply chain financing package for e-com-merce companies. Other banks are readying similar packages.
$305bn China’s online sales
volume last year
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17SinoShip Autumn 2014
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Few people know the Chinese textile market better than Chen Jianhua, the president of Hengli Group, a lead-ing fabric company in the People’s
Republic.Chen bought a bankrupt textile factory
in Jiangsu and started Hengli Group in 1994. Some 20 years later and Hengli Group has become one of the largest weaving companies in the world with more than 60,000 employees. its end users include world famous names like Nike, Adidas and Toyota.
despite his heady position within the sec-tor, Chen is aware that China risks losing its top billing for garment exports.
“Currently the textile industry in China is facing many challenges including a decrease in overseas orders, rising labour costs, the appre-ciation of the RMB, and blind investments from speculators,” Chen says.
Chen believes the industry needs innova-tions to get through the current difficulties.
“We are always looking for opportunities to diversify our business, but there isn’t much room for chemical fibre textile companies to transform, so we have decided to put our focus on the production of purified terephthalic acid (PTA), which makes polyester. We mostly relied on imports previously, and now we are investing in upstream industries and shipping to grab control of the whole industrial chain,” Chen says.
Hengli Group started a petrochemical sub-sidiary, Hengli Petrochemical, in 2010, and cur-rently has been developing a PTA manufactur-ing base on dalian’s Changxing island, a place that enjoys favourable policies for petrochemi-cal and marine development.
Hengli has allocated an investment of RMB25bn in total for the project. The group started operation of two PTA production lines in 2012 with total capacity of 4.4m tons each year, which has already made it the largest PTA factory in the world. Hengli Petrochemical completed a sales revenue of RMB43bn in 2013.
According to Chen, the third PTA produc-tion line is expected to start operation in September this year and Hengli Petrochemical is expected to increase its sales revenue to RMB60bn this year.
in order to support the production and transport of PTA, Hengli has also developed its own shipping terminal, railway and power plant on Changxing island. The two 100,000 dwt terminals have a joint annual handling capacity of 6.4m tons.
Hengli started its own shipping company, Hengli Shipping, last year and ordered ten 15,000 dwt ships, which will be dedicated to PTA transport, at Jiangsu Haitong Offshore Engineering.
Hengli Shipping started operations in July this year following the delivery of the first three vessels. The rest of the ships are expected to be delivered before the end of this year. The com-pany is now the only dedicated PTA shipping company in northeast China.
Chen says the deliveries of the vessels have changed the company’s history of transporting with chartered ships and the new vessels will greatly improve the transport efficiency in the group’s supply chain, adding that the invest-ment in the PTA project and shipping are important steps to complete the group’s indus-trial chain and ease the raw material scarcity
facing the domestic textile industry.Hengli Group has also invested RMB10bn
to develop a new raw material manufactur-ing base through another subsidiary, Kanghui Petrochemical, on Yingkou’s Xianren island. The phase one project started operations in June this year. Up to now, Hengli has estab-lished an industrial network with five manu-facturing bases in Suzhou, Nantong, Suqian, dalian and Yingkou.
NEED TO KNOW NEED TO KNOW hEnGLi ShippinGHengli SHipping waS established in 2013 as the ship-ping arm of Hengli Group, one of the largest textile compa-nies in the world. The company has started operations this year following the deliveries of first three out of ten bulk carriers it ordered at Jiangsu Haitong. The rest of the ships are expected to be deliveried before the end of this year.
The textile industry in China is facing many challenges
One of the world’s largest textile manufacturers has just moved into shipowning. Jason Jiang reports
Zipped up
18 www.SinoShipnEwS.Com
19SinoShip Autumn 2014
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SinoShip spent the best part of six months tracking down the elusive, mercurial Nobu Su for an inter-view. Few have soared so high and
crashed so spectacularly as Su, the boss of Taiwan’s Today Makes Tomorrow (TMT).
When we meet up, Su is not what we had expected, the larger than life charac-ter of six years ago has been replaced by someone more quiet, more reflective and, to our mind, sounding a little bit edgy. Understandably so, given the court cases he is fighting in so many corners of the globe.
The image his PR firm asks us to use speaks volumes. Gone are the youthful looks, the lines on the forehead and the grey locks tell their own story. Most pertinently however in the mugshot is the volume of gold colours for this was the man that felt his Midas touch would never leave him. One of the industry’s most enigmatic characters, far more technically astute than most other shipowners (pioneering previously unheard of ship conversions, for example), Su got big by betting big. He was the biggest FFA player during the boom years and he was right about Chinese iron ore imports, but he grew too big, too fast and when things turned, he had nowhere to go.
during the boom era he was the game in town, feted by every broker and snake oil salesman and, looking back, it’s easy to argue he just could not stop believing what they said. Come the financial crisis, like the Emperor’s New Clothes, Su was exposed and bereft.
Su’s demise has seen an empire fall apart, ships sold, crews left stranded and unpaid and lawyers spending many an hour in courts fighting for every nickel and dime.
“We decided to let some ships to go as the shipping market will stay quiet a long time in my view,” Su says, disregarding court verdicts that mandated vessel sales.
Su is keen to highlight a number of intel-lectual property issues he has raised in a US court. He has more than 10 patents related to shipping and he feels some are infringing on his designs.
“i think this overcapacity and structural change will eventually lead people who know how to create different solutions to survive. So i’m working on it,” he says of his many self-created ship designs.
Looking at the markets today,
once-bitten, twice-shy Su is not keen to make any investments in shipping now.
He cites the “huge market volatility” in both dry bulk and tankers and how “brittle” both sectors are, with overcapacity a new constant.
“Whatever market pick up there will be,” Su says, “it won’t last for a long time as we have huge overcapacity. i don’t expect good markets in any of the shipping markets.”
Looking back, Su now reckons market forces were beyond his control for his mis-timed investments.
“The freight was not decided in the nor-mal competitive way,” he recalls, adding: “it is decided in a very anti-competitive way. i did not get this feeling for a long time. So if i knew, i would not invest so largely, like $7bn in orders at two major Korean shipyards. i would have played it differently.”
NEED TO KNOW
NEED TO KNOW tmtOne Of tHe most high profile casualties of the ship-ping downturn Today Makes Tomorrow (TMT) has been run by Nobu Su since 2002 when his father died. Originally founded in 1958 as Taiwan Maritime Transportation, in its 2007 heyday under arch-risk taker Su, TMT operated more than 130 ships. The com-pany is now subject to numer-ous bankruptcy related cases.
