China port fees bring Chinese-built, US-owned ships into focus; owners expect waivers

China levying port fees on the US-owned and operated ships implies that even several Chinese-built vessels may also be charged an exorbitant amount and push up freight unless a specific exemption is granted, market participants said Oct. 13.

This is prompting several US shipping companies and operators to avoid Chinese ports for the time being and await clarity while seeking possible exemptions.

"Take our case. We have a large American ownership of more than 25%, with several tankers built in China, and [for now], will not send our ships to Chinese ports," said an executive with a global shipping enterprise.

American ownership of Chinese-built ships is a paradox that needs to be addressed to avoid China's own imports and exports becoming more expensive, brokers, shipowners and charterers said. Under the draft rules, which are yet to be finalized and formally notified, it is proposed to exempt the existing fleet of those shipowners and operators from these hefty fees for up to three years who order newbuild ships from Chinese yards, shipping sources said. The Chinese government's Oct. 10 notification stated that the measures for the detailed implementation of the proposed fees will be formulated separately.

The proposed fees for a single port call, in some cases, are more than the freight for the entire voyage to China. The $56/net ton equivalent of proposed fees translates to almost $6 million for a US-owned or operated VLCC calling at Chinese ports, according to the estimates by the global shipping brokerage E A Gibson. Based on the Platts Oct. 13 worldscale assessment, the VLCC freight on the benchmark Persian Gulf-China route works out to be around $5.8 million, up from $5.15 million, Oct. 10. The US Gulf-China VLCC freight is almost double that of the Persian Gulf-China route, and therefore port fees need to be proportionate, a tankers broker said.

The VLCCs are likely to be most affected as China is the biggest market for this vessel size, E A Gibson said in a report published shortly after the Chinese announcement. China imports almost 11.5 million b/d of crude, which is equivalent to around half a dozen VLCCs daily, though substantial volumes are also imported in Suezmaxes and Aframaxes.

For the benchmark Persian Gulf-Japan LR1 route, the freight is around $1.44 million, while E A Gibson estimates the Chinese port fees for this vessel size at $1.2 million.

According to the Chinese government notification, a ship can be charged for up to five voyages annually, and the fees will be hiked every year around mid-April for the next three years.

Under charter party agreements, such additional port fees will be on the charterers' account, and they will not be able to pay such an exorbitant amount, so it will "kill the deal", a source with a clean oil tankers' owner said. This will prompt the charterers to look for ships that are not owned by Chinese entities and push up the freight "massively", he said.

Disruptions and repositioning

Given the short lead time for implementation from Oct. 14, some affected ships are already on the water heading for China and trade flows will be disrupted, E A Gibson said.

The entire scale and scope of the port fees is so vast that in the absence of exemptions and waivers, hardly any US-owned and operated ships will call at Chinese ports except those that are already on the way, or just recently chartered for loading at Chinese ports, an executive of one such company with more than 25% US ownership said. Even they will have to seek waivers, he said. The draft measures recommend a 50% special port fee waiver for existing voyage contracts, but since the originally proposed fees are so heavy, their being halved may not be enough for most market participants to go ahead with their respective voyages.

According to a Chinese government notification, the vessels owned or operated by enterprises or organizations in which US enterprises, organizations or individuals directly or indirectly hold 25% or more equity, voting rights, or board seats will be eligible to pay such fees.

Several major tanker companies, such as Scorpio, Ardmore, Teekay and Torm, have sizeable US ownerships because of listing on stock exchanges, and the Chinese decision could significantly disrupt overall trade as their tankers may avoid Chinese ports until there is clarity on the port fees. Several Scorpio ships were built in Chinese shipyards such as GSI Nansha and New Times. A senior Ardmore executive and a Torm spokesperson said their respective companies are monitoring the situation arising out of the Chinese announcement closely. Sources at the other two companies have not yet responded to a request for comment.

Wherever possible, the US-linked ships will try to reposition in Europe or the Americas and a tight supply of non-US-owned ships will boost their freight premiums, E A Gibson said. While US shipowners are limited, the US-operated fleet is substantial because oil majors control a large number of tankers, it said.

The Platts Global VLCC Index, or GVI 7S, for scrubber-fitted, Eco ships, which slipped below $70,000/d earlier this month, is now again above $80,500/d.