[Summary: In 2003, China imported 35% of its crude oil supplies and 36% of its iron ore supplies. The sharp rise in 2003 of the shipping cost of iron ore had greatly impacted China’s iron and steel industries. Therefore, relying on foreign fleets for oceanic shipping of imported mineral resources has become a great challenge. To ensure China’s ability to ship its needed mineral resources, the author makes the following policy suggestions: A) Transport strategic materials using domestic fleets; B) Establish strategic cooperative relationships between the mining and shipping industries; C) Support the following: loans to purchase ships, tax incentives for the purchase of second-hand ships, development of ship chartering, and improvement of the laws and regulations for oceanic shipping.]
China’s Demand for Mineral Resources
Raw materials are fundamental to the nation’s industrialization and modernization. Consumption of mineral products exhibits the following pattern in major developed countries: A) During the rapid expansion period of industrialization, consumption of minerals’ products expands at a correspondingly rapid pace. Bulk mineral’s "consumption elasticity" (the ratio of mineral product consumption growth to GDP growth) is greater than 1. B) When the industrialization period ends, consumption of mineral products such as steel and copper tends to stabilize. C) Energy consumption grows with GDP growth.
The industrialization process has sped up since 1978 when China adopted its reform and open policies. Consumption of mineral products has risen sharply with increasing consumption elasticity. From 1985 to 2000, the average consumption elasticity for each five-year period was 0.46, 0.60 and 0.83, respectively. In 2004, it exceeded 1.0. The average consumption elasticity coefficient for steel, copper and aluminum in the past 10-year period all exceeded 1.0. This is a similar pattern to what other developed countries experienced during their industrialization periods.
The projection of demand for mineral products is based upon the general pattern and trend of the relationship between the growth of the national economy and the consumption of mineral products over the past 15 years. The potential effect of new industrialization paths and advances in technology on the consumption of mineral products must also be considered. By 2010, the total energy demand is expected to reach the equivalent of 1.867 to 2.273 billion tons of coal, including 300 to 350 million tons of crude oil (or 6 to 7 million barrels a day), 1.74 to 1.92 billion tons of coal, 78 to 120 billion cubic meters of natural gas (or 8 to 12 cubic feet per day), and 250 to 310 million tons of steel. By 2020, the total demand is expected to reach the equivalent of 2.6 to 3.2 billion tons of coal, including 470 to 480 million tons of crude oil (or 9.4 to 9.6 million barrels a day) and 2.2 to 2.4 billion tons of coal.
By 2010, it is expected that China will have access to 300 to 400 million tons annually of additional crude oil reserves in newly discovered oil fields, with a capacity of 18 to 25 million tons of crude oil per year. In 2010, the production of crude oil is expected to be 168 to 180 million tons, only 51-55% of the demand. By 2020, crude oil production is expected to be 156 to 185 million tons, only 34-40% of the demand. There will thus be a shortage of 275 to 304 million tons.
By 2010, domestic iron ore output is expected to reach 200 million tons, which will yield 70 million tons of iron. Scrap steel output will be 45 million tons. The demand for steel will be 250 to 310 million tons. Therefore, domestic iron production will only be able to meet 38% of the total steel demand. By 2020, domestic iron ore output is expected to be 156 million tons, yielding only 56 million tons of iron. Scrap steel output will also be 63.3 million tons. However, the demand for steel will be 273 to 334 million tons, so domestic iron production will only meet 29% of the total demand for steel.
It is estimated that by 2010 and 2020, the demand for coal consumption will reach 1.738 to 1.922 billion tons and 2.173 to 2.4 billion tons, respectively. However, because production capabilities are limited, the shortage of coal supplies will reach 250 million and 700 million tons, respectively. For this reason, beginning in 2004, China changed its coal export policy, and coal exports have been reduced by 10 million tons.
