China’s Belt and Road Initiative: rearranging global shipping?
Interest in China’s Belt and Road Initiative, now the preferred name for the One Belt, One Road scheme introduced by President Xi Jinping over three years ago, has intensified. An international gathering in Beijing last month sharpened the focus. This grand concept has two components, both of which are potentially of great significance for the global shipping industry.
The Silk Road Economic Belt of land routes, and 21st Century Maritime Silk Road of sea routes have been proposed as programmes to link China with Asian, Middle East, African and European countries more efficiently. While the Maritime Silk Road naturally seems of most direct interest for international shipping, the Belt also has huge implications for shipping activities. Infrastructure building or upgrading in numerous countries on these routes, facilitating trade movements and strengthening economic activity more broadly, is likely to prove influential.
Since its inception, the Belt and Road Initiative has often seemed rather vague, although individual projects discussed and arranged have provided some clarification. The rationale has been revealed, even if the precise motivations for China’s enthusiasm were open to varying interpretations. Reasons for pursuing the scheme apparently are complex.
Potential benefits for international shipping, as commented in a recent editorial in Hellenic Shipping News Worldwide, are ‘still a bit hazy’, although positive expectations are widespread. Additional attention to progress was attracted by the May 2017 Beijing forum focusing on the Initiative, attended by leaders from many countries. There were no momentous announcements, apart from China’s pledge to invest £124 billion.
But fresh impetus for projects could be derived. A momentum boost may be needed: based on some measures, investment in the BRI declined last year.
What is being reshaped?
An overarching question has arisen: is the scheme reshaping global trade? The answer probably depends on what is meant by reshaping.
Volumes and patterns of trade affected, and also the timescale of changes, are relevant aspects. Reshaping, in this context, can be assumed to mean large changes or prospective changes in geographical patterns of international trade and in trade volumes moving. Given the prominence of some individual projects within the Belt and Road Initiative framework, and the increasing frequency of news items about current and future projects, it could be concluded that a reshaping is indeed happening.
But is that conclusion realistic and accurate? It is abundantly clear that a number of new international trade routes are being opened up, while others are being improved and upgraded. These are having an impact on both the Belt and the Road portions.
The changes are significant and may become much more so over the years ahead. However, it can be argued that evidence for labelling this process as a ‘reshaping’ of global trade is not, or at least not yet, entirely convincing. An alternative characterisation might be suggested.
One of the most prominent aspects of the Belt and Road Initiative is a change (possibly a reshaping) in the pattern of global ownership and control of infrastructure which facilitates trade movements. Investment or management, or both, by Chinese companies is typically a defining element of projects, often involving Chinese construction and equipment Infrastructure ownership and control by China is not always complete, but greater influence provides benefits and enhances the security of imports into and exports from China.
This aspect is certainly changing the dynamics of global trade patterns and trends.
Broad implications for sea trade
The Chinese authorities often emphasise what they regard as the Initiative’s altruistic nature. Its most visible manifestation is promoting activities strengthening international commercial trade, which are frequently described as ‘win-win’ ventures. All participants are expected to benefit from this project.
Nevertheless, the underlying rationale for the Belt and Road Initiative is heavily focused on China’s imports and exports, although other international trades may be affected indirectly. Most emphasis is on the Belt portion, overland routes and connections. Some are accompanied by port projects, which are considered part of the Maritime Silk Road.
Closer examination of the Initiative’s, and in particular the Maritime Silk Road’s, evolving impact on global seaborne trade highlights one feature in particular. Many principal sea trade flows to and from China, as well as elsewhere, on high volume routes, seem likely to be unaffected or only slightly affected by BRI developments. Examples of the largest volume trades, where a nil or minimal direct impact from Belt and Road projects is currently envisaged, are listed below.
Over a longer period there could be a larger impact, indirectly, as economic activity in some importing countries strengthens. Dry bulk sector Iron ore exports from Australia, Brazil, South Africa, Canada; coal exports from Australia, Indonesia, Russia, Colombia, South Africa, USA; grain/soya exports from USA, Canada, Australia, Black Sea, Brazil, Argentina; and many minor bulk commodity movements.
