In a statement on its website, the ministry said that effective Jan. 20 port operators no longer enjoy discretion in allowing dry bulk and oil carriers that exceed existing deadweight limits to berth at their terminals.

“The safety outlook regarding oversized ships is not good, and the risks from their stopping at ports is on the higher side,” the ministry said.

The ministry urged port operators to abide by a March 2006 law requiring a stringent review process and the ministry’s permission to allow oversized ships to berth at Chinese ports. The ministry’s latest stance appears to trump an October 2006 law that allowed ports to host such ships at their discretion as many as three times a year.

The ministry said State Council’s safety commission backed the latest measure.

The first of Vale’s fleet of such ships, called “very large ore carriers” or VLOCs, temporarily docked at the port of Dalian late last month.

The surprise docking came after the China Shipowners’ Association had expressed opposition to the presence of such ships, calling them “safety and pollution risks.”

An official at the association’s domestic affairs department declined comment Tuesday, but cited existing Chinese statutes that limit the entry of such ships.

The ministry did not completely prohibit VLOCs from docking in Chinese ports.

Analysts say Chinese shipowners may view VLOCs as a commercial threat, but shipbuilders want contracts to build such ships.

“Within China, there is a dilemma,” Jay Hsiao, a Braemar Seascope broker, said.

VLOCs, with capacities of 300,000-400,000 deadweight tons, are about twice the size of Capesizes, their next largest brethren, at around 180,000 deadweight tons.

Vale commissioned VLOCs to help it compete in the Chinese market against BHP Billiton Ltd. (BHP) and Rio Tinto Plc (RIO), which are located much closer to China.

-By Chuin-Wei Yap, Dow Jones Newswires; Zhoudong Shangguan in Beijing contributed to this article.

In the Dalian province of China, STX Dalian Shipbuilding Complex constructed the world’s largest shipyard that measures 5,500,000 sq. meters.

SHANGHAI (Dow Jones)–China’s shipbuilding industry faces severe challenges after suffering a sharp decline in new orders in the first 11 months of 2011, the country’s top economic planner said Monday.

Shipowners were reluctant to increase fleet sizes amid the global economic slowdown, the National Development and Reform Commission said in a statement. New shipbuilding orders fell 47.3% in the January-November period compared with a year earlier to 33.69 million deadweight tonnes, or DWT.

New orders in November itself were below the number of ships completed for an 11th straight month, the agency said.

Ships built in the first 11 months of 2011 grew 8.8% on-year to 61.77 million DWT, while incomplete orders fell 17.4% on-year to 162.7 million DWT by the end of November, the NDRC said.

Growth in ship exports slowed in the January-November period to CNY291.3 billion ($46.3 billion). The 14.1% growth in exports represented a slowdown from the 17.2% jump in the same period last year.

-By Jean Yung, Dow Jones Newswires

Vale S.A., the second largest mining company in the world, is also owner of the world’s largest sea-going ore carriers called VLOC’s, or Very Large Ore Carriers.  These 362-meter (1,188 ft), 400,000 DWT ships are the longest and largest dry bulk carriers in the world, and were specifically ordered by Vale to reduce transportation costs of iron ore from Brazil to Chinese ports.

Vale’s initial plan was to order 35 of these mega-ships at an $8.1 billion dollar price tag.  It was an ambitious strategy by Vale’s former CEO, Roger Agnelli to help use economy of scale to mitigate the issue of transporting ore from one side of the planet to the other.  This plan has since completely backfired.

Strong and unanticipated opposition from the highly influential China Shipowners Association (CSA), who control 80% of China’s shipping capacity, has prohibited these ships from entering port.  In an interview posted to their website this past July, the CSA refers to Vale’s ore shipping intentions:

Reporter: These days, Chinese iron ore import has received greater attention from the society. For a period of time, some international mining giants have been building their own fleet one after another. They have already made a vast fleet expansion plan. From what we understand, if this vast fleet expansion plan was realized, Chinese iron ore transportation would be substantially monopolized by them. Therefore, we would like to know China Shipowners’ Association’s view on this?