In 2001, the remaining exploitable natural gas reserve was 1.8345 trillion cubic meters. The estimated long-term reserve of natural gas is expected to be 12 to15 trillion cubic meters. By 2010 and 2020, the demand for natural gas is expected to be 78 to 120 billion cubic meters and 180 to 280 billion cubic meters, respectively. The production will be 130 and 165 billion cubic meters, respectively. So demand can be basically met domestically in 2010. However, there will be a shortage of 65 billion cubic meters in 2020.
Importation and Transportation of Iron Ore and Crude Oil
In 1993, China’s import volume of iron ore was about 33 million tons. In 1995, 41.2 million tons were imported, and that number increased to 55 million tons in 1999. The average annual growth was less than 5% during those years. There was even a negative growth of 7% in 1998. In 2000, the importation of iron ore grew more than 10% and reached 70 million tons. From 92.4 million tons in 2001, the amount increased to 111.5 million tons in 2002 and reached 148 million tons in 2003. Approximately 36% of China’s iron ore was imported. China has become the world’s largest importer of iron ore. While the total amount of the world’s iron ore shipments increased by 43 million tons in 2003, China’s import of iron ore increased 33 million tons in that year alone. China’s iron ore imports accounted for nearly 30% of the world’s oceanic shipping of iron ore. Even so, China’s fleets have shipped a very limited share of the imported iron ore due to the limitations of scale and structure of China’s shipping fleets. This is one of the main reasons why shipping prices of imported iron ore have risen sharply since 2003.
Since 1996 China has been a country with a net import of crude oil. In 2003, the net import of crude oil was 97.41 million tons, accounting for 15% of China’s demand for crude oil. In general, countries with huge demands for imported crude oil usually control a powerful crude oil carrier to handle shipping for its imported crude oil. For example, almost all of Japan’s crude oil is imported. Its annual import volume exceeds 250 million tons. The tonnage of large crude oil carriers controlled by Japanese ship owners exceeded 20 million tons and is able to handle the shipping of more than 80% of Japan’s imported crude oil. All the large crude oil carriers were leased to crude oil importers with long-term contracts, ranging from a minimum of 5 years to as long as 18 years. In Japan, in addition to the close cooperation between ship owners and crude oil companies, a stable, cooperative environment has been established among other relevant businesses, such as the shipyards, banking and finance industries, and insurance companies.
All of China’s imported iron ore was shipped by fleet and mainly came from Australia, Brazil, India and South Africa. Two major import routes for oceanic shipping are from West Australia to Beilun Port in Zhejiang Province and from Brazil to Beilun Port. China’s role has become increasingly more important in the world’s oceanic shipping of iron ore. In 2001, China’s iron ore imports grew by 22.4 million tons. That same year, the world’s oceanic shipment of iron ore grew only 6 million tons. There would be a 3.8% decline in shipments of the world’s iron ore without the growth of China’s imports. In 2003, China’s iron ore imports grew to 33 million tons, while the world’s iron ore shipments grew only 43 million tons.
In recent years, China’s import of iron and steel materials and products has grown by 50 to 60 million tons a year. With such rapid and continuous growth, supply and demand, as well as the overall structure of the world shipping market, have changed. This has brought the world’s dry bulk shipping market to China. Although the Western economies have not fully recovered, the international dry bulk shipping market has been vigorous for an unprecedented period since 2002.
The Baltic Exchange Dry Index (BDI) reached a peak of 5,681 on February 4, 2004, 2.4 times the previous historic high in May 1995. The BDI started to ease down after the Chinese government released a series of macroeconomic policies when some industries in China appeared to show signs of over-investment. However, the world’s dry bulk shipping market is still a seller’s market. The market began to stabilize in late June and the BDI stayed at 4,000 points. China has become the driving force for the growth of the shipping market (see table 1).
The Sharp Rise of Iron Ore’s Ocean Freight Charges
In view of the freight charge, the fast increase of China’s iron ore imports is the cause of tension between the supply and demand for marine transportation. The year 2003 was the first time in history that cost of the freight was higher than the price of the commodity. In 2003 the global iron ore FOB price rose 9%. In 2004 the contracted FOB price grew 18.6%. In the "2004 Yearly Ores Price Agreement" signed between the six Japanese steel mills and the Australian mining company BHP BILLITON, the average FOB price for the BHP’s high-grade fine ore (with 65% iron content) rose from US$20 per ton in 2003 to US$23.78 per ton in 2004.