This was the man that felt his Midas touch would never leave him
Nobu Su, the man who flew too high, is now fighting court cases on multiple fronts. Exclusive interview by Jason Jiang and Sam Chambers
Too close to the sun
20 www.SinoShipnEwS.Com
■ ■ ■ pRoFiLE
Among thousands of old ves-sels on China’s Yangtze river, Zesheng Shipping’s modern tankers in eye-catching yellow
and red colours are not difficult to spot. The company currently is the leading petro-chemical shipping firm on the river.
Ren Zeyou, general manager and co-founder of the firm, started his career as an apprentice on a ship in the 1980s, before moving on to operate a shipping business with chartered ships on the Yangtze in the 1990s. He started Zesheng Group with his brother in 2003 with only one owned 2,000 dwt chemical tanker, but just five years later the company’s fleet had grown to 29 vessels.
in 2008, Zesheng Group and the logistics arm of China National Aviation Fuel (CNAF) started a 50/50 joint venture, Chongqing Zesheng Shipping. With support from its state-run partner, Zesheng Shipping has become one of the top names on the Yangtze and the only aviation oil shipping company in southwest China.
its fleet has grown from 29 vessels to the current 62 vessels in the past five years. Total shipping capacity has grown from 85,000 dwt to 300,000 dwt. The company’s profit has also kept an average annual growth of 20% in the period. According to Ren, the company has another four vessels on order.
“The demand for aviation oil in south-west China has been increasing thanks to the fast growing aviation industry in the region. Most of the aviation oil is trans-ported from the middle and eastern China via inland rivers, however CNAF didn’t have its own shipping capacity at the time and most of its oil was shipped by chartered ships which created lots of risk for them,” Ren explains.
“CNAF has market advantage and
finance advantage and we have advantages in shipping fleet management,” Ren says.
Ren is optimistic about the petrochemi-cal shipping market on the Yangtze, saying: “With more petrochemical projects to be developed along the river, we are quite con-fident about future prospects.”
Zesheng has also formed long term stra-tegic partnerships with several large-scale companies including Sinopec, PetroChina, Pengwei Petrochemical and Kingboard Chemical Holdings.
“We are still facing a series of challenges, including a more competitive market and a worsening environment,” Ren says.
in order to promote environmental protection on the Yangtze and keep the sustainable development of the com-pany, Zesheng and CNAF have established another joint venture, Zesheng Tanker
Cleaning Company, which provides green tanker cleaning solutions.
“Tanker cleaning for each vessel will cre-ate about 100 tons of waste water, it would be a serious pollution if the waste water is not treated well,” Ren says.
The company aims to expand its fleet to 83 vessels in the next three years and gradu-ally expand its business to the domestic coastal market and start river-sea coordi-nated transport services.
NEED TO KNOW
NEED TO KNOW
ZEShEnG ShippinGfOunded by twO brothers 11 years ago. Has since teamed up with China's state aviation fuel firm and become one of the leading tanker names on the Yangtze with more than 60 ships, a figure set to grow to 83 in the next three years.
We are still facing a series of challenges, including a more competitive market and a worsening environment
Jason Jiang chats with the founder of one of the nation’s largest river tanker names
Ready for takeoff
21SinoShip Autumn 2014
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Orders for offshore rigs have dropped this year as have prices, says the head of one of the lead-ing rig builders in China.
Shi Wei, executive director of Cosco Shipyard Group and chief of the offshore division, discusses opportunities and chal-lenges in the market with SinoShip.
Cosco Shipyard Group is the shipbuilding division of the state run Cosco Group. it is part of Singapore-listed Cosco Corporation and is made up of six yards dotted across China. With OSVs, jack-ups, FPSOs and plenty more besides under its belt, the group is one of the premier offshore builders in the People’s Republic.
Shi is optimistic about the offshore mar-ket in the long term, it’s just right now where there’s a headache.
“The central government has put offshore development as one of the priorities in terms of national strategy and there will be more domestic investors interested in the sector who choose to order at domestic shipyards. Chinese shipyards’ market share in the off-shore market is increasing,” Shi says.
Cosco Shipyard didn’t enter the offshore sector until 2006. it currently has 27 offshore projects under construction, including eight offshore accommodation blocks.
“According to our research, there are lots of old oil platforms going to be updated and replaced by 2017, which will also bring opportunities to us, and the central govern-ment’s support in offshore financing also makes overseas investors place orders at Chinese shipyards,” says Shi.
However, Shi admits the company is still facing lots of challenges, noting in particular the general slowdown in orders this year.
“Offshore platform operators are slowing
down their orders as the oil companies are temporarily cutting expenditure on the development of oil fields, which has led to a decrease in daily chartering rates, and some oil companies also have postponed the planned bidding of drilling contracts, which means projects under construction are una-ble to get chartering contracts as expected,” Shi explains.
According to Shi, currently there are too many Chinese shipyards joining the competi-tion for offshore orders. “Their expectations for the offshore market are too high, and some of them receive orders under special terms in order to improve their offshore per-formance,” he says.
Shi says prices for offshore products are declining, further squeezing the profit
margin of the company. “The cost of financ-ing is increasing as the banks have increased interest rates for offshore financing, and payment terms have worsened. The advance payment percentage has dropped to 10% or even lower from 30% at the end of 2008.”
in concluding, Shi says, “A market always has both opportunities and challenges. What we have to do is to find the balance point.”
NEED TO KNOW
NEED TO KNOW
CoSCo ShipyARD
fOunded in June 2001, Cosco Shipyard is part of Singapore-listed Cosco Corporation. its six yards are involved in newbuilds, repair and conversion.
Offshore platform operators are slowing down their orders as the oil companies are temporarily cutting expenditure
Jason Jiang sits down with a top name from Cosco Shipyard
Why this year is a tricky one for China’s offshore builders
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23SinoShip Autumn 2014
LnG ■ ■ ■
Getting a grip on China’s actual liquefied natural gas (LNG) intentions is very tricky as the nation’s overall energy mix
keeps changing in line with fluctuating global prices for different energy types. Nevertheless, what is undeniable is that pollution is a very hot topic among the Chinese, and one that Beijing is very aware it must be seen to be handling, hence why LNG has a bright future.
China relies heavily on domestic coal to meet rising energy consumption.
Natural gas accounted for only 4.9% of China's total energy consumption in 2012, but large investments in domestic natural gas production and infrastructure, along with growing imports, are changing this figure dramatically.