Association Executive: China Shipowners’ Association has noticed that some international mining giants are attempting to monopolize the seaborne transportation of iron ore sold to China by building up their own fleet with newbuilding ordering or second hand acquiring. Those mining giants have been planning a vast fleet expansion for quite some time.

Reporter: Why do these mining giants want to build up their own fleet ambitiously?

Association Executive: Their intention of developing owned fleet in great force is to monopolize or control majority of China-bound iron ore transportation. By utilizing their privileged advantage, based on their existing control over iron ore pricing, they intend to further strengthen their control of transportation, the freight rate for seaborne iron ore transport, extend their monopoly on industries and finally figure for bigger benefits.

Reporter: How will the mining giants’ monopoly over seaborne transportation impact Chinese shipping industry and steel industry?

Association Executive: China, being a big shipping country, imports enormous iron ore every year. Lots of shipping companies rely on iron ore transportation as their living basis. If those mining giants monopolized the China-bound iron ore transportation, it would severely and negatively impact the Chinese shipping community and even the world shipping industry, causing many shipping companies very likely to make loss or further go bankrupt. Meanwhile, it would also have adverse impact on the healthy development of the Chinese steel industry as well as the Chinese economy. The consequence is very serious.

As you know, controlling transportation means controlling freight rate. Those mining giants are not only profiteering but also trying to create monopoly on shipping for further exorbitant profits. What’s more important, controlling transportation also means controlling cargo delivery, which will put Chinese steel mills to a more passive position in the whole iron ore trading. Considering the role of steel industry in the country, mining giants’ formation of monopoly will leave Chinese economic development into an extremely passive position. As the representative for Chinese shipping companies, China Shipowners’ Association hereby expresses our concern and high attention. In fact, such behavior of those mining giants has also upset the international shipping industry and banking industry.

In a recent interview, Mr. Shouguo ZHANG, Vice Executive Chairman of China Shipowners’ Association comments:

We think Vale’s serial moves might cause itself heavier burdens, bigger losses and also rouse concerns and vigilance from other Asian iron ore importing countries and areas. Brazil Vale’s current task of top priority is to immediately stop its ambitious fleet expansion plan especially to cease the construction of 400,000 dwt VLOC and other types of bulkers.  Only by doing so they can minimize their losses.

In August 2008, Vale contracted the Chinese shipbuilder, Rongsheng Heavy Industries (RHI), to build 12 VLOCs at a cost of $1.6 billion.  In a Bloomberg report, RHI Chief Executive Officer Chen Qiang comments:

I am not worried about any possibility of Vale canceling orders,” Chen said. “They need the ships to carry iron ore, and the vessels are greener and more advanced.

In early December, a crack in a ballast tank of the Vale Beijing almost sunk the ore carrier while at the Ponta da Madeira Maritime terminal in northeastern Brazil.  This issue raised concerns with Chinese authorities and further solidified their position to prohibit these ships from entering port.

With huge shipbuilding contracts still in place, Vale is now working to offer a portion of them up for contract, and come up with new commercial strategies for these vessels.  In a conference call with reporters last week, Jose Carlos Martins, Vale’s head of Ferrous and Strategy, told reporters, “I don’t think the ownership of the ships is fundamental to our strategy. Under some conditions it may have sense to buy, but most of the time, it’s better to contract.  The fleet, which will have the capacity to transport about 60 million metric tons of iron ore per year once fully in operation, can serve alternative ports including those in Malaysia and Oman.”

Mekong River, image (c) 2011 Robert Almeida

BEIJING (Dow Jones)–China suspended shipping along Southeast Asia’s Mekong River on Monday after attacks on Chinese cargo vessels left 13 sailors dead in what authorities say is the latest case of drug-related violence in the region.

Southeast Asia’s Golden Triangle–the region where Thailand, Laos and Myanmar meet–is one of the top-producing regions for heroin and other illicit drugs and home to violent narcotics gangs. China’s state-run Xinhua news agency quoted Thai authorities as saying the Chinese cargo vessels were hijacked in an attempt to smuggle drugs further downriver. Drugs often travel through the Thai capital of Bangkok on their way to international markets.