However, according to the freight index of the Baltic Shipping Exchange, the rate for iron ore marine transportation between West Australia and Beilun was US$6.7 per ton for 15,000-ton freighters at the beginning of 2003. It rose to US$18.78 by the end of the year, a 180% increase. On New Year’s Day in 2004, it rose to US$21, a 213% increase, much higher than the ore trade price increase. In two years, the transportation freight from Brazil to China rose from US $8 to US$40-50 per ton. Therefore, the freight cost is almost twice as much as the price of the ore.
Compared with the situation in 1999, the market has seemed to fluctuate to a greater extent. At that time the freight was only US$3 to US$4 per ton from West Australia to Beilun, while it was US$20 per ton at the end of 2003. For a Cape-of-Good-Hope ship that carried 168,000 tons of iron ore and transported it from Australia, the entire freight cost was only US$500,000 in 1999, but in 2004, the freight cost reached as high as US$3.43 million.
This kind of situation changes the international iron ore trade, with the trade terms changing to Cost and Freight (C&F). China used to use the FOB price to import the iron ore, but in recent years, several multinational corporations, through merger and reorganization, have controlled the international iron ore market, forming a "seller’s monopoly." At present Australia’s Hammersley, BHP BILLITON, and Brazil’s CVRD control more than 70% of the global iron ore trade. The more united the cargo owners, the more able they are to negotiate prices. The overseas cargo owners have expanded their contract volume under C&F and seized the right to dispatch ships, taking advantage of their control over resources. For example, 50% of Australian Hammersley’s export of iron ore to China changed the trade terms to C&F. In 2003, some Chinese iron ore consumers were unable to purchase the ore even if they had the money, pushing up the price of domestic iron ore even higher.
The freight increase has seriously burdened the steel and iron industry in China. Moreover, the high freight costs will ultimately be shifted to downstream industries, adding to production costs. Take twisted steel as an example. When the price of upstream iron ore products rises from 300 yuan (US$35) to 900- 1,000 yuan (US$105-117) per ton, the billet price rises from 1,000 yuan to 3,700-3,800 yuan (US$433-445). The cost increase to the steel and iron industry will be transferred to further downstream industries such as construction, shipbuilding, and real estate. It will also impact agriculture and the chemical fertilizer industry, causing an imbalance in the entire economic system.
Factors That Influence Iron Ore Importation Freight Charges, and Chinese Shipping Companies’ Countermeasures
First, due to the insufficient capacity of domestic fleets, the foreign fleets usually take control of import transportation. Second, ocean transportation for the domestic ore import is almost completely exposed to the spot market, with no long-term contracts. Third, the purchase of iron ore from scattered suppliers gives the foreign ore exporter the opportunity to exploit the situation. Lastly, the harbors become overstocked, and railroad transportation is unable to take over.
COSCO’s (China Oceanic Shipping Company) bulk cargo transportation fleet has 210 ships with 12.3 million deadweight tons. It also has 120 rented ships with 10.46 million deadweight tons. Among them, COSCO owns and controls nearly 50 Cape-of-Good-Hope vessels for iron ore transportation, nearly 25% of the total transportation capacity of the spot market. Nevertheless, foreign-owned shipping companies hold the majority of marine transportation contracts for China’s imported iron ore. According to preliminary statistics, of China’s overall iron ore imports in 2003, Chinese transportation companies ship approximately 25%. In this 25% transportation volume, only 10% is a highly profitable first-hand contract. In other words, the Chinese marine transportation company only enjoyed 10% of the total Chinese transportation of iron ore imports, while the foreign transport companies have taken the majority. We should learn from the Japanese experience in this respect. The Japanese government implements a very favorable policy toward the Japanese shipping enterprise, giving them subsidies and low-interest loans to buy ships. They also give tax incentives. Japanese steel mills, business organizations and Japan’s shipping companies have established close relations by share-holding and making long-term agreements. It is very difficult for foreign ship owners to infiltrate the Japanese large bulk cargo marine transportation market. Chinese ship owners find it difficult to transport iron ore imported from Japan, as well as China’s coal exports to Japan.