China’s demand for natural gas will more than triple over the next 25 years, accord-ing to a new report from the US Energy information Administration.
Natural gas demand in China is pro-jected to hit 17.5trn cu ft in 2040, nearly tripling recent volumes.
China’s consumption of natural gas rose at an average annual rate of 17% from 2003 to 2013, reaching nearly 5.7trn cu ft last year. Of this, imported natural gas met 32% of the country’s demand despite domestic
production more than tripling since 2003.The Chinese government anticipates
increasing its natural gas share of total energy consumption to around 8% by the end of 2015 and 10% by 2020.
China more than tripled natural gas pro-duction since 2003, producing 3.8trn cu ft in 2012, and the government is targeting pro-duction to reach about 5.5trn cu ft of natural gas per year by the end of 2015. Most of the anticipated production growth is from large onshore fields in the western and north central regions of China as well as from the offshore deepwater regions in the South China Sea. China's natural gas consumption has outstripped domestic supply since 2007, triggering rising imports of both liquefied natural gas and pipeline gas.
in 2013, China imported nearly 1.8trn cu ft of LNG and pipeline gas to fill the grow-ing gap between supply and demand. China typically imports between 1.8-2.3bn cu m of
LNG per month, except in the winter when that spikes above 3bn cu m.
imported natural gas met 32% of China's demand in 2013, up from 2% in 2006. China is swiftly developing its LNG import capacity in the urban coastal areas and currently has 10 major regasification terminals with 1.7trn cu ft per year of capacity. in 2012, China rose to become the third-largest LNG importer in the world, after Japan and South Korea, and in 2013, the country imported 870bn cu ft of LNG. Estimates for the first half of 2014 show LNG imports growing at faster levels than in previous years.
China also continues to invest in natural gas pipeline infrastructure that will link production areas in the western and north-ern regions to demand centres along the coast.
China's potential wealth of shale gas, coalbed methane, and coal-to-gas resources has spurred the government to invest and partner with foreign companies that have technical expertise to unlock these reserves. According to EiA estimates, China holds the largest reserves of technically recover-able shale gas in the world, although inves-tors face geological, technical and water resource challenges, regulatory hurdles, transportation constraints, and competi-tion with other fuels.
Hazy, but skyrocketing
China’s gas figures remain cloudy. However, what’s undeniable is they are growing fast
32 Percentage of natural gas that
was imported to China last year, up from 2% in 2006
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China is slowly readying to open up its LNG supply chain to non-state run entities. Up until now the industry – both the terminals and
the ships – have been run by the big state names in China’s energy and maritime set up. However, as part of a wider bid across
many industries to foster competition and by extension efficiency, private and even for-eign firms will be in the mix for the People’s Republic fast growing gas infrastructure. This has already been seen on the shipping front with the likes of Teekay and Mistui OSK Lines forming joint ventures with
Chinese entities to deliver gas. However, it is set to go further whereby there will be no need for joint ventures, sources at the Ministry of Transport tell SinoShip.
As it is, new licenses to handle LNG transport are slowly forthcoming. This January CNOOC Yangjiang and Zhejiang Huaxiang Shipping were granted licenses to ship LNG domestically while Tianjin Marine, part of the HNA Group, has inked a letter of intention with dalian Shipbuilding industry (dSiC) for the construction of four LNG carriers, with capacities ranging from 160,000 cu m to 175,000 cu m.
On the terminals front, this is also set to open to greater competition. Currently, China’s first 10 LNG terminals are all state-run.
Seah Moon Ming, the chairman of the trade promotion agency known as iE Singapore, went to Shandong province in northeastern China this April, his first overseas trip in the new role. Seah is also ceo of Pavilion Energy, owned by Singapore state-owned investment company Temasek Holdings. He told local media in Singapore that he is looking at the pos-sibility of building liquefied natural gas receiving terminals in Shandong. Other foreign firms are also keen.
Shale gas targets cut
CHiNESE TARGETS FOR most things are worth taking with a pinch of salt. Beijing’s shale gas ambitions have received a sig-nificant dose of reality in recent weeks which bodes well for all those involved in China’s LNG imports business.
China recently slashed its 2020 goals for shale gas, a quiet acknowledgement that both natural resources, primarily water, and technology are still lacking to unlock what are deemed the world’s larg-est reserves of shale gas.
The initial goal – to ramp up from zero commercial production of shale gas to 60-80bn cu m by 2020 – was met with scepticism and was always deemed unlikely. Now, the country is back stepping a bit, cutting that goal to 30bn cu m by the
end of the decade and combining it with coal bed methane (CBM). it is worth not-ing that CBM targets have been repeatedly missed over the years.
Natural gas output is growing at a fast clip in China (production in the first half of 2014 was up 7.5% from a year earlier). China produced a total of 116bn cu m of natural gas last year, from all forms of extraction.
Beijing loosens entry barriersChina’s LNG transport has been monopolised by state-run entities to date. That’s all set to change
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27SinoShip Autumn 2014
pRopuLSion ■ ■ ■
Although the shipbuilding mar-ket has started to show positive signs with increasing orders awarded to Chinese yards this
year, local marine engine manufacturers are still seeing no signs of recovery.
“The inland river shipping market and coastal shipping market are still at a difficult stage, so the market is not really revived for shipbuilders and equipment providers,” says Li de, a senior manager at Weichai Heavy Machinery, a listed subsidiary of Weichai Group, one of the leading manufacturers of medium speed marine engines in China.
According to Li, the company’s medium speed marine engine business is still suffer-ing losses, but it is still focusing on the mar-ket and has no plans to enter the low speed marine engine market.
Weichai is also actively looking into the LNG propulsion market in order to find new growth areas.
“We have seen the potential in the LNG marine engine market, and we have already devel-oped our own LNG marine engine. We are currently working to complete our LNG propul-sion portfolio and will introduce the products at the right time. Currently we have seen the LNG price is on an up trend, so we are not in a rush to enter the market,” Li says.
An official from Antai Power, one of the largest private marine engine builders in China, says the company’s marine engine order volume has greatly increased in the first half of this year, but the unit price is still at a low level due to fierce competition in the market. Private engine makers will find it more difficult to survive compared with state-run rivals, he warns.
