China to set off on tanker buying spree for new shipping venture

XIAMEN, China Fri Sep 21, 2012 12:28am EDT

XIAMEN, China (Reuters) - State-owned China Shipping is planning to order up to 20 new supertankers for the fleet of a joint venture aimed at giving Beijing more control over its energy supply chain but which will add to the vessel glut in the struggling freight market.

China is the world's second largest crude consumer and imported more than 5 million barrels per day last year. Beijing wants to use its own vessels to move more than half of these imports by end-2015, up from around one-third currently.

A Chinese ship buying spree would provide much needed business to the domestic shipbuilding market, the world's second largest. Hundreds of small to mid-sized shipyards are teetering on the brink of bankruptcy as foreign orders dwindle and domestic lenders slash credit.

But any new vessels will add to an already oversupplied global shipping market which is struggling with dwindling clients and falling rates.

China Shipping plans to order 10 very large crude carriers (VLCCs), and may buy 10 more if the market conditions are right, company president Xu Lirong told Reuters on the sidelines of a shipping conference in Xiamen, China. He did not say when the orders would take place.

The VLCCs, the largest type of tanker in the global fleet, would be China Shipping's contribution to a newly established, independent company that would also include ships from China Ocean Shipping Company (COSCO Group), China Merchants Energy Shipping Co. Ltd (601872.SS) and Nanjing Tanker Corp (600087.SS).

"This is a strategy promoted by the country," Xu said. "The aim is to secure good supply, stabilize costs, form long-term cooperation and create a win-win situation. The VLCC pool is a very mature idea in the international market."

Details of the new joint venture, including its name, have yet to be finalized but local media in August reported the company would have a total of 50 new VLCCs, with COSCO's shipping unit Dalian Ocean Shipping Company contributing 20 tankers and the other firms contributing 10 vessels each.

Raymond Yu, vice president of China Merchants Group which owns shipping firms, said building new ships was one of the options available to the joint venture.

"Building new vessels is just one of the options. Now the market may take 3-5 years to recover and there is an over capacity, so it is hard to make a decision," he told Reuters.

SAFETY IN NUMBERS

A ship supply glut, rock bottom freight rates, high bunker fuel prices and world economic turmoil have forced the restructuring of many shipping firms across the globe, from Norway-listed Frontline (FRO.OL) and Italy's Deiulemar Shipping to Britain's Stephenson Clarke and Sanko Steamship in Japan.

Average VLCC tanker earnings tumbled to a record low level of -$7,850 a day last month, and traded at around -$1,122 on Thursday. That means freight rates were so low that shipowners were essentially paying their clients to use their vessels.

Industry executives and experts at the conference urged companies to strengthen cooperation and exercise self-discipline in pricing and building new ships to weather the downturn.

"The VLCC market has been heavily plagued since the financial crisis of 2008 with a gross oversupply of vessels in the market, caused by the overaggressive ordering of the past," said George Lazaridis, an analyst of Intermodal Shipbrokers Co.

"The overcapacity issue will only continue to get worse."

The industry slump, which has lasted more than four years, has forced companies to team up with competitors in order to survive.

Denmark's A.P. Moller-Maersk (MAERSKb.CO), Japan's Mitsui O.S.K Lines (9104.T), Singapore's Samco Shipholding and Ocean Tankers recently formed a tanker pool of around 50 VLCCs.

(Additional reporting and writing by Randy Fabi; editing by Miral Fahmy)