China’s iron and steel enterprises and the shipping enterprises should strengthen their ties by means of signed agreements and transportation contracts or even cooperation at the level of property rights. If domestic ship owners purchase ships according to the demand, and the steel mills, aided by ship owners’ ocean transportation superiority, take control of ocean transportation power, it will be impossible for the international mining businesses to continue to maintain the high profit margin over ocean transportation that they now enjoy.
Current Status of China’s Crude Oil Ocean Transportation
There are about 60 shipping companies that are engaged in crude oil transportation operating out of mainland China. The total fleet of 660 oil tankers can carry nearly 5 million deadweight tons. At the beginning of 2000, COSCO formulated a strategic plan to rapidly develop large-scale oil tanker fleets to meet the large increase of crude oil demand. It is estimated that by 2007, COSCO’s fleet will reach 31 tankers, with 4.2 million-deadweight tons. Adding the oil tankers ordered by other mainland companies, it is estimated that by 2007, the mainland shipping companies will have 23 Very Large Crude Carriers (VLCC) and six 100,000-ton tankers. If 50% of the 29 oil tankers are used in crude oil import transportation, 30 million tons of crude oil import can be shipped. Compared with the total import transportation need of 120-135 million tons, China’s shipping capacity will still have a large shortfall.
In recent years, as a result of not applying the "domestic products transported by domestic companies" policy, our own fleet has only been able to transport less than 10% of total imports. Despite increasing import concentrations in the Middle East and West Africa, the capacity of middle- and large-sized Chinese oil tankers has not grown correspondingly. Transportation by our own fleet occupies only a small portion of the total. In 2002 for example, COSCO transported 1.6 million tons of China’s crude oil imports, which only equaled 2.2% of the total import volume. If COSCO put three VLCC and three SUEZMAX oil tankers into full service on the Middle East route, the annual transportation volume would be about 10 million tons. Together with other transportation, the total volume of transportation could reach about 12 million tons, less than 13% of the 100 million tons of total imports in 2004.
Suggestions and Measures to Strengthen Oceanic Shipping of Mineral Resources and to Improve Ocean Transport Capabilities
1. Speed up the construction of large-scale petroleum-loading wharfs. Transform or build seven to nine 200,000-ton mooring berths by 2010 to secure crude oil import transportation. Confirm a second batch of petroleum strategic reserves projects as soon as possible, besides the four currently approved petroleum strategic reserve bases.
2. Establish a large-scale oil tanker fleet alliance to share profit and risk. A joint oil tanker alliance can be established by COSCO, China Marines, and other shipping companies with long-term transportation contracts with China National Chemicals Import & Export Corporation, China Petroleum Corporation and China Marine Petroleum Corporation. With an alliance created, shipping capital and management companies can be established.
3. Actively participate in international organizations and the international affairs related to international petroleum transportation. At present, the Malacca Strait, an international channel, has not been subject to an internationally recognized management organization. Japan, as the main user of the channel, started cooperating with the countries along the Strait in 1968. Japan has gradually become involved in the administration of the Malacca Strait. An entire package has been formulated for Japan to participate in the construction and shipping management of the Malacca Strait. As the second largest country after Japan to use the Malacca Strait, China should begin to participate in the management of the Strait as soon as possible and establish a Malacca Strait Construction and Management Fund.
4. Shipping enterprises should continue to expand their fleets. Because of the large capital investment required to build ships, China’s shipping companies have difficulty obtaining ship purchase loans and paying them back with interest. With shortage of capital being a bottleneck for China’s shipbuilding industry, the government may need to intervene to encourage the development of a ship chartering industry.
The article was based on a research report published on the website of Beijing Dajun Research Center of Economy (http://www.dajun.com.cn/kuangchan.htm).