No sparkSinoShip talks to a couple of local engine manufacturers. Times are clearly tough
Unit prices are still at a low level due to fierce competition
CSSC takes over Wärtsilä’s 2-stroke business
tHiS July, wärtSilä and China State Shipbuilding Corporation (CSSC) signed an agreement to establish a joint venture, which will take over Wärtsilä’s 2-stroke engine business. Through the agree-ment, CSSC will own 70% of the business through its affiliate CSSC investment and development, while Wärtsilä will hold a 30% ownership position. The parties will co-operate in 2-stroke engine technology, marketing, sales, and service activities. The parties have agreed to transfer CSSC’s whole position as shareholder to a joint venture established by an entity con-nected with the municipal government of Shanghai and CSSC.
Responsibility for servicing Wärtsilä’s 2-stroke engines will remain with Wärtsilä Services through its global network.
The value of the transaction is
approximately EUR46m. The closing of the transaction is subject to the required regulatory approvals, which are expected during the first quarter of 2015.
The joint venture will be domiciled in Switzerland, and the head office will remain at the present 2-stroke engine headquarters in Winterthur. The current 2-stroke engine business management team will remain in place.
The joint venture will assume owner-ship of Wärtsilä’s 2-stroke engine tech-nology, and will continue to develop and promote sales of the engine portfolio with the full support of both partners.
“The objective of the partnership is to combine the strengths of the two partners, both of whom are major players in the global marine sector,” Wärtsilä said in a release.
Shortly after the announcement of the new joint venture, Wärtsilä announced that it will divest its shares in Qingdao
Qiyao Wärtsilä MHi Linshan Marine diesel (QMd), the joint venture company estab-lished for manufacturing large low-speed marine diesel engines. Wärtsilä’s shares in the joint venture will be transferred to the current majority shareholder, Qingdao Qiyao Linshan Power development Co, a company fully owned by China Shipbuilding industry Corporation (CSiC).
QMd will continue to manufacture Wärtsilä low-speed marine engines under license from Wärtsilä via the new joint ven-ture with CSSC.
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The Yangtze continues to be the petri dish of China’s LNG fuel experiments. However, a clear bottleneck is visible.
infrastructure needs to be in place before punters are willing to embrace this fuel change.
The Ministry of Transport released a subsidy policy in April to promote LNG-powered ships on inland rivers. Shipowners that convert their ships will get financial support ranging from RMB850,000 to RMB1.4m per vessel. The current dilemma shipowners face, though, is the shortage of LNG bunkering facilities.
“The development of LNG-powered ships won’t have a substantial progress by the end of 2015,” says an official from Wuchang Shipbuilding industry Co (WSiC), which is currently building China’s first LNG bunker-ing vessels.
The new bunkering vessels have to come on the market first, he says.
despite the many carrots offered by the Ministry of Transport, gas powered ship development is not proceeding fast enough. The ministry said in earlier plans that it expected 1,610 vessels to switch to LNG power by 2015. However, only 14 ves-sels have been converted to LNG power, as of the end of July, and less than 100 vessels have been converted to dual fuel since 2012.
Shipowners contacted by SinoShip for this article are non-committal about their LNG fuel plans. “Profit is very essential to us,” says an official from Wuhan Jiangyu Shipping development. “Although the gov-ernment is offering subsidies, we still don’t know what risk LNG powered ships might bring, we are not prepared to enter this
sector, but we will wait and see.” According to research by the China
Waterborne Transport Research institute, more than half of inland river shipown-ers have no plans to operate LNG powered ships with just 14% of owners saying they are willing to try LNG propulsion.
“The Ministry of Transport is currently working on the relevant safety and techni-cal standards of LNG-powered ships and it is also working with research institutes and universities on the key technologies,” main-tains Chen Aiping, head of the Maritime Safety Administration of China.
Currently there are four LNG bunkering facilities under construction at three river ports – Nanjing, Wuhan and Wuhu – and more LNG bunkering facilities are waiting for approval.
“The LNG bunkering business has huge potential in China, if the government can offer more guidance on the relevant stand-ards and more support policies, the market will see a fast developing period in the next three to five years,” reckons Zhang Yonghua, an official from Jiangsu Haiqi Ganghua Gas development, an LNG bunkering business established in 2012. it started trial operations of China’s first LNG bunkering facility in Jiangsu last year and has plans to build more.
Perhaps the most eye catching devel-opment in recent months has been the news at the start of August that Shanghai Bestway has signed contracts with Green Power Water Transport Co to design and build 200 LNG-powered vessels. deliveries are scheduled from March next year from Shanghai Bestway’s affiliated shipyard Jiangsu dajin Heavy industry.
The contracts include one hundred 600 dwt vessels, fifty 800 dwt vessels and fifty 1,000 dwt vessels. The total value of the con-tracts is about RMB650m.
Green Power Water Transport was estab-lished in June this year and is dedicated to inland river shipping. Shanghai Bestway and its subsidiary Shanghai Walking LNG hold 25% and 10% respectively in the company.
Power downBeijing’s ambitious targets for LNG-powered ships are way off. Lack of infrastructure is the problem
pRopuLSion ■ ■ ■
1,610 Number of LNG-powered ships
Beijing was aiming for by next year. Barely 100 are in
existence today
Caterpillar’s first medium speed engine joint venture
CSSC ANQiNG KiEL Motoren, a joint ven-ture between Anqing CSSC diesel Engine (ACdE) and Caterpillar, started opera-tions on June 25. The joint venture has already bagged contracts for the construc-tion of 40 Mak brand M25 medium speed marine engines (pictured) and plans to produce 180 marine engines by 2018. The company is the only joint venture of Caterpillar in the field of medium speed engines globally.
“The jv will focus on improving produc-tion efficiency and management, lowering parts purchase cost, as well as expanding
sales,” says ACdE chairman Zhang Haisen. “When growing to a certain scale in the future, the jv and Caterpillar will develop new models, and enhance the engineering capability of the jv in an effort to support its sustainable development,” Zhang adds.
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For a shipowner the process of buy-ing a new vessel from a shipyard can be a hazardous venture, much riskier than buying an existing,
second-hand vessel. This is because the shipowner has to part with millions of dol-lars up front to a shipyard/builder, by way of payment instalments to fund the construc-tion. The shipowner as buyer generally has no mortgage or other security in the ship under construction; all the shipowner has is the refund guarantee issued by the shipyard’s bank, which therefore forms the cornerstone of the entire project. if the ship-yard defaults and is obliged to return the shipowner’s instalments, the bank refund guarantee provides the shipowner with the necessary security.