A Chinese Foreign Ministry spokesman said at a daily news briefing Monday that the Chinese government had appealed to Thailand to boost shipping safety on the river. “The Foreign Ministry and other relevant departments and regions will continue to closely follow development of the incident,” said Chinese Foreign Ministry spokesman Liu Weimin.

(This story and related background material will be available on The Wall Street Journal website, WSJ.com.)

Xinhua quoted a Thai official as saying its personnel would aid the Chinese investigation and that it will cooperate with Chinese and Laotian officials to protect commercial shipping interests in the region.

Thai border troops seized the vessels and drugs on board on Wednesday after a gun battle with hijackers. The Chinese sailors’ bodies were discovered in northern Thailand between Friday and Monday, according to Xinhua. It wasn’t immediately clear when the vessels were hijacked.

The decision to suspend shipping along the Mekong was handed down by officials in China’s southwestern Yunnan province. Li Hui, a spokesman for Yunnan’s foreign affairs department, said the decision had been requested by a local shipping association and by Chinese sailors out of safety concerns. Li said the length of the suspension depended on an ongoing investigation into the hijacking.

The suspension of shipping is unlikely to disrupt major trade flows as boats along the Mekong typically serve local communities and aren’t connected to major economic centers.

-By Brian Spegele, The Wall Street Journal

 
The Law of the Sea Treaty (LOST) — signed by the U.S. in 1994 but never ratified by the Senate — is showing some signs of life on Capitol Hill, even as new circumstances make it less attractive than ever. With China emerging as a major power, ratifying the treaty now would encourage Sino-American strife, constrain U.S. naval activities, and do nothing to resolve China’s expansive maritime territorial claims.

At issue is China’s intensified effort to keep America’s military out of its “Exclusive Economic Zone,” a LOST invention that affords coastal states control over economic activity in areas beyond their sovereign, 12-mile territorial seas out to 200 miles. Properly read, LOST recognizes exclusive economic zones as international waters, but China is exploiting the treaty’s ambiguities to declare “no go” zones in regions where centuries of state practice clearly permit unrestricted maritime activity.

Take the issues of intelligence gathering. LOST is silent on the subject in the exclusive zones, so China claims it can regulate (meaning prohibit) such activity.

China wants to deny American access so it can have its way with its neighbors. Beijing is building “anti-access” and “area denial” weapons such as integrated air defenses, submarines, land-based ballistic and cruise missiles, and cyber and anti-satellite systems.

If the Senate ratifies the treaty, America would become subject to its dispute-resolution mechanisms and ambiguities. Right now, since the U.S. is the world’s major naval power, its conduct dominates customary international law — to its decided advantage.

This dispute is not really about law. China simply does not want the U.S. military to gather intelligence near its shores. And others quietly support China’s position, including Russia, Iran, and India. Given China’s incursions into other Asian nations’ exclusive zones, these states may seek to restrict international maritime activities as well, complicating U.S. efforts.

All Washington wants is to do what it has done since it became a maritime power: use its Navy to enhance international peace and security, deter conflict, reassure allies, and collect intelligence. LOST undercuts these strategic imperatives, and that is why it has always been a bad idea for the U.S.

The treaty is not an answer — it is only a beguiling, flawed escape hatch from the hard work America and others must do to meet China’s challenge.

That hard work must include properly funding and equipping the U.S. Navy and exercising it in China’s exclusive zones, especially on intelligence missions, based on long-established state practice. Together with diplomacy to prevent conflicts, these steps will reassure allies of full U.S. support in resolving disputes with China.

—

Mr. Bolton served as U.S. ambassador to the United Nations from 2005 to 2006. Mr. Blumenthal was a senior country director for China and Taiwan in the Office of the U.S. Secretary of Defense.

The relationship between Japan and the members of the Association of Southeast Asian Nations has “matured from dialogues to one where Japan plays a more specific cooperative role” on a range of regional security issues, Japanese Vice Minister of Defense Kimito Nakae said Thursday in Tokyo, the day after meeting with senior defense officials from the 10 Asean nations.

