Image: COSCO

SHANGHAI (Dow Jones)–China Cosco Holdings Ltd. (1919.HK) said Thursday that its net loss widened in the first quarter as its dry-bulk shipping business slumped amid a slowdown in the global shipping industry.

The Beijing-based shipping company said its net loss for the three months ended March 31 totaled CNY2.7 billion ($428.2 million), according to Chinese accounting standards, compared with a net loss of CNY501.77 million a year earlier.

Revenue fell 4.6% on the year to CNY15.69 billion from CNY16.45 billion.

The results lend weight to a gloomy outlook for the year made in March by China Cosco Chairman Wei Jiafu, who said oversupply and a funding squeeze would continue to dog the global shipping industry. Wei said at the time that he expected lower rates and the financing squeeze to force weaker players to default on their payments or go into bankruptcy.

Pressure has been particularly high on China Cosco’s dry-bulk unit, which carries commodities including coal, grain and iron ore. The unit posted a decrease of 14.6% on the year in shipping volume in the first quarter to 55.6 million metric tons.

In 2011, China Cosco, which has 147 dry-bulk ships under charter and owns 229, stopped paying fees on some ships it leased before 2009 from Chinese and Greek ship owners, triggering the seizure of three ships. The company later said it had resumed its payments.

The company has said it expects excess shipping capacity to continue to weigh on the dry-bulk unit as it forecasts dry-bulk capacity growth of 10.8% in 2012, higher than an anticipated 4% growth in demand. In its statement Thursday, China Cosco said as of March 31 it had orders of 20 dry-bulk cargo vessels totaling 1.9 million deadweight tons.

Cosco’s container unit, in contrast, showed a recovery in the first quarter, as shipping volumes rose 19.5%, pushing the unit’s revenue up 2% to CNY8.05 billion.

China Cosco, the listed flagship of state-owned China Ocean Shipping (Group) Co., has businesses ranging from dry-bulk shipping, container shipping, port operations and container construction to cargo and shipping agency operations.

-By Andrew Galbraith, Dow Jones Newswires

Image: Aker Solutions

Aker Solutions has won a contract from Yantai CIMC Raffles Offshore Ltd to supply a complete drilling equipment package for a new jack-up drilling rig, being built by the Chinese yard.

The contract value is undisclosed.

The new rig is of the Friede & Goldman 2000E jack-up design, and the contract includes options for a further three jack-up rigs of the same design.

“We are pleased to see Aker Solutions’ competitive position in the jack-up market, which we expect to be active in the future,” says Thor Arne Håverstad, head of drilling technologies in Aker Solutions.

The equipment will be delivered in 2013.

Aker Solutions will provide drilling equipment from its production units in Kristiansand and Asker in Norway as well as Houston, US and Erkelenz in Germany.

Aker Solutions offers complete drilling equipment packages, including project management, engineering, procurement and commissioning. The company provides the full range of topside drilling equipment and systems, and worldwide customer support through a global drilling lifecycle services organisation.

According to China’s state-owned news company, Xinhua, 4 workers have died following a boiler explosion on board a bulk carrier at the Zijinshan Shipyard in Nanjing this past Friday night.

The ship was nearly ready to be handed over to the shipowner, China Changjiang National Shipping, when the blast occurred.

According to a statement by the shipyard, “of the 12 shipyard workers who were admitted to a hospital, two slightly injured have been discharged and the rest are still under emergency medical treatment.”

Image courtesy CNOOC

Last month, CNOOC Limited announced a summary of the company’s business strategy and development plan for the year 2012.

The total targeted net production of the company in 2012 is 330 to 340 million barrels of oil equivalent (BOE). The company’s net production for 2011 is estimated to be 331 to 332 million BOE.  For comparison, in 2010, the United States produced 589 million BOE.

During the year, four new projects in offshore China are expected to come on stream, among which the incremental peak production of Panyu 4-2/5-1 adjustment project is expected to reach around 57 thousand barrels per day in 2014, demonstrating the huge potential of the company’s producing fields. More adjustment projects are expected to come on stream in offshore China in the next few years and become an important driver to the company’s future production growth. In overseas, Long Lake oil sands project in Canada and Missan oilfield in Iraq are expected to make production contribution. Currently, there are 16 projects under construction, laying a solid foundation for the company’s mid to long term development.

In the aspect of exploration, the company will enhance its independent deepwater exploration, while expanding exploration in new areas and frontiers.

An aggregate of 114 exploration wells including 3 independent deepwater wells in South China Sea are expected to be drilled and 18,300 kilometers 2-Dimensional (2D) seismic data and 19,200 square kilometers 3-Dimensional (3D) seismic data to be acquired. The company’s reserve replacement ratio (RRR) is targeted to exceed 100% in 2012.

In 2012, in order to support a sustainable growth as well as to accelerate the exploration and development of deepwater and unconventional energy, the company’s total capital expenditure is expected to reach US$9.3-11.0 billion, among which the capital expenditures for exploration, development and production account for around 17%, 68% and 14% respectively.

“In the coming year, the company will strive to ensure that the capital expenditure plan is effectively implemented in order to support the company’s future production and reserve growth. Meanwhile, the company will continue to maintain its relative cost advantage under the rising industry cost environment,” Mr. Zhong Hua, CFO of the company commented.

Mr. Li Fanrong, CEO of the company said, “In 2011, despite of facing a number of challenges, the company has eventually completed its annual production target. It does not come easy. In the future, the company will still be targeting to achieve 6-10% CAGR on production growth from 2011 to 2015 by means of regional development and comprehensive adjustments in producing oilfields in offshore China as well as pushing for deepwater exploration and development. All these will lay a solid foundation for the company’s mid to long term development strategy and create more value for the shareholders.”

Daewoo Shipbuilding told the paper that it and Rilin Group will jointly construct a dockyard for ship repair as well as steel structure business facilities in Hwanggeumpyong and Dandong, China. Financial terms are being negotiated, the company told Dong-A, adding that the company plans to make a formal announcement in April.

The papers said Hwanggeumpyong, a small island on the border with China, is linked to Chinese territory due to long-term sedimentation. Daewoo in January signed a memorandum of understanding with Rilin for possible business tie-ups in areas like shipbuilding and vessel repair.

Newspaper website: http://www.donga.com

-By Seoul Bureau, Dow Jones Newswires

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.