Shipowners buying from mainland Chinese shipyards will often receive refund guarantees issued by PRC banks, and may therefore stipulate that the bank guarantee should be subject to Hong Kong law and court jurisdiction. if the mainland bank maintains a Hong Kong branch, any judg-ment obtained through the Hong Kong court will be enforceable in Hong Kong.
The refund guarantee can be one of two types. A ‘traditional’ guarantee creates a co-extensive or secondary liability on the part of the bank, meaning in practice that the shipowner must succeed in the underlying shipbuilding contract arbitration. Such tra-ditional guarantees can only be called once the shipowner has obtained an arbitration award upholding his right to cancel the shipbuilding contract and obtain the return of the instalments.
The second type of guarantee is the ‘on-demand’ guarantee or bond which, as the name suggests, can be triggered by simply
a written demand from the shipowner. A shipowner with an on-demand guarantee thus has the strongest form of security, giv-ing the right to payment of the funds irre-spective of any ongoing arbitration under the shipbuilding contract.
in Otto Offshore Ltd v. Bank of Communications the shipowner brought an action in Hong Kong under the bank’s refund guarantee. Separately, the shipyard obtained from the Tianjin court a restrain-ing order/injunction to prevent the bank from making payment under the refund guarantee. The bank applied to the Hong Kong court to stay the Hong Kong court
action, pending the outcome of the Tianjin court proceedings and the underlying shipbuilding contract arbitration. The bank contended that it should not be exposed to the risk that it would either be in breach of (a) the Tianjin restraining order or (b) a Hong Kong court order for payment under the guarantee. Significantly, the Hong Kong court rejected this argument and refused to stay the Hong Kong proceedings. The shipowner had not agreed, or submitted, to the jurisdiction of the Tianjin court. in addi-tion, the Tianjin court restraining order, not being a money judgment, was not recognis-able either under the relevant Hong Kong statute or at common law. The Tianjin court therefore did not have jurisdiction over the shipowner to give a judgment capable of being recognised in Hong Kong.
The Hong Kong court’s decision upheld both the vital role of the refund guarantee in the shipbuilding process, as well as the parties’ agreement in the guarantee to the jurisdiction of the Hong Kong court.
Advice when heading to a Chinese shipyardBill Amos from Mayer Brown JSM provides readers with a heads up about ordering newbuilds in China and refund guarantees
A shipowner with an on-demand guarantee has the strongest form of security
Wikborg Rein is an international law firm with over 230 lawyers located in Oslo, Bergen, London, Singapore, Shanghai and Kobe. Our unique and long-standing presence overseas enables us to offer our clients the benefit of our extensive international expertise.
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The provisions on the adminis-tration of foreign exchange for cross-border security, published by the State Administration of
Foreign Exchange (SAFE) in China replace 12 existing regulations providing for cross-border security.
Reflecting a huge step forward by SAFE, the new regulations apply to and regulate all kinds of cross-border security structures, including the following three categories, which are based on the places of registra-tion of the parties:
i. Nei Bao Wai Dai or Outbound Security, where the security provider is registered onshore (i.e. Chinese), and the obligor and the creditor are both registered offshore; thus, for example, where a guarantee is given, only the guarantor is Chinese.
ii. Wai Bao Nei Dai or Offshore Security, where the security provider is registered offshore, but the obligor/debtor and the creditor are both registered onshore (i.e. Chinese); using the same example again, where a guarantee is given, the guaran-tor is not Chinese, but both the other parties are.
iii. Any other types of cross-border security in which one of the creditor and debtor is onshore (Chinese) but the other is offshore, and thus the cross-border ele-ment is between these two parties; the security provider may be either onshore or offshore.
The main changes are as follows:• Thevalidityofanycross-bordersecurity
agreement is no longer subject to SAFE approval, registration, filing or other SAFE administrative requirements. A
security agreement would include, for example, a mortgage, pledge, guarantee or standby letter of credit.
• Inrelationto(i)OutboundSecurityand (ii) Offshore Security, the previ-ous system of quota management and pre-approval has been replaced with a requirement for registration of the security following its execution. Prior approval of the security is not required.
• For(iii),anyothertypesofcross-bordersecurity, no registration or filing is required.
• Thedistinctionintheadministrativeschemes regarding security for finance purposes and security for non-finance purposes has been abandoned. This means that banks are no longer subject to any quota management in relation to security for finance purposes.
• Individualsarenowexplicitlypermittedto provide Outbound Security by refer-ence to the corresponding rules applica-ble to non-banking institutions.
• SAFEapprovalontheenforcementofsecurity is abolished.
in practice, these changes mean:• Inrelationtocharterparties,where,for
example, a Chinese guarantor provides to a foreign shipowner a parent guaran-tee of performance by the charterer of a charterparty, if (a) the charterer is a for-eign company, the guarantor must reg-ister the guarantee with SAFE within 15 days but if (b) the charterer is a domestic Chinese company then the guarantee will be characterised as (iii) above, “any other type” of cross-border guarantee and will not require any form of filing, registration or approval.
• ForanEnglishP&IClubprovidingaguarantee, then (a) if this is directly to a Chinese company as claimant on behalf of a foreign shipowner then no registra-tion will be required but (b) if it is pro-vided on behalf of a Chinese shipowner this will fall within type (ii) above and will require registration.
• Inrelationtorefundguarantees,theposition is as follows: at present, where a Chinese yard is obliged under a ship-building contract to procure a refund guarantee from a Chinese bank, that Chinese bank will file general informa-tion of that guarantee (and any mate-rial amendment to it) with SAFE on a monthly basis as part of a risk manage-ment requirement, although prior SAFE approval is not required, nor is SAFE registration. Under the new regula-tions, that position would appear to be unchanged.
We expect that these new regulations will be warmly welcomed by the interna-tional market, offering, as they do, flexibil-ity, certainty and accessibility when using cross-border security.
Rules relating to the provision of cross-border security are relaxedInce & Co’s Vincent Xu on a significant change at the State Administration of Foreign Exchange (SAFE) likely to be welcomed by shipowners everywhere
The new regulations offer flexibility, certainty and accessibility
34 www.SinoShipnEwS.Com
SHANGHAi iS RAPidLY climb-ing the ranks as an expensive place to live in. Could its soar-ing costs hamper its intentions to be an international finance and maritime centre by 2020, a goal that has been set by Beijing seven years ago?
A survey on costs of living by the Economist intelligence Unit (EiU) found Shanghai as more expensive than New York
Many mainland cities are moving up in the rankings due to higher wages, rising infla-tion and the appreciation of the renminbi. The most expensive among them is Shanghai, which rose to the 21st spot worldwide.