Mr. Nakae was speaking at the opening of a seminar on common security issues held the day after the annual defense meeting. Attended by representatives of Japan and Asean countries, which include the Philippines, Vietnam, Indonesia and Thailand, the seminar this year prominently featured maritime issues.

At the meeting, Asean nation officials underlined the need to establish a common understanding on the interpretation of international law regarding freedom of navigation, and to implement a formal, binding code of conduct to keep disputes in check. Several countries, such as Vietnam and the Philippines, have territorial claims that conflict with China’s in the South China Sea, which some geologists suspect covers oil and gas reserves.

Bolstering the possibility of establishing a wider multilateral strategic framework, Mr. Nakae said resolving the maritime problem requires stronger cooperation from Japan, the U.S. and others.

China’s growing naval confidence was the primary subject discussed by a panel of regional security experts during the session on “efforts to strengthen maritime security in the region.”

“Chinese naval activism will not likely be a temporary phenomenon, but will be a permanent feature of Asian politics in the years to come,” said one panelist, Toshi Yoshihara, a professor of Asia-Pacific studies at the U.S. Naval War College. “Maritime Asia is going to be a busy place. It is going to be a busy theater as China fulfills what it believes is its rightful maritime prerogative.”

Earlier this week, Japan and the Philippines tightened military and security ties, elevating the bilateral relationship to a “strategic partnership” in a joint statement signed by Prime Minister Yoshihiko Noda and Philippine President Benigno Aquino III in Tokyo.

By YOREE KOH, Copyright 2011 Dow Jones

By Andrew Galbraith in Shanghai and Jason Dean in Beijing, Wall Street Journal

A spat over contracts between China’s biggest shipping company and foreign ship owners is calling attention to broader tension over the rise of a Chinese corporate sector that doesn’t always play by established global rules.

The move by China Cosco Holdings Ltd., the listed flagship of state-owned China Ocean Shipping (Group) Co., to halt or delay payments for vessels it leased at the height of the shipping boom in 2008 reflects in part the cyclical stresses in the global shipping industry. But some analysts, lawyers and executives in China say it also reflects a willingness among some Chinese companies — often, like China Cosco, owned by the government — to snub existing norms of global commerce.

In recent years, foreign banks and other creditors have faced repeated difficulties getting payment on bonds or derivatives contracts from Chinese companies. In 2009, for example, China’s government encouraged state-owned airlines and shipping companies, including Cosco, to challenge losses from derivatives deals with foreign banks used to protect against sudden surges in the price of fuel. That same year, China-based Asia Aluminum Holdings Ltd. offered to buy back its debt for pennies on the dollar, leading to losses for international investors.

Foreign companies that do business in China are routinely warned that contracts aren’t viewed in China with the same sort of legal sanctity that they receive in most developed economies. Jingzhou Tao, a Beijing-based lawyer with Dechert LLP, says that withholding payments is a frequent tactic used in China to force price negotiations. “A contract is not an unchangeable bible for Chinese companies,” Mr. Tao said.

Prices for leasing the cargo ships that carry commodities like coal and iron ore have plunged since 2008, when China Cosco signed the deals at issue. Industry executives say it is common for shipping companies to want to renegotiate long-term contracts as a result of economic swings. But it is unusual for financially solvent companies to renege on contracts the way that China Cosco has done on some.

Representatives of China Cosco didn’t respond to requests for comment Friday. During a conference call a week earlier after it posted a first-half loss, China Cosco Executive Director Zhang Liang called such disputes “normal” and blamed ship owners for “trying to use the media to make a bigger impact.” The company said it had renegotiated deals on 18 ships. A China Cosco official said Thursday it plans to restructure its unprofitable dry-bulk shipping operations.

China Cosco, which has about 200 dry-bulk ships under charter and owns 234, appears to be trying to correct course. Some ship owners that had complained about the Chinese company’s failure to pay have said in recent days that they started receiving payments again.

Angeliki Frangou, chairman and chief executive of Navios Maritime Holdings Inc., said Cosco stopped payments in July but has since met original agreements with no renegotiations. “We have been paid,” she said. “Cosco is a counterparty that we like to do business with and will continue to do business with. This was an incident that was very quickly resolved.”