Tanker sector Oil and gas movements from Middle East, West Africa, Caribbean. In some sea trades where partial transport by pipeline begins or increases as a result of new or expanded pipeline capacity, total transport cost could rise because of transhipment.
Sea trade impacts: pluses and minuses
Despite a large proportion of global seaborne trade probably seeing little or no impact from the Belt and Road Initiative, numerous positive effects are foreseeable elsewhere.
Various projects could strengthen seaborne trade volumes, which determine demand for shipping capacity. By contrast, several actual or potential negative changes have become prominent: Container sector An expanding overland route between China and Europe has already attracted movements of high value, time-sensitive goods which previously would have been transported by sea.
Gas sector Moving more gas through new or higher capacity gas pipelines to China acts as a restraint on sea trade.
Pipelines which carry gas which could have been shipped as LNG (liquefied natural gas) by tanker, such as the Myanmar/Chongqing gas link, or shorten sea distances, are detrimental.
Tanker sector Some crude oil suppliers exporting to China are introducing new or increased capacity pipelines. The volumes moved potentially replace seaborne cargoes. Other pipelines, such as Kyaukphyu, Myanmar to Chongqing, shorten the sea distance from several supply sources.
These developments show that pipelines and associated port infrastructure resulting from Belt and Road Initiative projects could restrict or possibly even prevent seaborne trade growth in related trades. But it appears unlikely that substitution or curtailment of sea movements will have more than a modest overall impact on the global seaborne trade pattern. Looking at the positive effects foreseeable, these can be divided into direct and indirect influences.
Both types of influence could increase raw materials or semi-finished and finished products quantities moving by sea, on a range of routes. Perhaps most obviously, infrastructure building on an extensive scale will require increased volumes of construction materials. Transport infrastructure involves new or upgraded roads, railways, pipelines and ports; distribution centres and industrial parks are also part of the vision.
Additional bridges and tunnels, harbour breakwaters, quays and cranes, plus warehousing will be required. Together with power stations and electricity grids, and water control installations such as dams, developments are envisaged across a swath of Asian and Middle East territory. Large volumes of construction project material such as steel products, cement and heavy machinery and equipment probably will be supplied by sea from China, as well as from other sources.
When these items are, in turn, produced wholly or partly in China from imported raw materials, a second support for global dry bulk trade arises. Moreover, if new coal-fired power stations are built in some countries under the Belt and Road Initiative to boost electricity supplies, additional seaborne steam coal imports could result. These direct impacts could be accompanied by an indirect boost.
Improvements in connectivity through enhanced transport infrastructure, linking manufacturing industry or agriculture to global markets, could strengthen many countries’ economic growth. A more rapidly developing economy usually boosts trade, with favourable implications in particular for container movements and bulk commodity as well. More prosperity generally implies more sea trade.
How positive the seaborne trade trend contribution proves depends greatly on the nature and magnitude (number and size) of projects, and the development work timescale. If all projects together are of relatively modest magnitude, and development work is extended over long periods, short term advantages for cargo movement volumes by sea may not be a notable feature. But cumulative longer term benefits may still be significant.
Infrastructure building in Asian countries: how much is needed?
Potential for future infrastructure building in Asia was highlighted in a report published in February 2017 by the Asian Development Bank.
Depending on assumptions adopted, the ADB estimates that Asian countries need to invest between £22,600 billion and £26,200 billion during the period of fifteen years from 2016 to 2030. These totals imply an average £1500bn to £1700bn annual spending on infrastructure. Currently the region is investing an estimated £881bn annually, so a large increase is recommended.
Most of this projected spending represents physical infrastructure in four categories: (a) transport – roads, railways, ports and airports; (b) electrical power – generation, transmission, distribution; (c) telecommunications; (d) water supply and sanitation. The lower end of the range of estimates reflects expenditure which excludes climate change mitigation and adaptation costs, while at the higher end, this item is included. Power and transport are the two sectors with the largest spending requirements, comprising 52 percent and 35 percent of the total respectively based on the range’s lower end.
The ADB’s analysis, although not specifically related to China’s Belt and Road Initiative, supports the argument that there is scope for additional spending on fixed assets. These extra assets can further enhance a country’s stock of capital. ADB analysts state that ‘the region’s infrastructure has improved rapidly, but remains far from adequate’.
