shipping line

Riding the Silk Rooster

China Merchants has a knack for catching themes. China Merchants Holdings has been a decently managed company in the China context, holding decent port assets. But investors, mainland and foreign, always seem to get taken away by some idea of golden returns. In the late ‘00s there was all this fanfare about its Vietnam investment with billions of HK$ market cap added pretty much on the back of the concept. 

Having Shanghai Port Group shares take off in the late ‘00s also helped propel the shares into the stratosphere for a while, as owning a stake in a Shanghai listed company offered investors participation in China rallies. 

Yet, we know what happened to plans for Vietnam development. It was a total dud due to massive overbuilding of port assets. China Merchants let the project die quietly after a few permutations. Sri Lanka port expansion also was not without its controversies.

Ultimately Shanghai Port after 2008 turned out to be a little less exciting for 5 years or more – Until September 2014. Since then shares have doubled.  This is one reason why shares of HK China Merchants Holdings perked up recently. But there is also the fanfare of China going big in global infrastructure as a result of a “new” Economic Silk Road initiative, which was laid out in NDRC in late March 2015 in a paper entitled Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road.

COSCO Pacific has not had it so easy since the late ‘00s. It hasn’t been able to recover from the perception of being a passive patsy for the poorly run COSCO parent and having a few more passive port investments as well as a boring container leasing business (which it sold parts thereof more than once).  But, in its defense, it has always maintained 1) good disclosure, and 2) a good dividend distribution.

Port and infrastructure companies are certainly companies to look at as beneficiaries of the “new” economic silk road.


The Silk Road Economic Belt theme and policy statement out this time (see official China announcements and speeches) is different than the 20 year old “through train concept” for Asia to Europe via Central Asia (and not the money and share trading conduit between China and HK…). This was the old version for new trade growth avenues.

Over the last few years China has been backing a number of global infrastructure themes, from ports in Suez and Sri Lanka, to potentially theme parks in Cambodia, and ultimately to road and rail buildouts in SE Asia and new military bases and drilling rigs in disputed waters in the South Pacific. 

China now is wrapping this in a comprehensive plan, seeking to show that the growth in the international strategic footprint is about increasing RMB transactions, and ultimately participating in a Chinese Economic Sphere that will even come with its on multilateral bank, which many countries are now warming up to. 

It is a total package, marketed as global business expansion but also comprising a significant geo-political element with military sideshows.  Move over Pax Americana. Here comes the Silk Rooster. It makes perfect sense. And it is not new. It is simply more front burner due to new focus from Xin Jinping.

China Merchants didn’t just invest in a new global footprint ports last month. It’s been growing around the world for a decade or more, as have Shanghai Port and COSCO/ COSCO Pacific. 

What’s more China didn’t just start building military bases in the middle of the South Pacific. It’s been laying down asphalt and train tracks in Laos for awhile. And if it can find financing that is supported by multilateral agencies, like its new Asia Infrastructure Bank, it will be building theme parks/property projects and roads, rail networks, ports, canals across the globe. 

And a new surprise for some may be how substantial its influence in Thailand has become. The PLA and connected Communist Party members have been buying up and producing from jade, precious stones and metals mines in SE Asia for a long time. And one could not have done this without support from the authorities and the military. Recently CITIC (ultimately PLA linked) raised more funding for its re-capitalization from parties including Japanese trading houses and Thai Chinese. The Japanese are another key constituent of Thailand’s industrial base. From a Chinese perspective it is even more important to box in Japan’s influence around the Malacca Straits. 

In some cases, China may have picked the wrong horse, such as Noble Group, which likely expanded too rapidly into commodity asset bases in places such as Brazil toward the top of the commodity cycle. And China has so far missed the boat on acquiring logistics companies rather than simply buying more container ships, bulk vessels and tankers. But it will figure it out.

Because China needs global expansion to replace stagnating China growth, China will pour a lot of resources overseas. And its large state owned companies will benefit immensely. For the moment these companies often don’t get the right cultural mix on international infrastructure projects, and they tend to go into projects in massive waves with too many Chinese workers, while leaving many behind along with support infrastructures. But this is 1) on purpose and 2) may get better regulated in future. 