For Shanghai to prosper as an international maritime
centre (iMC) it will need plenty of foreign expertise and investment.
Rising costs combined with a poor environment might detract from getting the best talent available.
Another list recently out, compiled by Mercer’s ranks 211 cities on costs for expatriates. Shanghai ranked tenth world-wide in this list.
Ed Hannibal, a partner at Mercer’s, commented: “While multinationals continue to recognize the importance of having a global workforce and corporate assignments remain prevalent, they must be able to monitor and balance the cost of their expatriate programs.
Employers need to evaluate the impact of currency fluctuations, inflation, and political instabil-ity when sending employees on overseas assignments while ensuring they retain talented employees by offering competi-tive compensation packages.”
Many believe cargo is king and Shanghai will propel its way to the top regardless of how pricey it becomes to live there, with plenty of analysts pointing out that Singapore, arguably the world’s most busy shipping hub these days, ranked number one on the EiU’s cost of living list.
One supply chain consult-ant, Russel Beron, who recently moved to Hong Kong after a long stint in Shanghai tells SinoShip: “ My opinion is that the cost of living will not impact whether or not Shanghai becomes a maritime centre. if
you look at Hong Kong, the cost of living is much higher and it is still a top shipping centre. China is still by far the world's largest exporter and will remain so for a long time, so it would make sense for it to have an interna-tional maritime centre.”
Beron reckons that other issues such as government poli-cies, high tax rates, how easy it is to do business are more likely to have an impact than living costs.
Shanghai ranked second behind Singapore in a poll conducted by our sister site, Maritime CEO, at the start of the year on which city will be the most vibrant maritime hub in five years time. Among the respondents there was much chat in favour of Shanghai.
“Singapore will try to hold on to the title, but Shanghai has the hunger as well as the landmass to make it happen,” one voter wrote, while another suggested: “Shanghai, with its access to the Pacific and the industrial hinterland of Chongqing via the Yangtze is definitely the place to watch.” Another respondent said Shanghai could be top of the pile, but only if it manages to keep its pollution down.
■ ■ ■ huBS: ShAnGhAi
Soaring costs could dampen ambitionShanghai is getting ever more expensive. Could it price itself out of the market, asks Zoe Li?
Shanghai has the hunger as well as the landmass
35SinoShip Autumn 2014
POLiTiCAL MACHiNATiONS ARE hampering Taiwan’s efforts to improve the competitiveness of its ports, after a key free-trade bill stalled in the national parliament this summer.
Progress of a bill proposing the introduction of so-called Free Economic Pilot Zones (FEPZs) at Taiwan’s six major ports and its international air-port slowed to a crawl in June after the opposition democratic Progressive Party insisted the bill be reviewed on an article-by-article basis. A hearing man-aged to address just four of the bill’s 73 articles before being adjourned amid protests from students claiming the ruling Kuomintang party was attempt-ing to steamroll the bill through the legislature.
The FEPZs aim to offer tax incentives for Taiwanese busi-nesses repatriating profits for reinvestment in the zones, businesses in the agricultural and industrial raw materi-als processing sectors, as well
as on goods exported after storage. The plan targets high value-added service industries, particularly smart logistics, international health care, value-added agriculture, as well as financial and educational services. if successfully enacted, the proposal initially targeted an increase in private invest-ment of NT$21bn ($701m) this year alone, with trade value earmarked to touch $NT1trn in 2015.
The zones are also seen as crucial to Taiwan’s attempts to join regional free-trade agree-ments such as the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership, as well as its effort to compete with rival ports on the mainland, Hong Kong,
Singapore and South Korea. The focus on smart logistics could be a particular boon for freight forwarders, as could the poten-tial to integrate basic manufac-turing capabilities at the ports, and both have been widely welcomed by groups includ-ing the international Ocean Freight Forwarders & Logistics Association, the largest logistics industry association in Taiwan.
“All of Taiwan’s six free-trade harbours focus on specific
logistics services depending on their geographical locations and port characteristics,” says Andrew Chen of the Taiwan international Ports Corporation (TiPC). “The FEPZs’ potential to facilitate basic metals process-ing services could have a signifi-cant impact at Kaohsiung Port,
which since November last year has been operating as a goods delivery point for primary alu-minum, aluminum alloy, copper, lead, nickel, tin and zinc from the London Metal Exchange,” Chen adds. Kaohsiung is already pressing ahead with land sales to steel and metals processing firms at an exist-ing manufacturing park in the Nanxing development Zone, while Taipei Port in spring sold land parcels earmarked for a wood pulp logistics centre and a support facility for the assembly and export of wind turbines. Anping Port, which focuses on value-added agriculture and bulk goods, would also stand to benefit if the FEPZ plan is approved, while Su-ao focuses on green energy, and Taichung on oil blending.
Smoother customs proce-dures are also expected at the FEPZs under a legal revision that will allow forwarders to sidestep customs brokers and independently declare mani-fests, improving clearance times, according to Chen. “The revision will also lower forward-ers’ transhipment costs and enhance the convenience of cargo consolidation, attracting more forwarders to operate in Taiwan’s ports.”
However, there remains substantial corporate and political opposition to the FEPZ proposals. The local industry is concerned that foreign invest-ment, particularly in the agri-cultural sector from mainland firms, could damage domestic competitiveness.
“i think we will have to wait until after municipal elections in late November, when we have the election of seven kinds of local people’s representa-tives,” says Chiu Rong-Her, an assistant professor of shipping and business logistics man-agement at National Taiwan Ocean University. “The issue will be shelved until then when we know which political lead-ers will be able to solve the problem.”
huBS: tAipEi ■ ■ ■
The introduction of so-called Free Economic Pilot Zones (FEPZs) across the island is on hold for the time being, writes David Green
Political impasse stalls port plans
The zones are seen as crucial to Taiwan’s attempts to join regional free-trade agreements
LATE SHOW Legislators failure to agree to new trade zones will hamper progress at Kaohsiung Port
37SinoShip Autumn 2014
BANKS ARE GETTiNG back into the ship financing business and Hong Kong is full of banks. Almost by default, banks in the city should be financing more ships now than at any time in the past few years.
“Hong Kong has always been one of the major ship finance centres in the world,” says david Cheng, honorary chairman at Credit Agricole Ship Finance Asia.