But some in the industry remain frustrated. “They’ve paid up to date [and] I don’t want to be nasty,” said Raymond Ching, vice president at Hong Kong-based Jinhui Shipping & Transportation Ltd. “But obviously, withholding payments and giving us either no response or very, very absurd reasons — it’s just something that we won’t tolerate.”

—

Tom Orlik in Beijing contributed to this article.

The move comes after China’s State Oceanic Administration ordered a halt to all operations last week at the Penglai 19-3 oil field, which is jointly owned by both companies.

ConocoPhillips, which operates the oil field, said last month it hadn’t been notified of any claims resulting from the spills, but would consider them as they came.

The U.S.-based oil company estimates that more than 3,200 barrels of oil and oil-based drilling fluids have been spilled at the site since early June.

-By Wayne Ma, Dow Jones Newswires

The move by the State Oceanic Administration, which manages Chinese waters, rejects the Houston company’s claims this week that it stopped oil leaks associated with spills reported in June. Conoco, the agency said, “has not fulfilled its responsibility as a reasonable and prudent operator.”

A Conoco spokesman on Friday expressed surprise at the order and said it is working with the regulator to better understand its rationale. He added, “we have acted swiftly and have contained any release to the ocean.”

The requirement to suspend activity across the offshore oil field, called Peng Lai 19-3, is a blow for Conoco and its joint venture partner, state-owned China National Offshore Oil Corp., or Cnooc.

It is expected to have less influence on China’s overall supply situation.

Suspension is a sharp rebuke of Conoco: spills were associated with only two of at least eight platforms and facilities it has in the Bohai Sea to service the field, equipment that is separated by miles of water. The closure comes after Conoco this week said it had met China’s Aug. 31 deadline to soak up and otherwise address problems associated with the spills that involved 3,223 barrels of crude oil and drilling fluids.

A halt in production at China’s largest offshore field is likely to send refineries that depend on the wells’ output scrambling for supply, but may not much alter China’s energy situation.

“It’s not going to be something that’s going to have a large impact on China’s national production,” said Tom Grieder, a Geneva-based analyst for IHS World Markets Energy.

IHS says China in 2010 produced about 4.07 million barrels a day, but little of it was from offshore production bases like Conoco’s. Figures from Conoco suggest the field produced around 114,500 barrels a day last year, and in recent months had sagged below that level.

The Chinese company owns 51% of the field; Conoco owns 49% and is the operator. Cnooc didn’t respond to a request for comment.

The company noted the field was already producing at a reduced rate and that its portion of the output represented about 3% of its global annual production. Capacity of the field is rated at 160,000 barrels a day. Conoco has heavily invested to ramp up production since oil was discovered in 1999 and production began in 2002.

Conoco has interests in two other areas in Bohai Bay, but they are smaller.

The Oceanic Administration may have acted in response to Conoco’s recent findings that a liter or two of oil a day continued to seep from the seabed despite a halt to the original spills in June. The company cited pressure build up and said it was capturing all the oil that emerged.

To comply with Beijing’s order to halt all discharge by Aug. 31, Conoco said this week it was “reducing reservoir pressure” near one platform. Friday’s statement said that activity will continue in a safe and environmentally responsible way.

The Oceanic Administration put no timetable on the shut-down order, but said it hinged on the producers taking new steps including procedural changes and making an environmental impact study.

In the almost three months since the first spill was reported on June 4, Conoco has spared little effort to detail its regret for the accidents and show its commitment reduce the problems. The company has garnered little notice in Chinese state media for efforts such as collection of 14 tons of trash on Chinese beaches by its surveyors and findings that almost all of the oil seen on shore was fuel oil, apparently leaked by ships not its platforms.

The Oceanic administration in particular has directed sharp criticism at Conoco in recent days, including sending strong suggestions that it would seek monetary compensation from the oil company for the accident. Chinese companies rarely face sustained heavy criticism from authorities when blamed for industrial accidents.

IHS’s Mr. Grieder said the biggest long-term impact may be on Conoco’s own ambitions in China, such as securing contracts to produce energy from unconventional sources like gas from shale. Any extended challenge to Chinese authorities, for instance over future compensation claims, could leave Conoco, the analyst said, “effectively frozen” in its ability to get future footholds.