Imagine 50,000 workers descending on a small economy. The backlashes will eventually force some redirections. But at the same time China will have built a new mainland Chinese diaspora far larger than ex-Communist Party members who fled China with potentially as much as a trillion dollars.

Many countries, not just SE Asia, Japan or the US need to figure out how to integrate into China’s new global political economy. On the one hand investors can participate and benefit, while keeping tight leashes on credit policies. On the other hand, sovereign nations need to quantify and de-limit Chinese incursions into their national territory.

Author: Charles de Trenck / Publisher: SCMO

Ship-to-ship transfer – whether reasonable to refuse permission

Article published on July 2014 in Stephenson Harwood Shipping Bulletin and reproduced by courtesy of Stephenson Harwood

The parties entered into a voyage charter of the Falkonera, a VLCC, on BPVOY4 with amendments, which included:

"Charterers shall have the option of transferring the whole or part of the cargo … to or from any other vessel including, but not limited to, an ocean-going vessel, barge and/or lighter …

if charterers require a ship-to-ship transfer operation or lightening by lightering barges to be performed then all tankers and/or lightering barges to be used in the transhipment shall be subject to prior approval of owners, which not to be unreasonably withheld, and all relevant certificates must be valid"

The Falkonera loaded oil in Yemen. Charterers asked owners to approve STS transfers into three vessels (Kythira, Front Queen and Front Ace). Kythira was smaller than Falkonera, while Front Queen and Front Ace were both VLCCs, the same size as Falkonera. Owners approved transfer to Kythira, but refused to allow transfer from the Falkonera into either the Front Queen or the Front Ace, in spite of a number of efforts to deal with owners' safety concerns. Charterers then proposed an alternative vessel, True, and eventually permission for discharge into True was given, and the cargo was transferred into True and Kythira.

Charterers claimed that implementing the plan of bringing in the True involved significant delay and increased cost which were for owners' account. They argued that owners had unreasonably refused permission for the proposed STS transfers, as their opposition was based on aversion to any VLCC-VLCC transfer, rather than to the characteristics of a particular vessel.

Charterers' claim succeeded, and owners appealed:

The appeal was dismissed.
1     It was for charterers to prove that owners had acted unreasonably. In order to entitle owners to withold approval it was not necessary that their conduct was correct or their conclusions right. They would only be in breach if no reasonable shipowner could have regarded their concerns as sufficient reason to decline approval.

2     The right to transfer was "to … any other vessel", including a VLCC. The fact that transfer VLCC to VLCC could be regarded as non-standard was not of itself reasonable ground for refusal. Owners were taken to have agreed in the contract to have accepted such risks as were inevitably attendant on a VLCC-VLCC transfer. It was necessary for there to be some other basis on which the withholding of approval could be said to be unreasonable.

3     The issue was not whether owners were satisfied with the planning of the STS transfer, but whether there was some characteristic of the receiving vessel which meant that the STS would be unsafe.

4     The judge's conclusion was one of fact, reached after extensive consideration of expert evidence. He had applied the correct legal test.

(Falkonera Shipping v Arcadia Energy [ 2014 ] EWCA Civ 713)

Authors: Michael Bundock, Senior Associate and professional support lawyer with Stephenson Harwood & Joanne Champkins, Associate specialising in marine insurance with Stephenson Harwood / Publisher: SCMO

Trip time charter – whether vessel off-hire during detention

Article published on July 2014 in Stephenson Harwood Shipping Bulletin and reproduced by courtesy of Stephenson Harwood

A vessel was chartered by NYK to Cargill for a time charter trip. Cargill sub-chartered to Sigma. The cargo was a shipment sold by Transclear to IBG. (Transclear were a sub-charterer, but it was not clear whether this was from Sigma or from an intermediate charterer.)

A dispute concerning unpaid demurrage arose between Transclear and IBG and Transclear had the vessel arrested. Cargill withheld hire for the period of the arrest, relying on clause 49 of the charterparty:

"Should the vessel be captured or seizured [sic] or detained or arrested by any authority or by any legal process during the currency of this Charter Party, the payment of hire shall be suspended until the time of her release, unless such capture or seizure or detention or arrest is occasioned by any personal act or omission or default of the Charterers or their agents."