There are several reasons for this, including the fact that capital can flow easily through the city and that shipowners have long congregated here as a result of the city’s role as a focal point for trade and its large and busy port, not to mention the many incentives the city has always offered to businesses.
Unfortunately for Hong Kong, this particular piece of the business is a bit more com-plicated and is rarely depend-ent on a particular location. For banks, ship finance is a regional business. in broad
strokes, banks are just as happy to finance a ship in Hong Kong as in Singapore (or Tokyo or Shanghai or Seoul).
“Ship finance is a regional business so sometimes it is difficult to say who provides more,” says Cheng. “There is not sufficient business for a bank to operate in shipping finance just in one city.”
Rather, banks take a regional approach. Most banks separate this particular piece of business in terms of larger regions, like Asia Pacific.
Banks, of which Hong Kong has an overabundance, are getting back into the business carefully. Some, like HSBC, are more likely to rely on existing relationships rather than focus on the ship finance business as a whole. Others are willing to finance ships but to lower levels of leverage than in the past.
The days when a shipowner was able to finance as much as 80% or more of the value of a ship are gone. Banks are now
more cautious and are more likely to finance 60 or 65% of a ship value.
This is partly a result of an ongoing problem of oversup-ply in the industry. in a market survey of shipping companies through the second quarter of 2014, HSH Nordbank found 73% of respondents (mostly in Germany) believe the container vessel segment has the larg-est amount of overcapacity. Another 39% of respondents say bulkers have the largest overcapacity.
The reality is that there is
overcapacity in most segments and that is unlikely to resolve itself soon judging by the cur-rent global orderbook.
“in two years time there is a lot of tonnage coming online,” says Cheng.
So banks are more likely to limit who they do business with to the companies and people that they know well and whom they feel know the business of shipping.
But many banks are consid-ering moving elsewhere and this is threatening Hong Kong’s position as a ship finance centre.
Competition is coming from several areas.
Singapore, for one, is work-ing hard to attract more busi-ness in all sectors, not just shipping. it has been offering incentives for companies to locate their offices there and has been making it easier to invest. This has attracted com-mercial principals, such as shipowners. in turn, it has also attracted the service provid-ers that follow these principals such as the banks that provide the financing that the principals need to carry out their business.
Shanghai still trails but the growth of the industry in China has made it easier for the city to emerge as a finance centre for the shipping industry.
Tokyo is a large player but one that is dominated by a rather large domestic industry. Seoul is also a relatively impor-tant ship finance centre thanks to the Korean shipping industry but it trails the others in the region.
The government is aware of the challenges that the industry is facing. A report on enhanc-ing the city’s role as an inter-national maritime centre was released in April and highlights the city’s positioning in the sector but also points out that the city needs to strengthen its shipping related institutions, including finance, and put more human resources to developing the sector.
huBS: honG KonG ■ ■ ■
Hong Kong’s place as the preeminent Asian centre for ship finance has faded, writes Alfred Romann
Where the city ranks in global ship finance
In broad strokes, banks are just as happy to finance a ship in Hong Kong as in Singapore (or Tokyo or Shanghai or Seoul)
38 www.SinoShipnEwS.Com
■ ■ ■ BooKS
JUST WHAT WiLL Asia’s energy needs be in the future? it’s a big question but one it behoves us all in international shipping to try and work out, espe-cially when you consider that, according to America’s Energy information Administration (EiA), about half of the world's oil production moves on mari-time routes. The EiA recently raised its 2014 and 2015 average price estimates for crude oil, gasoline and natural gas by a few dollars a barrel and thermal unit. Perhaps some analysts have the answers?
In Future Oil Demands of China, India, and Japan: Policy Scenarios and Implications (Lexington Books, 2014), George Eberling argues that the future oil demands of China, india and Japan will result in intense competition for scarce energy resources. Eberling argues that China's rising dependence on imported oil will mean the PRC will try to become the dominant actor in world energy affairs in the near future. Already China is sourcing more oil from the
Near and Middle East and Sub-Saharan Africa. This global quest for the black gold will only increase as China’s dependency on imports sharpens.
Muhammad Olimat, a professor at Khalifa University in the United Arab Emirates, goes somewhat further and argues in his book, China and the Middle East: from Silk Road to Arab Spring (Routledge, 2013), that oil is the central driver in all relations between the Arab world and China. He argues, "The core of Sino-Saudi relations is oil, while iran and China are tied with deep his-torical, civilizational, cultural and political relations, but China’s current interests in iran centre on oil." Olimat con-tends that if China is taking an interest in anything else in the region, notably the Arab Spring
movements, then it is primar-ily in terms of how it will affect China’s oil trading relations with those nations as Beijing seeks to up exports from the Middle East.
Ben Simpfendorfer, a former investment bank analyst in Hong Kong and now a partner in the consultancy, Silk Road Associates, neatly put the case for China’s growing relation-ship with the Arab world – both political, financial and oil trad-ing – in his widely influential first book The New Silk Road in 2011 (Palgrave Macmillan). Since then China’s reliance on Middle East oil has only grown and affected everything from world barrel prices, as China has become a major buyer in a market previously largely selling to Europe and America, to anti-piracy activities in the
Malacca Straits. Simpfendorfer continues his analysis of the growing inter-linkage of the East, Middle and Far, in his new book The Rise of the New East: Business Strategies for Success in a World of Increasing Complexity (Palgrave Macmillan, 2014). it’s not just about China anymore, but also about the growing consumer power of other Asian nations, particularly indonesia, and how that will drive oil demand from Southeast Asia too. Across the region the three key themes of urbanisation, the rise of the middle class and local resource scarcity will drive oil demand and import shipments over the next two decades.
Finally, Sam Tranum’s Powerless: India's Energy Shortage and Its Impact (Sage Publications, 2014) reminds us starkly that india will have to compete increasingly with China for oil if its growth trajectory is to continue. Tranum, a journal-ist based for some years in Kolkota, argues that india (even compared to China) is starved of most of the resources it needs to grow its energy base to support industrial development – oil, as well as coal, gas and uranium. Tranum estimates the energy supply-demand gaps are 75% for oil, 49% for natural gas, 56% for uranium, 35% for electricity and 15% for coal with only minimal domestic reserves of most power-related commodities. Just as in China importing energy, be it coal, oil or gas, will continue and grow, argues Tranum. Quite simply, he says, "Current renewable technologies and resources cannot bridge india’s supply-demand gaps."
For the foreseeable future it seems oil will continue to voy-age east from the Arab world in greater and greater quantities.