Daniel Gilbert contributed to this article.

By John W. Miller, Wall Street Journal

China Cosco Holdings Ltd.’s desire to change the terms of contracts for ships carrying commodities such as coal, wheat and iron ore is common in an industry in which economic cycles often throw long-term deals out of whack.

But people in the industry say Cosco clashed with maritime tradition by unilaterally refusing to pay for its dry-bulk ships without first offering to renegotiate their contracts.

Shipping companies and the ship owners from whom they charter vessels often renegotiate deals when market conditions change or if one party is struggling financially, shipping brokers, analysts and executives say. Waves of renegotiations arose during the commodities slumps of the 1990s and after the fall of Lehman Brothers Holdings Inc. in 2008.

The difficulty of enforcing contracts on the other side of the planet gives parties hoping to renegotiate a contract leverage that doesn’t exist in, say, landlord-tenant disputes.

“If the carrier is tied to a charter contract when the revenue from the freight is less than the cost of the charter, then it’s become not uncommon for parties to make a new deal,” says Dirk Visser, an analyst with Netherlands-based Dynamar BV. There are certainly grounds for doing so now. The Baltic Dry Index, which reflects the price of chartering dry-bulk ships, has fallen to 1537 from above 7000 three years ago.

In English law, which governs many maritime agreements, “a charterer rarely, if ever, has the unilateral right to change the rates agreed just because the market has gone down,” says Philip Roche, a shipping lawyer with Norton Rose LLP in London. But dispute arbitration, as is typically laid out in contracts, is an expensive and lengthy process that can damage or destroy commercial relationships, so disagreements usually are settled, he says.

Paris-based broker Barry Rogliano Salles, whose staff of 35 in China arranges hundreds of dry-bulk cargoes a year, said it is pursuing or has concluded a half-dozen renegotiations.

Late last year, BRS fielded a call from an iron-ore importer that the rate brokered with a ship owner in 2007—$30 a ton for six ships a year from Brazil to China—was too expensive. The total value of the deal was more than $200 million. But market freight rates had tumbled to under $20 a ton. BRS brought the two sides together and, after months of negotiation, cut a new deal for nine ships at $25 a ton.

“It made sense for both sides, nobody put a gun to anybody’s head,” says BRS Chief Executive Tim Jones. “This is common. What is uncommon is the position where there’s no negotiation and one company is saying, ‘This is what we’ll do.’ “

Cosco, which has about 200 dry-bulk ships under charter and owns 234, this year simply stopped paying fees on some ships it leased before 2009 from Chinese and Greek ship owners, triggering the seizure of three ships and criticism from shipping-exchange managers. Moody’s rating service warned that Cosco’s action could hurt the ability of dry-bulk ship owners to get credit.

Cosco has resumed its payments. “It requires some effort to chase payments” from the shipping company, says Raymond Ching, vice president of ship owner Jinhui Shipping & Transportation Ltd. While Cosco has paid Jinhui, “we cannot deny the fact that they have been delaying payments,” Mr. Ching says. Jinhui declines to say for how long Cosco delayed payment.

Cosco on Friday said it renegotiated deals on 18 ships. Executive Director Zhang Liang said such disputes are “normal,” and the company said its dry-bulk revenue for the first half fell 27% from a year earlier. “Charterers were trying to use the media to make a bigger impact,” Mr. Zhang told reporters.

Greece’s DryShips Inc. and Navios Maritime Holdings Inc., ship owners that had said they were denied payments by Cosco, didn’t return calls seeking comment for this article.

The container business, which involves carrying 20- or 40-foot steel boxes across oceans, also is subject to charter renegotiations when market conditions change. Chilean container line CSAV Group in 2009 successfully renegotiated with German ship owners to cut rates in exchange for stakes in CSAV. “They had a trump card: ‘If you don’t reduce rates, then we’ll go bust,’ ” says Jan Tiedemann, an analyst with Alphaliner, a shipping consulting firm.

Andrew Galbraith and Neena Rai contributed to this article.