US ownership clause of Chinese port fees could cast ‘wide net’

ONE ADVANTAGE shipping has over land-based businesses like real estate is that if a government charges a new fee, shipping assets can detour around the cost. Owners of buildings don’t have the luxury of sailing away.

Shipping’s globe-spanning mobility has led to myriad unintended consequences over the years. It’s happening yet again, courtesy of the tit-for-tat port fees of the US and China.

The US port fees that begin on Tuesday are expected to be a relative non-event for shipping markets and rates. Not so with the Chinese port fees.

How US port fees prompted Chinese response

The US port fees on Chinese-operated and Chinese-built ships have been dramatically watered-down versus the original proposal in February.

After massive private-sector pushback, the US Trade Representative realised that the port fees, as originally written, would effectively be paid by US importers and exporters, the levies were far too high, and the economic cost to America would be too great.

Consequently, the USTR sharply reduced the scope of ships to be charged on the import side, reduced the amount of the fees, and exempted vessels in ballast to protect US exporters’ margins.

What remained was a policy that excessively targeted and punished one company more than any other: China-state-owned Cosco.

Alphaliner estimated that US port fees would cost Cosco $1.5bn per year based on containership deployments as of September.

This, not surprisingly, has led to reciprocal port fees in China that will also go into effect on October 14. “China’s countermeasures are necessary acts of passive defense,” said China’s Ministry of Commerce on Saturday.

How Chinese and US port fees differ

In some ways the fees are the same.

The US is charging ships of Chinese owners and operators $50 per net tonne. China will charge around the same: 400 yuan ($56) per net tonne. Chinese port fees will only be charged once per service and capped at five a year, just as in the US.

That’s where the similarities end and the unintended consequences start to pile up.

In addition to US-built and US-flagged ships, which are insignificant, Chinese port fees will be charged to ships owned or operated by any entity in which US individuals or businesses directly or indirectly hold 25% or more of the equity, voting rights or board seats.

It depends on how China measures US ownership — details have yet to be announced — but taken strictly, this would cover a high number of vessels, including the fleets of most US-listed owners.

“This casts a wide net and could affect many public shipping companies with a listing on US stock exchanges,” wrote Erik Broekhuizen, head of marine research and consulting at Poten & Partners, in a report on Friday. “The potential impact is significant.”

A company’s US securities filings only disclose stakes of 5% or more, but data on institutional funds’ holdings of all sizes is widely available and denotes fund nationality. Shipping shares are bought for investment purposes as well as to construct exchange-traded funds.

The largest institutional holders in US-listed shipping stocks are Dimensional Funds, Blackrock, Fidelity and Vanguard.

Most US-listed companies with a significant free float would exceed the 25% threshold if the final Chinese rules cover US shareholders that own less than 5% and assess aggregate US ownership.

“An important question will be: if a combination of US investors holds 25% or more, will the fees apply? If that is the case, impacts will hit shipping segments more broadly,” said Fearnleys Securities analyst Fredrik Dybwad.

For example, the securities filings of Israel-based Zim list only one US shareholder, Renaissance Technologies, with 5% ownership. However, Zim’s free float —the portion of shares available for public trading — is 93%, with reported institutional holdings of 53%, including non-US institutions, and very heavy interest among US retail investors.

It depends on how Chinese regulators measure ownership, but it would be hard to argue that Zim is not at least 25% owned by Americans.

That would put Zim in the unusual position of getting charged at both ends: by port fees in China for voyages to all destinations, as well as US port fees for its Chinese ships.

Alphaliner estimated that Zim faces US port fees of $510m per year based on September deployments of Chinese-built ships. Zim chief financial officer Xavier Destriau Lloyd’s List in late August that Zim plans to redeploy its Chinese-built tonnage to mimimise fees.

Another US-listed containership operator with heavy exposure to Chinese port fees is Hawaii-based Matson. Its equity has a free float of 98% and institutional ownership of 88%. Matson’s China-US service represented 37% of teu throughput in the latest quarter.