Asia and its energy needsPaul French pumps through a series of oil themed titles
The PRC will try to become the dominant actor in world energy affairs in the near future
SANd TREASURE China is becoming the Middle East’s top trading partner
39SinoShip Autumn 2014
opinion ■ ■ ■
diFFERENT PARTS OF the world have differing approaches to taking vacations, but the general rule seems to be that the summer months are a bit slower from a business point of view as many people head off on a well deserved break from the daily grind. This is particularly true in the West. in the US, the onset of the ‘driv-ing season’ brings about opti-mism in tanker markets (usu-ally unfounded) that gasoline demand will prompt a spike in rates. in Europe, a vast migra-tion south takes place with roads such as the wonderfully named ‘Autoroute du Soleil’ in France choked with holiday traffic. Many travellers choose to break their journey at one of the budget hotels sited alongside major roads. These establishments offer small, utilitarian accommodation with no more than the absolute basics – somewhere to sleep but certainly not somewhere you would want to spend any more time than is absolutely necessary.
The last time i stayed in such an establishment, i couldn’t help thinking that this cost effective lodging solu-tion was not dissimilar to the cabins our seafarers live in. The difference, of course, is that whilst i was there merely to grab a few hours sleep before hitting the road again, for the seafarer it was home for any-thing up to nine months. Of all the advances made in shipping in recent years, be they improv-ing efficiency, safety or envi-ronmental protection, one area where we seem to have gone backwards is the environment we expect our crews to live in.
i recently went onboard a 16-year-old containership,
which had been built at a Korean yard for a European owner. What struck me more than anything was the quality of the accommodation - spa-cious, well thought out and with fixtures and fittings that showed that someone had really put some thought into designing a space for people to live and work in for extended periods. The Master told me that whilst he had originally had reservations about joining such a vintage ship, these were quickly dispelled when he saw his new ‘home’.
The ships being churned out today at such alarmingly frequent levels seem to ensure that regulations regarding liv-ing space are met but make little, if any, consideration to making a pleasant working and living environment.
The ubiquitous formica and other ‘wipe clean’ sur-faces, combined with the ‘off white’ panels which seem to
be present in every accom-modation block are certainly user friendly in terms of ease of maintenance and keeping them clean, but they are not really an environment you want to hang around in. it’s unreasonable to expect the united nations which constitutes so many crews today to all become best friends, but providing an environment where people want to spend time will lead to more of that crucial element which binds people together – communication.
Read British author Horatio Clare’s excellent book Down To The Sea In Ships and you get a clear picture of why it’s impor-tant to have a gathering point for socialising when the work day is over. The ship’s bar on an old containership may now be ‘dry’ with not a drop to drink, but at least it remains a meet-ing point for the crew, rather than scurrying back to their cabins with a pot of instant
noodles and a dVd to stick in their laptop.
in my days as a shipbroker, i recall selling ships for one particular owner where the list of items excluded from the sale often ran to several pages, primarily made up of a list of paintings and items bearing the house flag together with a long inventory of all the books in the ship’s library. You only had to look at that list and think that off-duty hours on this ship had the potential to be quite pleasurable. Today, an excluded items list rarely extends to much more than the rented gas bottles.
The Maritime Labour Convention has noble aims to improve the lot of the sea-farer, but shipbuilders and the owners who order new ships can help provide the basis of a happy crew who want to return to their ship with a bit more attention on providing a pleas-ant living environment.
Try being accommodatingSeafarers deserve a decent living environment, and shipowners will reap the benefit with a happy crew, argues Bei Hong
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41SinoShip Autumn 2014
opinion ■ ■ ■
WHEN i WAS six, i lived with my parents in Mogadishu. it was a delightful place to be a little boy. One day a man with a big black beard and tattoos came to stay in the spare bedroom. He was a Royal Navy petty officer, landed ashore to the hospital with acute appendicitis, rescued, to conva-lesce after his operation, by my ex-RN father. His ship was on anti-piracy patrol.
Two things we never thought we would see again, some years ago, were wars of religion and private warships. We were wrong on both counts. Wars of religion are doing well, but privateering may soon have had its day.
One large British provider of armed security guards for merchant ships has just gone into liquidation. There are very definite rumours that this com-pany may have been the first, but it almost certainly will not be the last of the armed guard providers to go bust. There are quite a number of self-employed
people sitting around with guns with money due to them.
The number of companies in the business has increased, and the perceived risk has decreased.
Shipowners and particularly charterers, faced with lots of competitors, have reacted in the usual way, by haggling the price down, because they no longer expect their ships to be attacked.
At the same time, we have what i might term the ‘anti-vaxxers’ – those shipping com-panies – particularly some of the large containerlines – who are now running ships through with no armed guards onboard, relying on the pirates assum-ing that they will have guards, because most ships do.
The effect has been a
reduction in the income of the guard companies, whilst their cost structures have been unable to adjust.
i would expect those com-panies who are operating ships themselves to be the hardest hit, as they have the highest levels of fixed cost. Their ships are often described as ‘escort vessels’ but more often they are actually used as accommoda-tion vessels, for guards and their arms, at each end of the High Risk Zone, thus allowing guards to carry military type weapons, which would not be permit-ted through customs without military type paperwork, to join and to disembark from ships without going ashore, thus avoiding customs and immi-gration altogether and saving a fortune in agency costs and
hotel bills – provided there are only a few men sitting onboard doing nothing.
Those companies that regu-larly land their men are carry-ing less fixed costs and are in a somewhat better position to bend with the wind of fortune. The bigger operations often have other sidelines, like provid-ing personal security for the obscenely rich, both with and without yachts, and they will fall back on those.
We may observe in passing that Parkinson’s Law applies. Bureaucracy expands to fill the space available, and is now so perfect that my company was recently grilled at length, taking a couple of hours of our time, because one guard on one ship, flown out in a hurry as a relief, was missing one bit of paper.
My favourite story of the whole security thing will remain the account, given to me, dead-pan, by a delightful man, of the ‘security services’ variety, about a Russian oligarch who wished to send his not small yacht through the Red Sea, quite early on in the business. He was able, let us not enquire how, to obtain the services of a Russian warship to accompany his gin palace, and, to ensure that the grey ship stayed close by, he instructed the yacht’s steward-esses to sunbathe, topless, on the upper deck, throughout the transit.
Andrew Craig-Bennett details the hardships now faced by private maritime security companies
The decline of the privateer, 2014 style
There are a number of self-employed people sitting around with guns with money due to them