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China Merchants Energy Transportation funds fleet renewal with private placement

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Shanghai Stock Exchange-listed China Merchants Energy Shipping (SSE:601872) is engaging in a new private share placement of up to 4.1 billion Chinese Yuan (U.S $593.7 million) to fund the build-and-buy of two roll-on/roll-off (ro-ro) vessels, four oil tankers and a couple of very large ore carriers. Monies raised will also be used to install sulfur scrubbers on its fleet so that it can meet the global IMO 2020 limit of 0.5 percent sulfur in fuel.

Earlier this week the company announced that it will set-up a joint venture business with Guangzhou Automobile Group to operate a roll-on/roll-off shipping business.

China Merchants Energy Transportation will contribute the entire equity of wholly owned subsidiary Shenzhen Changhang Ro-Ro Logistics to the joint venture. That contribution will account for about 70 percent of the joint venture. The remaining 30 percent will be invested in cash by Guangzhou Automobile. The joint venture will be registered in the city of Nansha, Guangzhou, with a registered capital of Chinese Yuan 1.26 billion (about US$183 million).

Shenzhen Changhang Ro-Ro Logistics will become a wholly owned subsidiary of the joint venture once it is set up.

Ro-ro investment

A few days prior, China Merchants Energy Transportation had authorized Shenzhen Ro-Ro to buy and build two car-carrying vessels. The building will take place between related companies that are part of the China Merchants group.

Shenzhen Changhang Ro-Ro Logistics will contract with China Merchants Heavy Industry (Jiangsu) to build the two vessels subject to a price of 271 million Chinese Yuan (US$39.25 million) for one or 542 million Chinese Yuan (US$75.61 million) for two ships.

A statement from China Merchants says that the order price for the ships is 522 million Chinese Yuan, with the remainder being fees to unrelated parties. The company also notes in the explanatory document to its private placement that the central government back in 2016 updated automotive standards in respect of outer dimensions and quality limits for cars, trailers and trains. Accordingly, there has been a renewal of the landside vehicle fleets in China and that the demand for waterborne vehicle transport is strong.

Insight into the company’s plans

The private placement document also provides some insight into some of the company’s plans and behaviors.

The company is attempting to respond to the Chinese government’s goal of developing “maritime power” to ensure the security of energy transport. Back in 2016, the Chinese Ministry of Transport issued its 13th five-year plan for water transport, which diagnosed a problem that China had a big, but weak, shipping industry. The Ministry emphasised the need to build up the sector to support China’s ability to transport crude oil, iron ore, liquefied natural gas, grain, coal and other such resources.

In its explanatory note to the private placement, China Merchants Energy Transportation notes that the proportion of Chinese-owned carriage of seaborne commodities is at a low level. Strengthening the ability of China to carry its resources is beneficial to the security of China’s transport of bulk commodities, the company indicates.

As of January 2019, the company has 49 very large crude carriers and has four more on order. The company also notes that in tankers, there is fast technology-related progress and newer ships tend to have better environmental features along with lower operational and maintenance costs. The company argues that the four newbuildings are important for renewal of the company’s fleet structure.

China Merchants Energy Transport also discussed very large ore carriers. These are dry bulk-carrying ships with a carrying capacity of about 400,000 metric tons. A metric ton is equivalent to 2,204.6 U.S. pounds. Most of the larger dry bulk ships in operation around the world are about 200,000 to 300,000 deadweight (deadweight is a measure of the carrying capacity of ships as expressed in metric tons).

The company notes that the cost of transporting iron ore can be driven down by the use of 400,000 deadweight ships compared to vessels of 200,000 to 300,000 deadweight. That, in turn, would help Chinese iron and steel-making companies by reducing the cost of their raw materials. China Merchants Energy Transport therefore is ordering two more very large ore carriers to join the 26 VLOCs that it already manages.