More and better transport, power supplies and other basic necessities could assist improved economic progress, enabling sustained rapid economic growth to be achieved across the region.
Maritime Silk Road shipping and ports
The shipping services involved have not received much attention. At first glance, this lack of focus on a vital aspect might seem surprising. There is a simple explanation.
Sea transportation services provided by the global shipping community, of which Chinese shipowners are a major part, are already supplying adequate capacity for the Maritime Silk Road routes. Looking ahead, transport capacity and capability is likely to remain sufficient. In many shipping sectors (container ships, bulk carriers, tankers and some specialised segments) global over-supply is a characteristic, and in several markets has been so for some time.
Many more new ships are under construction or on order, and there is currently no suggestion that shortages will emerge. Consequently, extra shipping capacity specifically designed for Maritime Silk Road developments has not yet been seen as essential. For China, involvement in shipping services on the Maritime Silk Road appears destined to expand over the years ahead.
Shipowners based in China control one of the world’s largest merchant ship fleets, which has been growing rapidly in recent years. These shipowners currently have the largest national volume of new ships on order, implying further strong fleet expansion. Although this feature is only an indicator of China’s future participation in specific trades, it reinforces a general impression pointing to sufficient transport availability continuing.
According to a recent UNCTAD report, internationally the Belt and Road Initiative ‘may help reduce transport costs, increase trade flows and open new markets to all involved countries’. The report adds that the Initiative’s success, from a transport sector perspective ‘rests heavily on optimization of the transport infrastructure and services, including shipping and logistics, required to support connectivity in China and beyond’. Within the Maritime Silk Road framework, port projects are the prominent element.
In particular, several Asian countries – Pakistan, Sri Lanka, Myanmar and Malaysia – have been at the forefront. At the other end of the Road, Greece has been a notable feature. Developments are under way or under discussion also in Indonesia, Vietnam and at the western end, Georgia while the feasibility of a new canal across the Kra Isthmus in Thailand is being investigated.
Implied naval benefits?
Another aspect of the Belt and Road Initiative is relevant to freedom of commercial trade and free passage of ships in international waters.
Are China’s foreign port investments at least partly motivated by possible military (naval) usage, if there is a crisis? One research study saw this outcome as implausible, arguing that China is not building naval port installations, only commercial facilities. Yet the ‘string of pearls’ concept, which can be interpreted as having ominous overtones, is a cause of anxiety in some Asian countries, especially in India.
This colourful name denotes a network of ports, which could be used by China to protect sea lanes along which a high proportion of its seaborne import and export trade is carried. Crucial sea lanes are the Straits of Malacca and Hormuz. Some of the ports in this category, it is suggested, could become strategic bases for the Chinese navy as well as their prime commercial function.
One contention is that formal naval bases are not so necessary if there is naval access at commercial facilities. Other observers argue that ideas of military usage are unconvincing.
Among Belt and Road Initiative ramifications, some downsides for the global shipping markets have become visible. One prominent negative influence foreseeable is shorter loaded voyage distances in a number of major cargo trade movements.
These reductions could have an adverse impact on vessel tonne-mile employment, resulting in a weakening of requirements for sea transport services. But such modifications seem likely to be more than offset by changes having a beneficial influence on demand for shipping capacity. In particular, additional trade volumes as a direct or indirect consequence of projects stimulated by the Belt and Road scheme could provide a boost.
Large quantities of semi-finished of finished products related to construction activity probably will be needed, imported from China or other producers. These, in turn, could strengthen long-haul raw materials movements. In countries where infrastructure is expanded and improved, economic growth could be enhanced.
The mainly emerging market economies benefiting in Asia, the Middle East and elsewhere could see higher seaborne trade volumes – imports, exports or both.
But the impact will vary widely, depending on an individual country’s specific circumstances.
For this reason much more detailed analysis is required to determine the full extent of likely changes and, even then, uncertainties of project magnitude and timing render forecasting a hazardous exercise.
Source: Article by Richard Scott, associate, China Centre (Maritime), Solent University and managing director, Bulk Shipping Analysis