Matson and Zim would be at a competitive disadvantage in the Chinese market compared to non-US listed liner operators that don’t cross the US ownership threshold.

The US ownership stipulation in the Chinese fees “is the real kicker”, wrote Roar Adland, global head of research at brokerage SSY, in an online post on Friday.

“The extension of financial ownership and board seats will possibly catch many listed companies given the likelihood that a large chunk of shares will be in nominee accounts with large US investment banks and mutual funds.

“Add in any company partly financed by US private equity, leasing companies, or even private companies where the principals have secondary US citizenship, and it is clear that the share of the world fleet potentially ensnared by these ‘special fees’ is substantial.”

On the private equity side, US-based Oaktree has been a major player in shipping. Oaktree owns 27% of Danish product carrier owner Torm even after Oaktree’s recent sale of Torm shares to Hafnia.

Adland said that due to the complexities of the partial US ownership clause, standard fleet data “will just give numbers that represent the top of the iceberg”.

How Chinese port fees could shift markets

Charterers err on the side of caution when confronted with regulatory uncertainty that has material cost implications.

This behaviour was on full display in the fourth quarter of 2019, when the US, during the first administration of Donald Trump, sanctioned tankers of Cosco Dalian.

Instead of shunning tankers of that particular division of Cosco, charterers ceased taking any Cosco-linked tonnage, causing very large crude carrier spot rates to briefly spike to record highs of over $300,000 per day.

That “take no chances” pattern could repeat.

Concerns over China’s 25% US ownership rule should theoretically reduce the pool of tankers and bulkers acceptable to charterers for transport of commodities to China. Not only would ships that clearly breach the US ownership threshold be shunned, but also, ships would be less attractive to charterers if there is any question.

Unlike the US port fees — which exempt ships in ballast to protect US exporters — the Chinese fees have no exemptions as currently written, meaning that costs would ultimately be passed along to Chinese importers.

“At first glance, these new fees, if they are indeed implemented and enforced as written, are likely to hurt China more than the US, at least in the short term,” said Broekhuizen.

According to Adland, “From an economic perspective, these fees are nothing but an additional voyage cost and so will be passed on to the charterers, and eventually receivers, through higher freight rates on a voyage basis.

“The marginal cost for US-affiliated vessels will thus increase if trading into China, while other vessels could enjoy higher earnings on a TCE [time-charter equivalent] basis on the same route.

“While that may sound good for some, it also means higher CFR [cost and freight] commodity prices for seaborne imports and margin compression in China, making certain arbitrage trades unprofitable.”

Adland continued, “The Chinese authorities are not known for making hasty policies on the back of ChapGPT, so in all likelihood, these calculations of negative secondary effects — primarily higher costs of imports — have been made and the conclusion was that the additional political pressure and domestic popularity was worth it.”

In the near term, Chinese port fees will create disruptions that are expected to increase rates.

“According to one of our brokers, the tanker market has been ‘frozen’ after the Chinese announcement,” said Broekhuizen.

“Initial responses show some dry cargoes being diverted to India and Indonesia to avoid Chinese discharge,” said Clarksons Securities analyst Frode Mørkedal. “Such shifts could tighten vessel supply, generally supporting freight rates across tanker and bulker segments.”

Adland predicted that affected charterers and operators will fix replacement vessels and relet affected tonnage, with that affected tonnage moving to non-Chinese business.

“If the Chinese measures are implemented and remain in place…the ensuing market chaos and dislocation of tonnage is supportive of rates,” he said.

According to Dybwad, “Inefficiencies are set to increase on the back of this, which historically has been good for shipping rates.”

He noted that the Chinese fees translate into an additional cost of $6m per call for a VLCC, $5m for a capesize and $20 per tonne for a liquefied petroleum gas cargo.

“As these numbers are significant, this should…likely lead to higher rates, though perhaps not offsetting the impact of port fees.”