A future in LNG carriers looks bright but the firm's more imminent ambition lies in the tanker business, says Liu Hanbo
Liu: The company can make headway into third-country markets via the acquisition of a western tanker firm.
ICE-COLD winds and blinding snow pounding the CESI Wenzhou during its naming ceremony in Shanghai might have led some guests to have a moan about the weather.
But a timely snowfall ahead of the Chinese spring festival is seen by locals as a good omen for the coming lunar new year — heralding a bumper harvest, or profitable business.
This is exactly what Cosco Shipping Energy Transportation — the oil and gas shipping unit of state conglomerate China Cosco Shipping Group — and its partner Mitsui OSK Lines expect of the 174,000 cu m liquefied natural gas carrier that cost about $210m.
The ship is set to sail for the Australia Pacific LNG project on a long-term charter of more than 20 years, at a stable and lucrative daily rate.
Including CESI Wenzhou, the Chinese giant now has 16 LNG carriers already on the water.
There are 22 more on order, of which 14 are scheduled for delivery by 2020 to serve at Russia’s Yamal project.
But aside from the promising LNG sector, CSET has an even bigger ambition for its tanker business, where large newbuilding orders have been placed and considerations for mergers and acquisitions are now officially on the agenda.
LNG ambition: a major profit contributor
“These 14 Yamal LNG carriers can not only provide us high and stable returns, more importantly, they will help us to take a lead in arctic LNG shipping and to gain a strategic advantage in the industry,” CSET president Liu Hanbo tells Lloyd’s List in an interview.
He is not shy about revealing CSET’s ambition for the LNG shipping business, which he hopes will see profits double over the next five years.
For the first half of 2017, CSET’s LNG sector, with nine ships in operation, contributed Yuan131m ($20.7m) in net profit, accounting for roughly 15% of the total.
In the future, where there will likely be rapid growth in natural gas production amid China’s insatiable demand for clean energies, Mr Liu’s goal is hardly unattainable.
The latest evidence of this came as the Chinese government released its first official Arctic policy white paper on Friday that encourages enterprises to invest in infrastructure and pilot sailings, paving the way for shipping routes that would form a ‘Polar Silk Road’.
Among the various strategic considerations behind Beijing’s Arctic initiative, energy security is surely an important component, especially given that more LNG processing facilities at the Yamal project are expected following the first one commissioned in December last year.
Besides Yamal, the market is also surrounded by several other potential projects, including a framework agreement signed in November between Cheniere Energy and China National Petroleum Corp for long-term LNG sales and purchase partnerships.
But compared with the buoyant LNG sector that remains dominated by long-term contracts, the ailing tanker market may require more thoughtful orchestration.
Don’t forget that Shanghai-and Hong Kong-listed CSET controls 47 very large crude carriers — 39 self-owned — on the water and 10 on order, among dozens of smaller oil and product tankers.
Tanker business: it’s time to buy
Freight rates for almost all types of tankers fell substantially last year.
First was the very large crude carrier segment, where average earnings plunged to $24,048 per day from $41,488 per day in 2016. Excess tonnage coupled with production cuts from the Organisation of Petroleum Exporting Countries has even led to a tepid rate recovery during winter, the traditional peak season of oil shipping.
While many players were concerned over the scarcity of liquidity, Mr Liu thinks it is time for his company to buy and expand.
“It was a good opportunity to buy ships last year, and the same applies this year for company acquisitions,” he says.
CSET, however, is not immune to the market downturn, with comprehensive income attributable to its parent dropping 63% year on year to Yuan790m in the nine months ending September 30. Still, the firm ordered 16 tankers, including six VLCCs, three suezmaxes, two panamaxes and five aframaxes, for approximately $1bn in late 2017.
Money seems not to be the issue, especially after CSET announced a private placement plan in November, to raise up to Yuan5.4bn to finance its shipbuilding contracts and shore up liquidity.
At the same time, the advantages of bringing in fresh tonnage are obvious.
These eco-designed vessels, purchased when newbuilding prices were low, not only bring down the company’s operations costs but also make its fleet more competitive, especially when oil majors are becoming more demanding in terms of vessel quality, according to Mr Liu.
For example, the two VLCC orders placed at Dalian Cosco KHI Ship Engineering cost about $80m per ship, according to exchange filings. Another four booked at Dalian Shipbuilding Industry Co are even cheaper after excluding refundable taxes, Lloyd’s List understands.
However, making more newbuilding orders may lead to the risk of dampening market prospects. Acquiring a new shipowner, though, does not entail that same risk amid attempts to build scale.
The latter option is becoming increasingly attractive, according to Mr Liu, because the continued low freight rate environment has put a significant dent in some tanker owners’ bottom lines as well as their market values.
“Some owners, especially those pure tanker players, won’t last long under the current market conditions,” he adds.
So, does Cosco Shipping remain interested in buying Gener8, having submitted an all-cash bid while Euronav was in talks with the New York-listed firm last year?
“At present, we don’t have a specific target. But I think for acquirers that are in good shape financially and operationally, there is a great opportunity now,” Mr Liu replies. “And my company is in a very good shape.”
When completed, the private share offering will considerably drive down the company’s debt ratio and enhance its borrowing ability, he adds.
There are also rational reasons behind his strategies in acquisition and expansion.
Following the merger of Cosco Group and China Shipping Group, the combined entity has set targets to reach world-class standards for all its constituent businesses, including energy shipping.
“So far, our business is still centred on China,” Mr Liu admits. “If we can make headway in more third-country markets, say, by acquiring a western tanker firm, we will be able to connect trades in the east and west, create more triangular routes and largely improve our operational efficiency.”
What is more, the larger fleet size can help the company better handle Beijing’s energy security requirements, which stipulates that 80% of Chinese imported crude oil has to be carried by its own ships.
Today, the target is not even half-achieved.
Market recovery: 2019
Whether it is ships or another company, the acquirer has to see a market recovery to make investments pay off.
With the decline in oil inventories and a rise in vessels scrapped, Mr Liu expects the crude tanker market to recover by 2019.
That will be when the new ships are about to be delivered and the anticipated acquisition deal, if made to happen, is about to be completed.
Of course, unlike weather forecasts, markets expectations may affect, if not change, the results.
But there are no rewards without risks.
And if the late-winter snowfall is any portent of good fortune, coupled with a well-planned strategy, why not give it a try?