The arbitral tribunal held that Cargill were entitled to put the vessel off hire. On appeal Field J held that Cargill were not so entitled. Cargill appealed.


The appeal was dismissed. Cargill were not entitled to put the vessel off hire, as the arrest had been "occasioned by any personal act or omission or default of the Charterers or their agents".

1     The word "agents" in clause 49 was not limited to agents strictly so called. Delegates of Cargill could be its agents for the purposes of the clause, irrespective of the precise contractual relationship existing between the delegate and the party above him in the contractual chain. The word “agents” was accordingly capable of extending to sub-charterers, sub-sub-charterers and receivers.

2     The acts or omissions or defaults in question were not restricted to those occurring "in the course of the performance by the delegate of the delegated task".

3     The general scheme of clause 49 was that the vessel would be off-hire where the relevant matters were either on NYK's side of the line or were the acts or omissions of third parties (eg government authorities) unconnected to either NYK or Cargill.

4     However, the dispute between Transclear and IBG clearly fell on Cargill's side of the line. The dispute arose out of Cargill's trading arrangements. The result was that hire continued to run over the relevant period (subject to questions of causation). The acts or omissions of both Transclear and IBG led to that result.

(The Global Santosh [ 2014 ] 2 Lloyd's Rep 103)

Authors: Michael Bundock, Senior Associate and professional support lawyer with Stephenson Harwood & Joanne Champkins, Associate specialising in marine insurance with Stephenson Harwood / Publisher: SCMO

Foreign insolvency – whether termination of contract of affreightment prevented

Article published on July 2014 in Stephenson Harwood Shipping Bulletin and reproduced by courtesy of Stephenson Harwood

F, a party to a contract of affreightment which was expressly subject to English law, had an express right to terminate the contract on the insolvency of the other party, P (a Korean company). P entered into an insolvency process in Korea, and that process was recognised by an order of the English Court as a "foreign main proceeding under the Cross-Border Insolvency Regulations 2006 ("the CBIR").

F terminated the contract of affreightment under its express contractual right. The administrator of P applied to the English Court for an order that F should not exercise its right to terminate.


The application was rejected by Morgan J.

1     The Court's power under CBIR to order a stay of "the commencement or continuation of individual actions or individual proceedings" did not apply. The service of a notice terminating the contract was not the commencement or continuation of an individual action or individual proceeding.


The Court had power under CBIR to grant "any appropriate relief". However:
2.1     that did not give the Court power to order that F should not terminate the contract. The Court's power was limited to relief which would be available to the court when dealing with a domestic insolvency.

2.2     Even if the court had such a power, the judge would not have exercised it. It was appropriate for the Companies Court to apply English law and to give effect to the parties' choice of English law.

(Fibria v Pan Ocean [ 2014 ] EWHC 2124 (Ch))

Authors: Michael Bundock, Senior Associate and professional support lawyer with Stephenson Harwood & Joanne Champkins, Associate specialising in marine insurance with Stephenson Harwood / Publisher: SCMO


Sanctions against National Iranian Tanker Company ruled unlawful

Article published on July, 8 2014 in Legal Eye and reproduced by courtesy of Stephenson Harwood

Stephenson Harwood welcomes the ruling of the General Court of the European Union that EU sanctions against National Iranian Tanker Company (NITC) are unlawful.

NITC has been subject to sanctions since 2012, which impose an EU-wide asset freeze and effectively block the company conducting any business within the EU or with EU companies worldwide. The court has now ruled that the Council had not "the slightest evidence capable of supporting" the decision to impose these measures, which have caused a great deal of damage to NITC's business, its employees and its beneficial owners; five million pensioners in Iran.

Rovine Chandrasekera, marine and international trade partner at international law firm Stephenson Harwood, which represented NITC, said: "It is clear that that the Council of the EU had no evidence to support the draconian sanctions imposed on NITC. The damage that has been done to the company, without justification, by the EU Council is significant. We hope the Council will lift the sanctions against NITC as soon as possible."

Author: Katie Hatcher (PR & Communications Manager with Stephenson Harwood) / Publisher: SCMO


So you want to be an Intra-Asia Trade player?

