In a previous article, we have seen the important role of China for the dry bulk shipping as a major importer and exporter of dry bulk commodities. During the last couple years, the growth of the Chinese economy has become slower, however the Chinese Government has recently announced a massive development program which can revive the old-known “Silk Road” in an effort to strengthen the International trading relationships of China and boost her global position. The Silk Road is a network of trade routes, historically established more than 2000 years ago, which linked China to Central Asia and the Arabian Gulf. The name has taken its origin from China’s most important export product of these years —the silk. This Silk Road influenced the development of the entire Asian region for hundreds of years.
This specific project was first launched during 2013, when the President of China announced a complete plan so as to develop the Maritime Silk Road of the 21st Century. This Maritime Silk Road of the 21st Century is part of a broader project which is called “One Belt and One Road” and, along with the Maritime Silk Road, it also consists of the Silk Road Economic Belt which connects China with Central Asia, the Arabian Gulf and Europe via land. The Maritime Silk Road, on the other hand, connects China with South East Asian countries, West Africa and reaches up to Mediterranean Sea. The OBOR region includes 3 continents and 66 countries with total GDP of trillion dollars, which is expected to cover more than 60% of the world’s population, about one-third of the world’s GDP, and about 25% of all the goods which are moved around the world.
During May 2017, the Chinese government hosted a forum with the top leaders of 28 countries during which the Chinese President analyzed the main aspects around the, so expected, largest infrastructure and development project of the 21st century. It is expected that China will inject about 150 billion dollars per year, with the total investment approaching the 900 billion dollars in projects around the globe, the Fitch Rating Agency estimated earlier this year. Ports, pipelines, electricity generation plants, bridges and railways are some of the main projects expected to take place, in an effort to improve the infrastructure and logistics links of China with Asia, Middle East, East Africa and Europe. Furthermore, this is also a model for the growth of the free bilateral trade between China and the participating countries. In this regard, China has already signed bilateral cooperation agreements, a big number of projects are underway while more than 200 companies have signed cooperation agreement for various projects along the OBOR’s routes. In shipping, the Ningbo Shipping Exchange has commenced a collaboration with the reputable Baltic Exchange on an index of rates related with the Maritime Silk Road’s routes.
What is the effect on shipping?
The One Belt One Road project is expected to reshape the international trade and shipping industry. A number of new international trade routes are being opened up, while others are being upgraded. One of the most serious aspects of the Belt and Road Initiative is a change in the pattern of global ownership and control of infrastructure which facilitates new trade movements. The control of such infrastructure from Chinese interests will definitely increase the Chinese imports/exports into/out of these countries.
Some of the effects on shipping from this massive project are going to be positive since the demand for shipping services is expected to be increased while others developments might have an adverse effect in shipping markets.
China and other Asian countries maintain their high growth: Further to this initiative, the seaborne imports in countries of developing Asia Europe and Japan could increase in the coming decades, with the region’s economic weight expected to continue to grow. China is therefore expected to play a long game via this project and, despite the fact that many industry players look pessimistic due to the recent slower Chinese growth, Chinese officials plan to maintain a growth of between 6.5 – 7% each year. On the other hand, the Asian Development Bank has projected that the developing countries in Asia and the overall Pacific region would need to invest about $22 to $26 trillion in infrastructure from 2016 to 2030 (which is about $1.5 to $1.8 trillion per year) to follow the growth momentum, take measures against the climate change and eradicate poverty. Asian countries are already benefited from the OBOR since projects already on their way.
Demand for shipping services is expected to rise: The infrastructure projects will increase the use of raw materials and subsequently the demand for shipping services. Large volumes of construction project material such as steel products, iron ore, cement and heavy machinery and equipment might be supplied from China or other sources via seaborne trade. The development of mega coal-fired power plants and steel mills (e.g. in Pakistan where an infrastructure and energy agreement is worth of more than 45 billion) will highly increase the demand for iron ore and coal. Furthermore, Iron ore, which is now transported mainly via Capesize or Panamax vessels and mainly into China, is expected to utilize also smaller handysize or supramax vessels for its trade. And this is because due to the increased demand for iron ore in many other Asian countries, the major suppliers of iron ore, like Vale, are establishing distribution centers in Asian countries which will collect iron ore from Australia and Brazil and afterwards transship into Asian countries with smaller vessels.
Port infrastructure projects may have a mixed effect in shipping markets: The Gwandar port of Pakistan is one of the projects funded with up to about $46 billion under the OBOR initiative and it can be used as a transshipment port to Central Asian Countries or West China. Also, a railroad from Djibouti to the Ethiopia which is built under the OBOR has just entered into service and with this railway, about 70 percent of Ethiopia’s foreign can trade go through Djibouti. The development of such new ports may have a positive effect since may create new shipping routes and utilize the seaborne trade as an alternative -and cheaper- method of shipping products from Central Europe to Central Asia. On the other hand, though, the upgrade or development of new ports might improve logistics by increasing the maximum vessels which can enter the ports and lower the turnaround time. Despite the fact that all market players prefer their vessels to call modern terminals, such a development might have an adverse effect in the market dynamics since the use of bigger vessels would hit the smaller ones and/or the overall ton-mile demand while the quicker operations would mean lower congestion and thus increase of supply at any given time. Take for example the pipelines which connect Kyaukpyu with Kunming. This decreases up to 700 miles the distance oil shipped from Africa or the Middle East into China and therefore used instead of oil tankers.
Construction or upgrade of Pipelines may negatively affect the oil tanker and LNG markets: The oil pipelines might be used as an alternative to the oil tankers and therefore their development might have an adverse effect on the demand for oil tankers. Same in the LNG market where new or higher capacity gas pipelines to China, such as the Myanmar/Chongqing gas link, will move more gas quantity via shore and it may restrain the seaborne trade effected via LNG tankers.
The Chines Shibuilding takes a leading position but oversupply may hurt the market: The Chinese shipyards are continuously improving their shipbuilding and equipment manufacturing facilities, focus on Research & Development and invest in ships of higher quality, with high-standard designs and higher control on the vessels’ engines. This growth along with the financial incentives which may be given by Chinese financial institutions to Shipowners of the countries participating in OBOR so as the latter to invest in new ships may have an adverse effect on the market equilibrium. Both the dry bulk and tanker markets experience over-supply during the last years and the further development of the shipbuilding industry may absorb the increased demand and delay the market recovery.
The Silk Road Economic Belt competes shipping: Under the Silk Road Economic Belt a $13.8 billion project of a Railway which is connecting the Kenyan port of Mombasa to Nairobi as well as South Sudan and other African countries. This project can affect the shipping markets by lowering the ton-mile demand since part of the transportation will take place with other means (road transport). Furthermore, the developments in road infrastructure are expected to expand the route between China and Central Europe and in this case the road transportation may attract movements of valuable and sensitive goods, which were previously transported by sea. Therefore, despite the fact that the whole OBOR initiative may create new opportunities for the shipping industry, projects scheduled under the Silk Road Economic Belt may have an adverse impact, though ti is not expected to create a noticeable effect on the shipping bulk markets.
Despite the fact that it is still too early to assess the specific impact of OBOR on the Shipping markets and onto the existing maritime routes, all market players should definitely keep an eye on the development of such important project. And we will keep you posted. Stay tuned and subscribe to our blog post to get all updates immediately in your mailbox.