The Straits Times / The Business Times News on Cosco

China Ocean Shipping expanding fleet

(SHANGHAI) China Ocean Shipping (Group) Co, the country's biggest shipping company, said it will buy twice as many oil tankers and container vessels to carry materials and meet a government goal of doubling economic output by 2010.

The company aims to have the capacity to ship 800,000 20-foot containers by the end of 2010, from 310,000 boxes as at Sept 30, said chief executive Wei Jiafu. The Beijing-based company, with 18 oil tankers, will have eight supertankers, each capable of hauling 2 million barrels of oil, by 2008.

The shipments of China Ocean, also called Cosco, 'looks good because the Chinese government needs to invest more on building houses and roads as well as meet energy needs', said Glenford Tan, an analyst at CIMB-GK Research in Singapore.

China's economic growth in the past decade, which fuelled demand for space to ship the nation's surging exports and imports, pushed haulage rates to records and helped Nippon Yusen KK and other Asia-based shipping lines reap windfall sales. Now, China Ocean wants to expand its fleet to carry more of the nation's trade.

China Ocean needs more vessels 'to meet China's oil imports' and 'the huge demand for world shipping', Mr Wei said on Monday at the World Shipping Summit in Shanghai. 'We will consider second-hand tankers too.'

China's economy expanded at an average annual clip of 8.7 per cent in the last decade. Exports may expand 20 per cent this year to US$745 billion, outpacing an 18 per cent gain in imports. That's increasing the need for container ships.

China Ocean will increase its container shipping capacity by 18 per cent this year and 22 per cent in 2006, as it takes delivery of vessels that can each carry more than 8,000 standard boxes, Mr Wei said. The company will buy vessels from shipyards in China, South Korea and Japan.

The nation's container output grew 35 per cent last year to 6.16 million 20-foot boxes, he said, citing customs data.

With expanding trade, P&O and other companies have been buying bigger vessels, raising fears that capacity will outstrip demand in 2006.

Global companies have ordered vessels that can haul 4.4 million 20-foot boxes, or 58 per cent of the total container capacity, with most of the delivery schedules starting in the fourth quarter of this year, Citigroup Inc's analysts Charles de Trenck and Yu Wenchi said in a Sept 26 report. The fear of a glut of cargo space is curbing shipping companies from raising transportation rates.

'Demand for container shipping could be outpaced by new vessels that will come into service next year,' said CIMB-GK Research's Mr Tan.

Freight rates for container ships may fluctuate at a 'high level' over the next four or five years because of increased demand in China, Mr Wei said.

Shipping lines are cooperating by sharing cargo space on their ships for key trade routes, letting them go to destinations not covered by their fleet and avoid extra costs from running more ships.

Members of the Grand Alliance and the New World Alliance, which include Neptune Orient Lines Ltd and TUI AG's Hapag-Lloyd, will exchange slots for services between Asia and Europe as well as the Mediterranean starting early next year. They will also introduce a new route between Asia and North America's east coast via the Panama Canal.

China Ocean doesn't plan to buy another shipping line because the price of assets is 'too high,' Mr Wei said. 'It's not the right time for mergers and acquisitions,' he said. The right time 'depends on opportunity. Right now we don't have any decisions' that are material transactions that need to be disclosed, he said.

China Ocean has three supertankers in service, one built by Nantong Cosco KHI Shipping Engineering Co, a venture in China between China Ocean and Kawasaki Heavy Industries Ltd.

The other two were built by Universal Shipbuilding Corp in Japan, which is due to deliver five more.

New 2-million-barrel tankers, known as very large crude carriers, or VLCCs, cost US$122 million each, according to an Oct 28 report by Oslo-based shipbroker PF Bassoe AS. Three-year-old VLCCs cost US$120 million each, the broker said. - Bloomberg