Reproduced from a 12 March 2010 article by courtesy of "Transport Trackers"

Container veteran Niels K Balling contributed this think piece on Intra-Asia containers. We leave his title in place as it reminds us of the song by the Byrds, and later sung by Patti Smith (So You Wanna Be a Rock and Roll Star). Mr Balling notes, in passing, that the intra-Asia market is so big and complex that trying to boil it down in this fashion perhaps does not do it justice, so he apologizes in advance...

The Southeast Asia/North Asia countries comprising the core Intra-Asia market have become the largest container trade in the world, by far (despite some over-counting a few years back in a now infamous looking at the market by a well-known report we refer to sometimes). We exclude the Asia/Australia and Asia/India and Middle East trades as they are independent trades served by independent assets.

Key issues:

Total REAL profit pool of the core Intra-Asia trade is destined to remain miniscule

Only niche operators will be able to cover the cost of dedicated capital deployed to this theatre

Roughly 1/3rd of the trade volume is handled by main line operators on trunk routes

Rest evenly split between dedicated major services, feeder services, niche operations and domestic protected trades

The Main Line Operators (MLOs) provide negative marginal pricing to offset equipment positioning needs they have anyhow, and to build container terminal volumes that generates lower total terminal handling cost. In other words sunk cost discounted to zero (or less), combined with marginal pricing for growth purposes to achieve lower variable cost. That's not entirely crazy as the volume gain often will generate more value through terminal handling discounts than the real Yield of Intra-Asia cargo. And the discount may apply to the TOTAL volume thus leveraging the discounted Intra-Asia business to great effect.

Any dedicated operator (as some of the traditional Intra-Asia shipping companies will tell you) can never recover the cost of normal operations against such network economics.

Next come feeder (about 15% of Intra-Asia volumes) and the quasi feeder operations. The latter comprises about 55% of dedicated Intra-Asia services. These are services deployed for combined Intra-Asia trade and MLO network purposes. The feeder and quasi feeder operations work on the same discounted cost basis.

The only reason for existence of 3rd party feeder operators is that they can do it cheaper than the main line operators despite the latter counting on their own sunk cost. How can the 3rd party operators survive? In most cases it comes down to lower asset and capital costs - for as long as it lasts.

In other words on a net, net basis a relatively large part of the major Intra-Asia trades are served based on dedicated shipping services to their operational scope without any hope of rate or cost differentiation against the main line operators' network economics. They cannot bring specific financial value to the table that can support a dedicated operation. And they die – and get reborn – regularly.

Overall Intra-Asia has a negative profit pool due to the sunk cost approach by main line operators. That's a great trade facilitator and may continue to support rapid volume expansion of Intra-Asia container volumes.

But where's the money for the shipping investors?

There's a lot of money available in this profit pool. If one knows where to look. There are several niche opportunities as well as classic arbitration windows available.

The niches are fairly obvious, especially within the Refrigerated foodstuff area. This is becoming an interesting niche because of slow steaming by main line operators. Certain products, like bananas, are highly transit-time sensitive and need fast, reliable transport. The arbitrage opportunities are however an even more interesting and growth opportunity generating.

The Intra-Asia trade to a large extent is an outgrowth of the coastal economic development within Asia. Part of the success of Asia is that logistics costs were always low. This is no more a given. Redistribution within Asia is becoming more costly, though sea represents the cheaper option and contributes to reducing costs. Just think of haulage cost in Japan to outlier areas. Or Taiwan, Korea cost for trucking to other consumer areas. And/ but... China is now joining the game.

The Intra-Asia trade regionally is essentially similar to domestic haulage in the US and Europe.

There are no major green issues yet except Japan, where basic economics already make it very compelling to distribute to say Southern Japan via China by ship rather than paying huge costs over road and ferry via Tokyo or Kobe. In other words, use shipping to avoid domestic land based transport.

Intra-Asia will continue to provide growing opportunities for transport arbitrage opportunities, for new entrants. And Intra-Asia transport costs will continue to remain low based on intelligent MLOs going beyond normal yield management to leverage their network for ever better marginal cost throughout their global operations.

For both types of operators Intra-Asia will continue to expand in value.

For new entrants the advice is that deep understanding of their market of choice will make the difference between survival and quick demise.

Author: Niels K Balling / Publisher: SCMO