December 8, 2011 7:27 pm

China ship order fuels market glut fears

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A significant order from a Chinese buyer for new crude-oil tankers has fuelled speculation that China is preparing a series of huge ship orders.

The orders would support employment in the country’s shipbuilding industry but flood struggling shipping markets with excess capacity.

China Rongsheng Heavy Industries (CRHI), China’s largest privately controlled shipbuilding group by order book size, announced on Thursday that it had received an order for 10 Suezmax crude oil tankers, plus options for a further 10, for delivery in 2013 and 2014. Suezmax tankers, the second-largest commonly-used size, carry 1m barrels of oil.

The order came from Global Union Shipping, whose ownership is unclear but market speculation links it to one of China’s state-owned shipping companies. New Suezmaxes cost $60m-$75m so the total order, if placed, is likely to be worth up to $1.5bn.

Chen Qiang, CRHI’s chief executive, welcomed the order in the middle of what he called “unfavourable” market conditions. For nearly all of this year, oversupply of ships has pushed down crude-oil tanker earnings – especially for the larger ship sizes – to below operating cost levels.

“Such a substantial order clearly demonstrates the capability of the group to achieve continuous steady growth,” Mr Chen said.

Observers outside China linked the order to signs that Chinese state-owned shipping groups are preparing to place vast orders for new oil tankers and, possibly, carriers for dry bulk commodities such as iron ore.

Delivery of such ships might ensure present difficult market conditions continue for years, according to many analysts.

Harald Serck-Hanssen, the head of shipping for Norway’s DNB, one of the world’s largest shipping lenders, said that he had expected activity to focus on orders for up to 80 very large crude carriers, which carry 2m barrels. “The fact that they are also ordering Suezmaxes makes this even more serious,” he said.

Paul Slater, a veteran shipping financier who has long warned of the risk that China might flood shipping markets by building excess ships, said that the order was “wholly irresponsible and unnecessary”.

If China wanted to control costs of shipping raw materials, its companies could sign long-term charters for up to 10 years at cheap rates in current markets, without ordering new ships, Mr Slater said.

He added, however, that the policy of regional governments might differ from central government policy.

Li Shenglin, transport minister in the central government, last month pledged to manage deliveries from the country’s shipyards to alleviate the glut of ship capacity that the latest order will exacerbate.

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